Version: 4 (current) | Updated: 11/13/2025, 6:21:56 AM
Added description
The newsletter incorporates charts, data tables, and narrative analysis, citing BIS reports and referencing the broader policy debate on counter‑cyclical capital buffers and the Phillips curve.
@file_pinax -> documents -> @chartbook_137:document {title: "Chartbook #137: The regime at risk - macroprudentialism faces the test of inflation", creator: @adam_tooze, created: @date_2022_07_16, subjects: ["Economic policy","Macroprudentialism","Inflation","Interest rates","Financial crisis","Debt","Zombie firms","Central banks","Banking system","Global economy"]}
@file_64280648_chartbook_137_the_regime_at_risk -> documents -> @chartbook_137:document
@file_64633662_chartbook_142_the_dollar_systems -> documents -> @chartbook_142:document {title: "Chartbook #142: The dollar system's resilience", creator: @adam_tooze, created: @date_2022_08_13}
@adam_tooze:person {full_name: "Adam Tooze", affiliation: "Columbia University"}
@adam_tooze -> created -> @chartbook_137:document {when: @date_2022_07_16}
@adam_tooze -> created -> @chartbook_142:document {when: @date_2022_08_13}
@chartbook_137:document -> discusses -> @macroprudentialism:concept
@chartbook_137:document -> discusses -> @inflation:concept
@chartbook_137:document -> discusses -> @interest_rate:concept
@chartbook_137:document -> discusses -> @financial_crisis:concept
@chartbook_137:document -> discusses -> @hard_landing:concept
@chartbook_137:document -> discusses -> @zombie_firm:concept
@chartbook_137:document -> discusses -> @debt:concept
@chartbook_137:document -> discusses -> @central_bank:organization
@chartbook_137:document -> discusses -> @banking_system:concept
@chartbook_137:document -> discusses -> @global_economy:concept
@chartbook_137:document -> cites -> @bis_annual_economic_report:document
@chartbook_137:document -> mentions -> @paul_volcker:person
@chartbook_137:document -> mentions -> @mohamed_el_erian:person
@chartbook_137:document -> mentions -> @gillian_tett:person
@chartbook_137:document -> mentions -> @cgfs:organization
@chartbook_137:document -> mentions -> @mortgage_debt:concept
@chartbook_137:document -> mentions -> @household_debt:concept
@chartbook_137:document -> mentions -> @corporate_debt:concept
@chartbook_137:document -> mentions -> @real_estate_prices:concept
@chartbook_142:document -> discusses -> @dollar_system:concept
@chartbook_142:document -> discusses -> @wall_street_consensus:concept
@chartbook_142:document -> discusses -> @growth_at_risk:concept
@chartbook_142:document -> discusses -> @counter_cyclical_capital_buffer:concept
@chartbook_142:document -> discusses -> @phillips_curve:concept
@chartbook_142:document -> discusses -> @zombie_firm:concept
@chartbook_142:document -> discusses -> @hard_landing:concept
@chartbook_142:document -> discusses -> @inflation:concept
@chartbook_142:document -> discusses -> @interest_rate:concept
@chartbook_142:document -> discusses -> @financial_crisis:concept
@chartbook_142:document -> discusses -> @macroprudentialism:concept
@chartbook_142:document -> discusses -> @policy_regime:concept
@chartbook_142:document -> discusses -> @central_bank:organization
@chartbook_142:document -> cites -> @bis_annual_economic_report:document
@chartbook_142:document -> mentions -> @gillian_tett:person
@chartbook_142:document -> mentions -> @cgfs:organization
@chartbook_142:document -> mentions -> @roong_mallikamas:person
@chartbook_142:document -> mentions -> @benjamin_weigert:person
@chartbook_142:document -> mentions -> @katharina_pistor:person
@chartbook_142:document -> mentions -> @code_of_capital:document
@chartbook_142:document -> mentions -> @japan:place
@chartbook_142:document -> mentions -> @us:place
@chartbook_142:document -> mentions -> @sri_lanka:place
@bis:organization {full_name: "Bank for International Settlements"}
@bis -> published -> @bis_annual_economic_report:document {title: "Annual Economic Review 2022", publisher: @bis}
@bis_annual_economic_report:document -> authored_by -> @bis:organization
@cgfs:organization {full_name: "Committee on the Global Financial System"}
@cgfs -> cochaired_by -> [@roong_mallikamas, @benjamin_weigert]
@roong_mallikamas:person {affiliation: "Bank of Thailand"}
@benjamin_weigert:person {affiliation: "Deutsche Bundesbank"}
@mohamed_el_erian:person {role: "Columnist", affiliation: "Financial Times"}
@paul_volcker:person {role: "Fed Chair (1979)", known_for: "Great inflation fight"}
@gillian_tett:person {role: "Journalist", affiliation: "Financial Times"}
@katharina_pistor:person {affiliation: "Princeton University"}
@code_of_capital:document {title: "The Code of Capital", author: @katharina_pistor}
@zombie_firm:concept {definition: "Firms that generate insufficient profit to pay down debt, can service interest but avoid bankruptcy, existing in a state of suspended animation"}
@hard_landing:concept {definition: "Severe economic slowdown caused by rapid tightening of monetary policy"}
@growth_at_risk:concept {definition: "Statistical method linking financial indicators to downside GDP risk"}
@counter_cyclical_capital_buffer:concept {definition: "Capital buffer that can be released during downturns to support lending"}
@phillips_curve:concept {definition: "Inverse relationship between unemployment and inflation"}
@wall_street_consensus:concept {definition: "Network of state‑backed, commercially driven financial practices centered in Wall Street and New York law"}
@dollar_system:concept {definition: "Global financial architecture in which the US dollar is the primary reserve and transaction currency"}
@mortgage_debt:concept {definition: "Debt incurred to purchase residential property, often a large share of household debt"}
@household_debt:concept {definition: "Total debt owed by households, including mortgages, credit cards, and loans"}
@corporate_debt:concept {definition: "Debt issued by firms to finance operations and investment"}
@real_estate_prices:concept {definition: "Market prices of property assets"}
@global_economy:concept {definition: "The worldwide system of production, consumption, and trade"}<!--
