The International Monetary Fund just issued a tome written in the indecipherable international-ese favored by global economic organizations, but warning darkly about “imbalances.”
Here is the latest view from the IMF:
“Large and sustained excess external imbalances in the world’s key economies—amid policy actions detrimental to external balances—pose risks to global stability.”
Over the medium term, sustained [current account trade] deficits, leading to widening debtor positions in key economies, could constrain global growth and possibly result in sharp and disruptive currency and asset price adjustments.”
In English, for American readers, this translates as: “Dudes, the US is running huge and chronic current trade deficits, leading to capital inflows and soaring asset prices (as foreign capital seeks a home in a crowded market). This could lead to a “Minsky moment”, when bloated asset prices ultimately collapse, thus taking down banking systems and economies along the way.”
The IMF solution?
“In general,” says the IMF, “reforms that encourage investment and discourage excessive saving (for example, through reduced entry barriers and stronger social safety nets) are necessary in excess surplus countries, while focus on reforms that reduce labor costs and improve competitiveness are more appropriate in excess deficit countries.”
Yes, China will hop right to it and turn domestic markets over to foreigners while radically expanding a social service net, and the US can cut wages, no?
Obviously, the IMF has no solutions. Well, they have scolded that a “prolonged period of loose financial conditions in recent years” has led to risky loan-making to debtor nations (the US) and so the IMF calls for tighter money.
One might ponder if the IMF fears or embraces the idea of a “Minsky moment”.
The US Federal Reserve is staffed by central bankers, to whom any call for tighter money is as captivating as “happy hours” are to alcoholics.
With the S&P 500 trading at 24.5 times earnings (above the long-term average of 15 or so), and commercial property prices busting through 2008-era highs, and with house prices on West Coast nearing $1 million medians, there are sure to be many in the Fed who think it is past high time to take away the punch bowl.
If so, that “Minsky moment” may become a “Minsky Year”, or two. If the Fed wants asset prices to come down, the Fed can obtain that end—the question is, once asset values begin to slip, do they slide…or avalanche?
Of course, the Fed should not worry about asset prices, and should concentrate on keeping nominal GDP on a stable growth path.
But central banker totems tumble hard, if ever, so keep a wary eye on the Fed.