I do not see anyone inside the Trump administration understanding how the international monetary system works. And I see no sign that Steve Mnuchin—whose brief this is—is willing to spend any time trying to learn. But if he were, he would be listening to Barry Eichengreen. Right now COVID-19 is administering a disastrous health shock to the world. Following that is the less deadly but still important negative supply shock to our economies. Behind that is a manageable but as yet unmanaged knock-on domestic demand shock. And behind that is the rapidly-apporaching international financial crisis with its global negative demand shock that, as of yet, nobody is seriously trying to manage:
Barry Eichengreen: Managing the Coming Global Debt Crisis https://www.project-syndicate.org/commentary/managiing-coming-global-debt-crisis-by-barry-eichengreen-2020-05: ‘These countries’ private companies borrow in dollars.... When it comes to the stabilizing use of monetary and fiscal policies, emerging markets are hamstrung. Which is why we are back to Baker Plan 2.0...
...suspend[ing] interest payments... private creditors... roll[ing] over an additional $8 billion worth of commercial debt. That, at least, is something. But, to borrow the baseball apostle Yogi Berra’s line, it is also “déjà vu all over again.” The Baker Plan likewise proceeded on the premise that the shock was transient and that a temporary debt standstill would be enough....
By 1989, seven unproductive years after the onset of the crisis, the Baker Plan finally was superseded by the Brady Plan.... Debts were written down. Bank loans were converted into bonds—often a menu of securities from which investors selected their preferred terms and maturities. Advanced-economy governments facilitated the transaction by providing “sweeteners”.... Today’s crisis is also being treated as temporary, with a moratorium on interest payments and a promise of commercial credits remaining valid only through the end of the year. The reality is different. Weak global growth and depressed primary commodity prices will persist. Supply chains will be reorganized and shortened, auguring further disruptions of trade. Receipts from tourism and remittances will not pick up anytime soon. And unless the debt overhang is addressed, capital flows will not resume… #finance #internationalfinance #macro #noted #2020-05-27