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"title": "Chartbook #137: The regime at risk - macroprudentialism faces the test of inflation",
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<p class="button-wrapper" data-attrs="{"url":"https://adamtooze.substack.com/subscribe?","text":"Subscribe now","action":null,"class":null}" data-component-name="ButtonCreateButton"><a class="button primary" href="https://adamtooze.substack.com/subscribe?"><span>Subscribe now</span></a></p><p>With the fight against inflation taking center stage, the talk now is of the risks involved in slowing an economy hard. It is a test not just of particular policies and policy-makers but of a policy regime. Ahead of the surge of prices in the second half of 2021, were central bankers focused on the right things? Did they underestimate the risks? Do they actually understand the economy? </p><p>The most common accusation is that the slow reaction to the build-up of inflationary pressure in 2021 will now require such a serious hike in interest rates that it will precipitate a “hard-landing” and severe economic pain. In his <a href="https://www.ft.com/content/f8185c63-72c0-479d-80e9-e9c0bf8eb8c5">latest column for the FT</a>, Mohamed El-Erian indicts the Fed for being too slow and warns of the tough times ahead for, “the most vulnerable segments of the population and the most fragile developing countries”.</p><p>Let us name this scenario for the ghost of Paul Volcker, the Fed chair who in 1979 ended the “great inflation” of the 1970s with a brutal interest rate hike and a savage recession, helping to precipitate a global debt crisis.</p><p>As I’ve argued in a recent <em><a href="https://foreignpolicy.com/2022/07/01/global-economy-policy-financial-crisis-1970s/">Foreign Policy</a></em><a href="https://foreignpolicy.com/2022/07/01/global-economy-policy-financial-crisis-1970s/"> piece</a>, the question is whether the next few years will finally lay that ghost to rest. If inflation does peak in the next few months - as is still widely expected - and then come down with no more than a short and mild recession, perhaps it will be possible in, due course, to stand back and recognize the rollercoaster of 2020-2022 for what it is, not a disastrous failure of policy, but a story of difficult policy-making under conditions of huge uncertainty in the wake of the unprecedented COVID shock. </p><div class="captioned-image-container"><figure><a class="image-link image2 is-viewable-img" target="_blank" href="https://substackcdn.com/image/fetch/$s_!yXIX!,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F55c14874-d26e-4d65-9067-7cca184d1462_1328x892.png" data-component-name="Image2ToDOM"><div class="image2-inset"><picture><source type="image/webp" srcset="https://substackcdn.com/image/fetch/$s_!yXIX!,w_424,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F55c14874-d26e-4d65-9067-7cca184d1462_1328x892.png 424w, https://substackcdn.com/image/fetch/$s_!yXIX!,w_848,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F55c14874-d26e-4d65-9067-7cca184d1462_1328x892.png 848w, https://substackcdn.com/image/fetch/$s_!yXIX!,w_1272,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F55c14874-d26e-4d65-9067-7cca184d1462_1328x892.png 1272w, https://substackcdn.com/image/fetch/$s_!yXIX!,w_1456,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F55c14874-d26e-4d65-9067-7cca184d1462_1328x892.png 1456w" sizes="100vw"><img src="https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/55c14874-d26e-4d65-9067-7cca184d1462_1328x892.png" width="1328" height="892" data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/55c14874-d26e-4d65-9067-7cca184d1462_1328x892.png","srcNoWatermark":null,"fullscreen":null,"imageSize":null,"height":892,"width":1328,"resizeWidth":null,"bytes":401295,"alt":null,"title":null,"type":"image/png","href":null,"belowTheFold":false,"topImage":true,"internalRedirect":null,"isProcessing":false,"align":null,"offset":false}" class="sizing-normal" alt="" srcset="https://substackcdn.com/image/fetch/$s_!yXIX!,w_424,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F55c14874-d26e-4d65-9067-7cca184d1462_1328x892.png 424w, https://substackcdn.com/image/fetch/$s_!yXIX!,w_848,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F55c14874-d26e-4d65-9067-7cca184d1462_1328x892.png 848w, https://substackcdn.com/image/fetch/$s_!yXIX!,w_1272,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F55c14874-d26e-4d65-9067-7cca184d1462_1328x892.png 1272w, https://substackcdn.com/image/fetch/$s_!yXIX!,w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F55c14874-d26e-4d65-9067-7cca184d1462_1328x892.png 1456w" sizes="100vw" fetchpriority="high"></picture><div class="image-link-expand"><div class="pencraft pc-display-flex pc-gap-8 pc-reset"><div class="pencraft pc-reset icon-container restack-image"><svg xmlns="http://www.w3.org/2000/svg" width="20" height="20" viewBox="0 0 24 24" fill="none" stroke="currentColor" stroke-width="2" stroke-linecap="round" stroke-linejoin="round" class="lucide lucide-refresh-cw"><path d="M3 12a9 9 0 0 1 9-9 9.75 9.75 0 0 1 6.74 2.74L21 8"></path><path d="M21 3v5h-5"></path><path d="M21 12a9 9 0 0 1-9 9 9.75 9.75 0 0 1-6.74-2.74L3 16"></path><path d="M8 16H3v5"></path></svg></div><div class="pencraft pc-reset icon-container view-image"><svg xmlns="http://www.w3.org/2000/svg" width="20" height="20" viewBox="0 0 24 24" fill="none" stroke="currentColor" stroke-width="2" stroke-linecap="round" stroke-linejoin="round" class="lucide lucide-maximize2 lucide-maximize-2"><polyline points="15 3 21 3 21 9"></polyline><polyline points="9 21 3 21 3 15"></polyline><line x1="21" x2="14" y1="3" y2="10"></line><line x1="3" x2="10" y1="21" y2="14"></line></svg></div></div></div></div></a></figure></div><p>On the prospects for a hard-landing, it is worth remembering the BIS analysis of the <em>Annual Economic Review,</em> which puts things in perspective. In the worst-case scenario it expects a shock to real estate prices far less dramatic than 2008 and a GDP shock of moderate