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Tuomas Malinen+ Your Authors @mtmalinen PhD econ. Chief Economist of GnS Economics. Adj. Professor of Economics @ Uni Helsinki. Economic growth, economic crises, monetary unions and central banks. Feb. 19, 2020 2 min read + Your Authors

It seems like a good time to remind everyone, why we are heading into an economic crisis.

A thread on the fragility of the global #economy.

There, naturally, is no other place to start than this.👇 1/
@CNBCJulianna @KellyCNBC @SaraEisen @GeoffCutmore

Yet, everything begins from the GFC.

Like we noted in a blog published on the 10th anniversary of the failure of Lehman Brothers, very little has actually been fixed in the global financial system.👇 2/ 

While the US banks are now bigger than before 2008 crisis, the biggest problems lay in Europe.

The European banks remained under-capitalized and filled with toxic assets, and the policies of the #ECB made everything worse. 👇 3/ 

Then came the QE:s.

To recap. In a QE-program, a central bank buys investment grade assets which, artificially, increases the demand of investment grade assets and pushes prices up and yields down. Because investors try to extend their profits,... 4/

they start to look for higher-yielding and more riskier products. This creates yield compression, where yields of both investment and non-investment grade assets start to converge.

An 'everything bubble' forms.

But, there's more. 5/ 

QE programs pushed excess reserves in the balance sheets of banks.

This altered their net interest margins, the liquidity portfolio and the duration of the assets, inducing the banks to increase lending and to move their portfolio towards riskier lending activities. 6/

This forced "risking up" of the Prim Dealers was also behind the turmoil in the #repo markets.

"The main issue is likely to be the fact that QE programs fundamentally altered the balance sheets of banks as well as their money-market activity." 👇 7/ 

And finally, China, the driver of the global business cycle since 2009.

China holds something of a command-and-control grip on the banking sector. This has made it possible for the Chinese economy to build a truly exceptional level of leverage. 8/

China currently surpasses all previous 'credit bonanzas' by any metrics.

(Please note that the PBoC has not made their estimates on the shadow banking assets for 2018 available.)

The problem with the ability to order banks to lend...9/

... is that much of that money will pour into unproductive investments.

This is what happened in China, and her productivity has been falling since 2012. This should not happen outside crises.

This quite simply means that any... 10/

...prolonged slowing of growth, not to speak of a negative GDP print, will lead to serious problems in the corporate and banking sectors of China.

Highly indebted firms are likely to default and the ratio of NPLs will explode hitting the banking sector, hard. 11/

And, then we're here. #Coronavirus has effectively stopped #China and is disrupting global supply chains.

Collapsing Chinese demand will hit the #Eurozone the hardest most likely setting in motion a banking crisis in a continent with the highest concentration of G-SIB:s 12/

When that happens, no amount of artificial central bank liquidity is able to hold the global asset markets up.

A crash occurs, followed by a desperate efforts of central banks and governments to respond, which fail.

A global collapse follows. 👇13/ 

So, there's a scarily high probability that the #CoronavirusOutbreak will topple the fragile global #economy .

And, there will be very few places to hide.
#Brace! 👇
#economy #COVID19 #recession 

You can follow @mtmalinen.


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