OPINION: Global stock markets and real estate are overvalued. The next financial crisis is coming, Willem H. Buiter writes.
NEW YORK — Since early 2020, central banks across the advanced economies have had to choose between pursuing financial stability, low inflation, or real economic activity. Without exception, they have opted in favor of financial stability, followed by real economic activity, with inflation last.
“There is not enough resilience in non-central bank balance sheets to address a fire sale of distressed assets or a run on commercial banks or other systemically important financial institutions that hold liquid liabilities and illiquid assets.” In any case, a U.S. sovereign default would also have a dramatic and devastating global impact, afflicting both advanced economies and emerging and developing markets. U.S. sovereign debt TMUBMUSD10Y, 1.612% is widely held globally, and the U.S. dollar BUXX, -0.00% remains the world’s senior reserve currency.
Central banks are the only economic actors capable of addressing the funding and market-liquidity crises that are now part of the new normal. There is not enough resilience in non-central bank balance sheets to address a fire sale of distressed assets or a run on commercial banks or other systemically important financial institutions that hold liquid liabilities and illiquid assets. This is as true in China as it is in the U.S., the eurozone, Japan, and the United Kingdom.
Whenever the inevitable price corrections materialize, central banks, supervisors, and regulators will need to work closely with finance ministries to limit the damage to the real economy. Significant deleveraging by all four sectors will be necessary to reduce financial vulnerability and boost resilience.
France Dernières Nouvelles, France Actualités
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