proportions relative to a scenario in which the ultra-loose monetary policy prevailed. </p><div class="captioned-image-container"><figure><a class="image-link image2 is-viewable-img" target="_blank" href="https://substackcdn.com/image/fetch/$s_!AAUQ!,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F29ca633a-eba3-4911-8d96-d3363f195f44_1026x1092.png" data-component-name="Image2ToDOM"><div class="image2-inset"><picture><source type="image/webp" srcset="https://substackcdn.com/image/fetch/$s_!AAUQ!,w_424,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F29ca633a-eba3-4911-8d96-d3363f195f44_1026x1092.png 424w, https://substackcdn.com/image/fetch/$s_!AAUQ!,w_848,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F29ca633a-eba3-4911-8d96-d3363f195f44_1026x1092.png 848w, https://substackcdn.com/image/fetch/$s_!AAUQ!,w_1272,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F29ca633a-eba3-4911-8d96-d3363f195f44_1026x1092.png 1272w, https://substackcdn.com/image/fetch/$s_!AAUQ!,w_1456,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F29ca633a-eba3-4911-8d96-d3363f195f44_1026x1092.png 1456w" sizes="100vw"><img src="https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/29ca633a-eba3-4911-8d96-d3363f195f44_1026x1092.png" width="1026" height="1092" data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/29ca633a-eba3-4911-8d96-d3363f195f44_1026x1092.png","srcNoWatermark":null,"fullscreen":null,"imageSize":null,"height":1092,"width":1026,"resizeWidth":null,"bytes":260038,"alt":null,"title":null,"type":"image/png","href":null,"belowTheFold":false,"topImage":false,"internalRedirect":null,"isProcessing":false,"align":null,"offset":false}" class="sizing-normal" alt="" srcset="https://substackcdn.com/image/fetch/$s_!AAUQ!,w_424,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F29ca633a-eba3-4911-8d96-d3363f195f44_1026x1092.png 424w, https://substackcdn.com/image/fetch/$s_!AAUQ!,w_848,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F29ca633a-eba3-4911-8d96-d3363f195f44_1026x1092.png 848w, https://substackcdn.com/image/fetch/$s_!AAUQ!,w_1272,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F29ca633a-eba3-4911-8d96-d3363f195f44_1026x1092.png 1272w, https://substackcdn.com/image/fetch/$s_!AAUQ!,w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F29ca633a-eba3-4911-8d96-d3363f195f44_1026x1092.png 1456w" sizes="100vw"></picture><div class="image-link-expand"><div class="pencraft pc-display-flex pc-gap-8 pc-reset"><div class="pencraft pc-reset icon-container restack-image"><svg xmlns="http://www.w3.org/2000/svg" width="20" height="20" viewBox="0 0 24 24" fill="none" stroke="currentColor" stroke-width="2" stroke-linecap="round" stroke-linejoin="round" class="lucide lucide-refresh-cw"><path d="M3 12a9 9 0 0 1 9-9 9.75 9.75 0 0 1 6.74 2.74L21 8"></path><path d="M21 3v5h-5"></path><path d="M21 12a9 9 0 0 1-9 9 9.75 9.75 0 0 1-6.74-2.74L3 16"></path><path d="M8 16H3v5"></path></svg></div><div class="pencraft pc-reset icon-container view-image"><svg xmlns="http://www.w3.org/2000/svg" width="20" height="20" viewBox="0 0 24 24" fill="none" stroke="currentColor" stroke-width="2" stroke-linecap="round" stroke-linejoin="round" class="lucide lucide-maximize2 lucide-maximize-2"><polyline points="15 3 21 3 21 9"></polyline><polyline points="9 21 3 21 3 15"></polyline><line x1="21" x2="14" y1="3" y2="10"></line><line x1="3" x2="10" y1="21" y2="14"></line></svg></div></div></div></div></a></figure></div><p>Source: <a href="https://www.bis.org/publ/arpdf/ar2022e.pdf">BIS Annual Economic Report </a></p><p>If some scenario of this kind transpires, then on balance, allowing for the dramatic recovery in labour markets and a resumption of growth in latter half of 2023, what will be the judgement on the economic policy mix in 2021? I think the jury remains out. </p><p>Of course, there are other risks that could further complicate the situation.</p><p>The most urgent concern is that in the course of the tightening of interest rate policy something breaks in the financial system - call this the financial crisis scenario. Another risk is, that as a result of the accumulation of debt service obligations, the 2020-2022 switchback in interest rates triggers a sustained fall in investment, spending and growth - call this the zombification scenario. </p><p>Gillian Tett in a <a href="https://www.ft.com/content/98a1e4c3-1a4c-4fe1-b55e-56a669a54b81">recent piece in the </a><em><a href="https://www.ft.com/content/98a1e4c3-1a4c-4fe1-b55e-56a669a54b81">FT</a></em> drew attention to more work out of BIS - this time by a working group of the Committee on the Global Financial System (CGFS), co-chaired by Roong Mallikamas (Bank of Thailand) and Benjamin Weigert (Deutsche Bundesbank) - which assesses the risk of these latter two effects. </p><p>Tett cites the CGFS in minatory terms. Her title and subtitle warn: </p><blockquote><p>“We should be worrying about debt as well as inflation. Pundits have long ignored the issue because declining interest rates kept borrowers’ servicing costs low.” </p></blockquote><p>Drumroll! But how worried should we be? As Tett notes, the message from CGFS Working Group is, in fact, mixed. The starting point is the global rise in debt and, in particular, the surge in debt following the COVID shock in 2020. This increase was substantial and, strikingly, it seems that debt rose most where households and corporations were already highly indebted. </p><div class="captioned-image-container"><figure><a class="image-link image2 is-viewable-img" target="_blank" href="https://substackcdn.com/image/fetch/$s_!FBn6!,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fc0a23ef4-f7f2-4e42-8f0f-3012d6d9efde_1302x866.png" data-component-name="Image2ToDOM"><div class="image2-inset"><picture><source type="image/webp" srcset="https://substackcdn.com/image/fetch/$s_!FBn6!,w_424,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fc0a23ef4-f7f2-4e42-8f0f-3012d6d9efde_1302x866.png 424w, https://substackcdn.com/image/fetch/$s_!FBn6!,w_848,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fc0a23ef4-f7f2-4e42-8f0f-3012d6d9efde_1302x866.png 