Review on Systemic Fragility in the Global Economy by Jack Rasmus

Lawrence A Souza

doi:10.13169/worlrevipoliecon.10.2.0263

Abstract

Global central banks are unwinding their balance sheets, flattening the yield curve, and inverting it; with global trade tensions, appreciating dollar (liabilities), and emerging capital market stress (bond sell off/capital outflows), the global economy is extremely fragile and could experience a financial crisis and recession by 2020 (the consensus is by 2021). Systemic fragility is caused by policy mistakes, made by central bankers. These decisions make the financial system more fragile, as current central bank ideologies and orthodoxy are deficient, and unorthodox. Central bank policies are making matters worse, by driving costs of capital to zero (negative), replacing real for financial assets, printing trillions to bail out banks, and purchasing bad debt and defective financial products, allowing massive leakage of capital to flow unregulated (shadow banking) across globe platforms, etc.; and all with no effect on real economic growth, wage growth, labor participation, inflation, and more importantly, standards of living and social welfare.

Highlights

There is no money going into real long-term assets, only short-term financial assets
This has led us into the contradiction of macroeconomic theory, monetary policy and central banking: liquidity-debt-insolvency nexus, the moral hazard of perpetual bail-outs, growing concentration of wealth at the extremes, growing perception that negative/zero interest rate Policy (N/ZIRP) can fix under-investment in capital and deflationary trends, and that current banking regulation-supervision is bad for the economy, financial services industry, and for institutional and retail investors in the long run
Global financial fragility (FF) is positively related to total financial asset investment in the system, and with interest rate maturity optimization, elasticity of inside credit, and available income to total debt levels; with inflation expectations to change in total debt levels; with credit default and reinvestment risk; and with fiscal and monetary government subsidies, support, credit facilities, quantitative easing (QE), bailouts, etc

Summary

Introduction

Fiscal, and macroeconomic economists, and financial institution and capital market experts agree, the global economy and financial system. There is no money going into real long-term (capital budgets) assets, only short-term financial assets (equity, fixed-income, ETFs, derivatives, structured products, crypto-currencies, etc.) This has led us into the contradiction of macroeconomic theory, monetary policy and central banking: liquidity-debt-insolvency nexus, the moral (immoral) hazard of perpetual bail-outs, growing concentration of wealth at the extremes, growing perception that negative/zero interest rate Policy (N/ZIRP) can fix under-investment in capital (human/physical) and deflationary (disinflationary) trends, and that current banking regulation-supervision is bad for the economy, financial services (institutions) industry, and for institutional and retail investors (savers) in the long run. This is the true reflection, of failed conceptual frameworks, of contemporary economic analysis (Harvey 2005, 2011; Posner 2011)

A Theory and Application of Systematic Fragility

Conclusions