848w, https://substackcdn.com/image/fetch/$s_!FBn6!,w_1272,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fc0a23ef4-f7f2-4e42-8f0f-3012d6d9efde_1302x866.png 1272w, https://substackcdn.com/image/fetch/$s_!FBn6!,w_1456,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fc0a23ef4-f7f2-4e42-8f0f-3012d6d9efde_1302x866.png 1456w" sizes="100vw"><img src="https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/c0a23ef4-f7f2-4e42-8f0f-3012d6d9efde_1302x866.png" width="1302" height="866" data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/c0a23ef4-f7f2-4e42-8f0f-3012d6d9efde_1302x866.png","srcNoWatermark":null,"fullscreen":null,"imageSize":null,"height":866,"width":1302,"resizeWidth":null,"bytes":220838,"alt":null,"title":null,"type":"image/png","href":null,"belowTheFold":true,"topImage":false,"internalRedirect":null,"isProcessing":false,"align":null,"offset":false}" class="sizing-normal" alt="" srcset="https://substackcdn.com/image/fetch/$s_!FBn6!,w_424,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fc0a23ef4-f7f2-4e42-8f0f-3012d6d9efde_1302x866.png 424w, https://substackcdn.com/image/fetch/$s_!FBn6!,w_848,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fc0a23ef4-f7f2-4e42-8f0f-3012d6d9efde_1302x866.png 848w, https://substackcdn.com/image/fetch/$s_!FBn6!,w_1272,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fc0a23ef4-f7f2-4e42-8f0f-3012d6d9efde_1302x866.png 1272w, https://substackcdn.com/image/fetch/$s_!FBn6!,w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fc0a23ef4-f7f2-4e42-8f0f-3012d6d9efde_1302x866.png 1456w" sizes="100vw" loading="lazy"></picture><div class="image-link-expand"><div class="pencraft pc-display-flex pc-gap-8 pc-reset"><div class="pencraft pc-reset icon-container restack-image"><svg xmlns="http://www.w3.org/2000/svg" width="20" height="20" viewBox="0 0 24 24" fill="none" stroke="currentColor" stroke-width="2" stroke-linecap="round" stroke-linejoin="round" class="lucide lucide-refresh-cw"><path d="M3 12a9 9 0 0 1 9-9 9.75 9.75 0 0 1 6.74 2.74L21 8"></path><path d="M21 3v5h-5"></path><path d="M21 12a9 9 0 0 1-9 9 9.75 9.75 0 0 1-6.74-2.74L3 16"></path><path d="M8 16H3v5"></path></svg></div><div class="pencraft pc-reset icon-container view-image"><svg xmlns="http://www.w3.org/2000/svg" width="20" height="20" viewBox="0 0 24 24" fill="none" stroke="currentColor" stroke-width="2" stroke-linecap="round" stroke-linejoin="round" class="lucide lucide-maximize2 lucide-maximize-2"><polyline points="15 3 21 3 21 9"></polyline><polyline points="9 21 3 21 3 15"></polyline><line x1="21" x2="14" y1="3" y2="10"></line><line x1="3" x2="10" y1="21" y2="14"></line></svg></div></div></div></div></a></figure></div><p>These levels of debt mean that if interest rates rise, debt service costs will become a heavier and heavier drag on the balance sheets of businesses and households. As the Working Group notes</p><blockquote><p>A 100-basis point increase in borrowing costs would raise the aggregate household debt servicing cost by around 1 percentage point of income in the average economy (Graph 6, right-hand panel, red triangles). However, due to the non-linear relationship, a 300-basis point rise would increase debt service by around 4 percentage points of income (blue triangles). Although such an increase in debt service costs is still modest, vulnerabilities could be amplified if rising interest rates have negative effects on collateral and asset prices which in turn result in debt rollover difficulties for borrowers.</p></blockquote><div class="captioned-image-container"><figure><a class="image-link image2 is-viewable-img" target="_blank" href="https://substackcdn.com/image/fetch/$s_!Qk5I!,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fe69da58d-cd01-4e19-8a6b-491f5008df6b_616x518.png" data-component-name="Image2ToDOM"><div class="image2-inset"><picture><source type="image/webp" srcset="https://substackcdn.com/image/fetch/$s_!Qk5I!,w_424,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fe69da58d-cd01-4e19-8a6b-491f5008df6b_616x518.png 424w, https://substackcdn.com/image/fetch/$s_!Qk5I!,w_848,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fe69da58d-cd01-4e19-8a6b-491f5008df6b_616x518.png 848w, https://substackcdn.com/image/fetch/$s_!Qk5I!,w_1272,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fe69da58d-cd01-4e19-8a6b-491f5008df6b_616x518.png 1272w, https://substackcdn.com/image/fetch/$s_!Qk5I!,w_1456,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fe69da58d-cd01-4e19-8a6b-491f5008df6b_616x518.png 1456w" sizes="100vw"><img src="https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/e69da58d-cd01-4e19-8a6b-491f5008df6b_616x518.png" width="616" height="518" data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/e69da58d-cd01-4e19-8a6b-491f5008df6b_616x518.png","srcNoWatermark":null,"fullscreen":null,"imageSize":null,"height":518,"width":616,"resizeWidth":null,"bytes":68990,"alt":null,"title":null,"type":"image/png","href":null,"belowTheFold":true,"topImage":false,"internalRedirect":null,"isProcessing":false,"align":null,"offset":false}" class="sizing-normal" alt="" srcset="https://substackcdn.com/image/fetch/$s_!Qk5I!,w_424,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fe69da58d-cd01-4e19-8a6b-491f5008df6b_616x518.png 424w, https://substackcdn.com/image/fetch/$s_!Qk5I!,w_848,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fe69da58d-cd01-4e19-8a6b-491f5008df6b_616x518.png 848w, https://substackcdn.com/image/fetch/$s_!Qk5I!,w_1272,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fe69da58d-cd01-4e19-8a6b-491f5008df6b_616x518.png 1272w, https://substackcdn.com/image/fetch/$s_!Qk5I!,w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fe69da58d-cd01-4e19-8a6b-491f5008df6b_616x518.png 1456w" sizes="100vw" loading="lazy"></picture><div class="image-link-expand"><div class="pencraft pc-display-flex pc-gap-8 pc-reset"><div class="pencraft pc-reset icon-container restack-image"><svg xmlns="http://www.w3.org/2000/svg" width="20" height="20" viewBox="0 0 24 24" fill="none" stroke="currentColor" stroke-width="2" stroke-linecap="round" stroke-linejoin="round" class="lucide lucide-refresh-cw"><path d="M3 12a9 9 0 0 1 9-9 9.75 9.75 0 0 1 6.74 2.74L21 8"></path><path d="M21 3v5h-5"></path><path d="M21 12a9 9 0 0 1-9 9 9.75 9.75 0 0 1-6.74-2.74L3 16"></path><path d="M8 16H3v5"></path></svg></div><div class="pencraft pc-reset icon-container view-image"><svg xmlns="http://www.w3.org/2000/svg" width="20" height="20" viewBox="0 0 24 24" fill="none" stroke="currentColor" stroke-width="2" stroke-linecap="round" stroke-linejoin="round" class="lucide lucide-maximize2 lucide-maximize-2"><polyline points="15 3 21 3 21 9"></polyline><polyline points="9 21 3 21 3 15"></polyline><line x1="21" x2="14" y1="3" y2="10"></line><line x1="3" x2="10" y1="21" y2="14"></line></svg></div></div></div></div></a></figure></div><p>What worries the Working Group are less the national averages than the tail risks. In particular it notes that amongst firms, it was loss-making firms and small and medium-sized enterprises that borrowed most during the COVID crisis. They do not have the strongest balance sheets with which to withstand the current tightening.</p><p>Beyond the weak tail of the corporate sector, the authors of the Working Group report are particularly worried about household debt and in particular mortgages that make up 75 percent of household debt. Households often take on far greater risks in housing markets than they realize, especially if they are suddenly faced with falling rather than rising house prices. </p><blockquote><p>The empirical evidence shows a strong association between mortgage credit and recession severity, with both higher levels and faster growth of household debt associated with larger consumption decreases during downturns and more severe recessions (Dynan (2012), Anderson et al (2016), Bunn and Rostom (2015), Kovacs et al (2018)). Jorda et al (2014) find that, although mortgage lending booms were only loosely associated with financial crises before the Second World War, mortgage lending was a significant predictor of financial crises in the second half of the 20th century.</p></blockquote><p>Currently, as the Working Group notes, property prices appear particularly stretched in many economies around the world. </p><div class="captioned-image-container"><figure><a class="image-link image2 is-viewable-img" target="_blank" href="https://substackcdn.com/image/fetch/$s_!elAK!,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fb3b54e5d-0bd0-4d54-8967-e87cba0968db_1284x958.png" data-component-name="Image2ToDOM"><div class="image2-inset"><picture><source type="image/webp" srcset="https://substackcdn.com/image/fetch/$s_!elAK!,w_424,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fb3b54e5d-0bd0-4d54-8967-e87cba0968db_1284x958.png 424w, https://substackcdn.com/image/fetch/$s_!elAK!,w_848,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fb3b54e5d-0bd0-4d54-8967-e87cba0968db_1284x958.png 848w, https://substackcdn.com/image/fetch/$s_!elAK!,w_1272,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fb3b54e5d-0bd0-4d54-8967-e87cba0968db_1284x958.png 1272w, https://substackcdn.com/image/fetch/$s_!elAK!,w_1456,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fb3b54e5d-0bd0-4d54-8967-e87cba0968db_1284x958.png 1456w" sizes="100vw"><img src="https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/b3b54e5d-0bd0-4d54-8967-e87cba0968db_1284x958.png" width="1284" height="958" data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/b3b54e5d-0bd0-4d54-8967-e87cba0968db_1284x958.png","srcNoWatermark":null,"fullscreen":null,"imageSize":null,"height":958,"width":1284,"resizeWidth":null,"bytes":243488,"alt":null,"title":null,"type":"image/png","href":null,"belowTheFold":true,"topImage":false,"internalRedirect":null,"isProcessing":false,"align":null,"offset":false}" class="sizing-normal" alt="" srcset="https://substackcdn.com/image/fetch/$s_!elAK!,w_424,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fb3b54e5d-0bd0-4d54-8967-e87cba0968db_1284x958.png 424w, https://substackcdn.com/image/fetch/$s_!elAK!,w_848,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fb3b54e5d-0bd0-4d54-8967-e87cba0968db_1284x958.png 848w, https://substackcdn.com/image/fetch/$s_!elAK!,w_1272,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fb3b54e5d-0bd0-4d54-8967-e87cba0968db_1284x958.png 1272w, https://substackcdn.com/image/fetch/$s_!elAK!,w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Fb3b54e5d-0bd0-4d54-8967-e87cba0968db_1284x958.png 1456w" sizes="100vw" loading="lazy"></picture><div class="image-link-expand"><div class="pencraft pc-display-flex pc-gap-8 pc-reset"><div class="pencraft pc-reset icon-container restack-image"><svg xmlns="http://www.w3.org/2000/svg" width="20" height="20" viewBox="0 0 24 24" fill="none" stroke="currentColor" stroke-width="2" stroke-linecap="round" stroke-linejoin="round" class="lucide lucide-refresh-cw"><path d="M3 12a9 9 0 0 1 9-9 9.75 9.75 0 0 1 6.74 2.74L21 8"></path><path d="M21 3v5h-5"></path><path d="M21 12a9 9 0 0 1-9 9 9.75 9.75 0 0 1-6.74-2.74L3 16"></path><path d="M8 16H3v5"></path></svg></div><div class="pencraft pc-reset icon-container view-image"><svg xmlns="http://www.w3.org/2000/svg" width="20" height="20" viewBox="0 0 24 24" fill="none" stroke="currentColor" stroke-width="2" stroke-linecap="round" stroke-linejoin="round" class="lucide lucide-maximize2 lucide-maximize-2"><polyline points="15 3 21 3 21 9"></polyline><polyline points="9 21 3 21 3 15"></polyline><line x1="21" x2="14" y1="3" y2="10"></line><line x1="3" x2="10" y1="21" y2="14"></line></svg></div></div></div></div></a></figure></div><p>The big worry, on the model of 2008, is that a vicious circle could be set up between increasingly unsustainable debts owed by households and firms and the financial system itself. Defaulting borrowers would put the banks at risk, further crippling economic growth and adding to the woes of the indebted firms and households. </p><div class="captioned-image-container"><figure><a class="image-link image2 is-viewable-img" target="_blank" href="https://substackcdn.com/image/fetch/$s_!CKCE!,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Ff2ad860c-c7b0-466d-873e-a028f414b1c6_1294x866.png" data-component-name="Image2ToDOM"><div class="image2-inset"><picture><source type="image/webp" srcset="https://substackcdn.com/image/fetch/$s_!CKCE!,w_424,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Ff2ad860c-c7b0-466d-873e-a028f414b1c6_1294x866.png 424w, https://substackcdn.com/image/fetch/$s_!CKCE!,w_848,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Ff2ad860c-c7b0-466d-873e-a028f414b1c6_1294x866.png 848w, https://substackcdn.com/image/fetch/$s_!CKCE!,w_1272,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Ff2ad860c-c7b0-466d-873e-a028f414b1c6_1294x866.png 1272w, https://substackcdn.com/image/fetch/$s_!CKCE!,w_1456,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Ff2ad860c-c7b0-466d-873e-a028f414b1c6_1294x866.png 1456w" sizes="100vw"><img src="https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/f2ad860c-c7b0-466d-873e-a028f414b1c6_1294x866.png" width="1294" height="866" data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/f2ad860c-c7b0-466d-873e-a028f414b1c6_1294x866.png","srcNoWatermark":null,"fullscreen":null,"imageSize":null,"height":866,"width":1294,"resizeWidth":null,"bytes":204957,"alt":null,"title":null,"type":"image/png","href":null,"belowTheFold":true,"topImage":false,"internalRedirect":null,"isProcessing":false,"align":null,"offset":false}" class="sizing-normal" alt="" srcset="https://substackcdn.com/image/fetch/$s_!CKCE!,w_424,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Ff2ad860c-c7b0-466d-873e-a028f414b1c6_1294x866.png 424w, https://substackcdn.com/image/fetch/$s_!CKCE!,w_848,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Ff2ad860c-c7b0-466d-873e-a028f414b1c6_1294x866.png 848w, https://substackcdn.com/image/fetch/$s_!CKCE!,w_1272,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Ff2ad860c-c7b0-466d-873e-a028f414b1c6_1294x866.png 1272w, https://substackcdn.com/image/fetch/$s_!CKCE!,w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Ff2ad860c-c7b0-466d-873e-a028f414b1c6_1294x866.png 1456w" sizes="100vw" loading="lazy"></picture><div class="image-link-expand"><div class="pencraft pc-display-flex pc-gap-8 pc-reset"><div class="pencraft pc-reset icon-container restack-image"><svg xmlns="http://www.w3.org/2000/svg" width="20" height="20" viewBox="0 0 24 24" fill="none" stroke="currentColor" stroke-width="2" stroke-linecap="round" stroke-linejoin="round" class="lucide lucide-refresh-cw"><path d="M3 12a9 9 0 0 1 9-9 9.75 9.75 0 0 1 6.74 2.74L21 8"></path><path d="M21 3v5h-5"></path><path d="M21 12a9 9 0 0 1-9 9 9.75 9.75 0 0 1-6.74-2.74L3 16"></path><path d="M8 16H3v5"></path></svg></div><div class="pencraft pc-reset icon-container view-image"><svg xmlns="http://www.w3.org/2000/svg" width="20" height="20" viewBox="0 0 24 24" fill="none" stroke="currentColor" stroke-width="2" stroke-linecap="round" stroke-linejoin="round" class="lucide lucide-maximize2 lucide-maximize-2"><polyline points="15 3 21 3 21 9"></polyline><polyline points="9 21 3 21 3 15"></polyline><line x1="21" x2="14" y1="3" y2="10"></line><line x1="3" x2="10" y1="21" y2="14"></line></svg></div></div></div></div></a></figure></div><p>But how serious is this risk? To produce the 2008 crisis required not just an overstretched housing market and a dangerous system of mortgage finance, it also needed a banking system whose funding structure was fundamentally unsound and whose balance sheets were dangerously over-expanded. As has often been noted, there was no radical overhaul of the system of financial capitalism after 2008. The big banks are, in in some cases at least, bigger than ever. But what is also undeniable is that the mega- banks are more robust. The median capital buffers of international banks were, in 2021, at least fifty percent more substantial than they were in 2006. </p><div class="captioned-image-container"><figure><a class="image-link image2 is-viewable-img" target="_blank" href="https://substackcdn.com/image/fetch/$s_!Aguo!,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F9978e4e3-7aa8-4210-a19b-b05e2ee79d78_722x966.png" data-component-name="Image2ToDOM"><div class="image2-inset"><picture><source type="image/webp" srcset="https://substackcdn.com/image/fetch/$s_!Aguo!,w_424,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F9978e4e3-7aa8-4210-a19b-b05e2ee79d78_722x966.png 424w, https://substackcdn.com/image/fetch/$s_!Aguo!,w_848,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F9978e4e3-7aa8-4210-a19b-b05e2ee79d78_722x966.png 848w, https://substackcdn.com/image/fetch/$s_!Aguo!,w_1272,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F9978e4e3-7aa8-4210-a19b-b05e2ee79d78_722x966.png 1272w, https://substackcdn.com/image/fetch/$s_!Aguo!,w_1456,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F9978e4e3-7aa8-4210-a19b-b05e2ee79d78_722x966.png 1456w" sizes="100vw"><img src="https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/9978e4e3-7aa8-4210-a19b-b05e2ee79d78_722x966.png" width="722" height="966" data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/9978e4e3-7aa8-4210-a19b-b05e2ee79d78_722x966.png","srcNoWatermark":null,"fullscreen":null,"imageSize":null,"height":966,"width":722,"resizeWidth":null,"bytes":285684,"alt":null,"title":null,"type":"image/png","href":null,"belowTheFold":true,"topImage":false,"internalRedirect":null,"isProcessing":false,"align":null,"offset":false}" class="sizing-normal" alt="" srcset="https://substackcdn.com/image/fetch/$s_!Aguo!,w_424,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F9978e4e3-7aa8-4210-a19b-b05e2ee79d78_722x966.png 424w, https://substackcdn.com/image/fetch/$s_!Aguo!,w_848,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F9978e4e3-7aa8-4210-a19b-b05e2ee79d78_722x966.png 848w, https://substackcdn.com/image/fetch/$s_!Aguo!,w_1272,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F9978e4e3-7aa8-4210-a19b-b05e2ee79d78_722x966.png 1272w, https://substackcdn.com/image/fetch/$s_!Aguo!,w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F9978e4e3-7aa8-4210-a19b-b05e2ee79d78_722x966.png 1456w" sizes="100vw" loading="lazy"></picture><div class="image-link-expand"><div class="pencraft pc-display-flex pc-gap-8 pc-reset"><div class="pencraft pc-reset icon-container restack-image"><svg xmlns="http://www.w3.org/2000/svg" width="20" height="20" viewBox="0 0 24 24" fill="none" stroke="currentColor" stroke-width="2" stroke-linecap="round" stroke-linejoin="round" class="lucide lucide-refresh-cw"><path d="M3 12a9 9 0 0 1 9-9 9.75 9.75 0 0 1 6.74 2.74L21 8"></path><path d="M21 3v5h-5"></path><path d="M21 12a9 9 0 0 1-9 9 9.75 9.75 0 0 1-6.74-2.74L3 16"></path><path d="M8 16H3v5"></path></svg></div><div class="pencraft pc-reset icon-container view-image"><svg xmlns="http://www.w3.org/2000/svg" width="20" height="20" viewBox="0 0 24 24" fill="none" stroke="currentColor" stroke-width="2" stroke-linecap="round" stroke-linejoin="round" class="lucide lucide-maximize2 lucide-maximize-2"><polyline points="15 3 21 3 21 9"></polyline><polyline points="9 21 3 21 3 15"></polyline><line x1="21" x2="14" y1="3" y2="10"></line><line x1="3" x2="10" y1="21" y2="14"></line></svg></div></div></div></div></a></figure></div><p>This returns us to the basic conclusion of the BIS’s scenario analysis for a hard landing. Even in the worst case model it seems unlikely that the core institutions of the financial system will suffer the kind of shock that debilitated them in 2008 and the threw the entire economy off course. </p><p>What then of the third concern attendant on the rise of debt in a world of higher interests rates, zombification? Zombie firms are firms that do not generate enough profit to pay down their debts. They are able to pay interest and service their liabilities, thus avoiding bankruptcy and liquidation, but they subsist in a state of suspended animation. According to the analysis of the Working Group team, 17 percent of companies in the advanced economies fell into the zombie category in 2020. That is a new record and it was set before interest rates began to increase substantially in early 2022. </p><div class="captioned-image-container"><figure><a class="image-link image2 is-viewable-img" target="_blank" href="https://substackcdn.com/image/fetch/$s_!JoVY!,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F45d48d55-e192-469c-8929-bfe4a554e323_1114x846.png" data-component-name="Image2ToDOM"><div class="image2-inset"><picture><source type="image/webp" srcset="https://substackcdn.com/image/fetch/$s_!JoVY!,w_424,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F45d48d55-e192-469c-8929-bfe4a554e323_1114x846.png 424w, https://substackcdn.com/image/fetch/$s_!JoVY!,w_848,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F45d48d55-e192-469c-8929-bfe4a554e323_1114x846.png 848w, https://substackcdn.com/image/fetch/$s_!JoVY!,w_1272,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F45d48d55-e192-469c-8929-bfe4a554e323_1114x846.png 1272w, https://substackcdn.com/image/fetch/$s_!JoVY!,w_1456,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F45d48d55-e192-469c-8929-bfe4a554e323_1114x846.png 1456w" sizes="100vw"><img src="https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/45d48d55-e192-469c-8929-bfe4a554e323_1114x846.png" width="1114" height="846" data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/45d48d55-e192-469c-8929-bfe4a554e323_1114x846.png","srcNoWatermark":null,"fullscreen":null,"imageSize":null,"height":846,"width":1114,"resizeWidth":null,"bytes":104553,"alt":null,"title":null,"type":"image/png","href":null,"belowTheFold":true,"topImage":false,"internalRedirect":null,"isProcessing":false,"align":null,"offset":false}" class="sizing-normal" alt="" srcset="https://substackcdn.com/image/fetch/$s_!JoVY!,w_424,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F45d48d55-e192-469c-8929-bfe4a554e323_1114x846.png 424w, https://substackcdn.com/image/fetch/$s_!JoVY!,w_848,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F45d48d55-e192-469c-8929-bfe4a554e323_1114x846.png 848w, https://substackcdn.com/image/fetch/$s_!JoVY!,w_1272,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F45d48d55-e192-469c-8929-bfe4a554e323_1114x846.png 1272w, https://substackcdn.com/image/fetch/$s_!JoVY!,w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F45d48d55-e192-469c-8929-bfe4a554e323_1114x846.png 1456w" sizes="100vw" loading="lazy"></picture><div class="image-link-expand"><div class="pencraft pc-display-flex pc-gap-8 pc-reset"><div class="pencraft pc-reset icon-container restack-image"><svg xmlns="http://www.w3.org/2000/svg" width="20" height="20" viewBox="0 0 24 24" fill="none" stroke="currentColor" stroke-width="2" stroke-linecap="round" stroke-linejoin="round" class="lucide lucide-refresh-cw"><path d="M3 12a9 9 0 0 1 9-9 9.75 9.75 0 0 1 6.74 2.74L21 8"></path><path d="M21 3v5h-5"></path><path d="M21 12a9 9 0 0 1-9 9 9.75 9.75 0 0 1-6.74-2.74L3 16"></path><path d="M8 16H3v5"></path></svg></div><div class="pencraft pc-reset icon-container view-image"><svg xmlns="http://www.w3.org/2000/svg" width="20" height="20" viewBox="0 0 24 24" fill="none" stroke="currentColor" stroke-width="2" stroke-linecap="round" stroke-linejoin="round" class="lucide lucide-maximize2 lucide-maximize-2"><polyline points="15 3 21 3 21 9"></polyline><polyline points="9 21 3 21 3 15"></polyline><line x1="21" x2="14" y1="3" y2="10"></line><line x1="3" x2="10" y1="21" y2="14"></line></svg></div></div></div></div></a></figure></div><p>If the situation is deteriorating, one has to ask why we face this deterioration in the condition of global business. The diagnosis of zombification was originally intended as an indictment of a policy regime that lowered interest rates to the point where they no longer exercised much selection pressure on weaker firms. The undead survived. But ahead of the COVID shock the ranks of zombie firms <em>were</em>, in fact, gradually thinning. The sudden surge in 2020 is due, not to policy choices but the unprecedented and, from the point of view of corporate finance, exogenous shock of COVID. Perhaps it would be fairer to label the recent additions to the ranks of ailing businesses not as zombies but simply as casualties. The difference in labeling matters. To be put out of their misery, zombies have to be blown to pieces. Casualties should be nursed back to health.</p><p>As Tett points out, one of the important conclusions of the Working Group is that the true scale of financial risks can be assessed only in detail.</p><blockquote><p>Aggregate debt statistics can be misleading because they might mask underlying debt vulnerabilities. For example, a stable aggregate debt-to-income ratio might mask an accumulation of debt among households or firms with lower incomes. Moreover, as highlighted in Section 2, lending to riskier borrowers exacerbates the vulnerability of the economy to shocks. Thus, data on the distribution of debt vulnerabilities can provide useful information on debt vulnerabilities among borrowers at most risk of experiencing repayment difficulties. Analysis of distributions requires micro data, which are often not available from public sources. The Working Group collected data from central banks to analyse the distribution of debt vulnerabilities.</p></blockquote><p>And the Working Group report is indeed a monument to the extraordinary wealth of data now collected by central banks on the balance sheets not just of the banks, but of the entire economy. This reflects the expansive power/knowledge logic of the contemporary policy regime.</p><p>What is known as the regime of macroprudential regulation - the monitoring of macroeconomic risks to the financial system, and impacts from the financial system on the macroeconomy - is centered on the systemically important banks. But, the health of the banks depends on their clients - households and firms - who make up the broader economy. “Stress testing” the center piece of the modern system of macroprudential regulation, gauges the health of bank balance sheets against more or less extreme macroeconomic scenarios. To make those models more comprehensive and accurate, central banks need to monitor not just aggregate numbers, but the balance sheets of the entire economy. How extensive and adequate, the Working Group asks, is the extent of this central bank monitoring? </p><p>To answer this question the Working Group polled 23 central banks in both advanced economies and emerging markets on their practices of debt surveillance. The results are fascinating for what they reveal about the extension of the macroprudential monitoring system from the banks to the rest of the economy. </p><div class="captioned-image-container"><figure><a class="image-link image2 is-viewable-img" target="_blank" href="https://substackcdn.com/image/fetch/$s_!7y02!,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F124543a5-ab2f-4221-a4f8-f30cd7d13e0b_1118x872.png" data-component-name="Image2ToDOM"><div class="image2-inset"><picture><source type="image/webp" srcset="https://substackcdn.com/image/fetch/$s_!7y02!,w_424,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F124543a5-ab2f-4221-a4f8-f30cd7d13e0b_1118x872.png 424w, https://substackcdn.com/image/fetch/$s_!7y02!,w_848,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F124543a5-ab2f-4221-a4f8-f30cd7d13e0b_1118x872.png 848w, https://substackcdn.com/image/fetch/$s_!7y02!,w_1272,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F124543a5-ab2f-4221-a4f8-f30cd7d13e0b_1118x872.png 1272w, https://substackcdn.com/image/fetch/$s_!7y02!,w_1456,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F124543a5-ab2f-4221-a4f8-f30cd7d13e0b_1118x872.png 1456w" sizes="100vw"><img src="https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/124543a5-ab2f-4221-a4f8-f30cd7d13e0b_1118x872.png" width="1118" height="872" data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/124543a5-ab2f-4221-a4f8-f30cd7d13e0b_1118x872.png","srcNoWatermark":null,"fullscreen":null,"imageSize":null,"height":872,"width":1118,"resizeWidth":null,"bytes":143583,"alt":null,"title":null,"type":"image/png","href":null,"belowTheFold":true,"topImage":false,"internalRedirect":null,"isProcessing":false,"align":null,"offset":false}" class="sizing-normal" alt="" srcset="https://substackcdn.com/image/fetch/$s_!7y02!,w_424,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F124543a5-ab2f-4221-a4f8-f30cd7d13e0b_1118x872.png 424w, https://substackcdn.com/image/fetch/$s_!7y02!,w_848,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F124543a5-ab2f-4221-a4f8-f30cd7d13e0b_1118x872.png 848w, https://substackcdn.com/image/fetch/$s_!7y02!,w_1272,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F124543a5-ab2f-4221-a4f8-f30cd7d13e0b_1118x872.png 1272w, https://substackcdn.com/image/fetch/$s_!7y02!,w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F124543a5-ab2f-4221-a4f8-f30cd7d13e0b_1118x872.png 1456w" sizes="100vw" loading="lazy"></picture><div class="image-link-expand"><div class="pencraft pc-display-flex pc-gap-8 pc-reset"><div class="pencraft pc-reset icon-container restack-image"><svg xmlns="http://www.w3.org/2000/svg" width="20" height="20" viewBox="0 0 24 24" fill="none" stroke="currentColor" stroke-width="2" stroke-linecap="round" stroke-linejoin="round" class="lucide lucide-refresh-cw"><path d="M3 12a9 9 0 0 1 9-9 9.75 9.75 0 0 1 6.74 2.74L21 8"></path><path d="M21 3v5h-5"></path><path d="M21 12a9 9 0 0 1-9 9 9.75 9.75 0 0 1-6.74-2.74L3 16"></path><path d="M8 16H3v5"></path></svg></div><div class="pencraft pc-reset icon-container view-image"><svg xmlns="http://www.w3.org/2000/svg" width="20" height="20" viewBox="0 0 24 24" fill="none" stroke="currentColor" stroke-width="2" stroke-linecap="round" stroke-linejoin="round" class="lucide lucide-maximize2 lucide-maximize-2"><polyline points="15 3 21 3 21 9"></polyline><polyline points="9 21 3 21 3 15"></polyline><line x1="21" x2="14" y1="3" y2="10"></line><line x1="3" x2="10" y1="21" y2="14"></line></svg></div></div></div></div></a></figure></div><p>All 23 central banks polled monitored a basic indicator like household credit to GDP. In addition, </p><blockquote><p>Almost all central banks report monitoring the evolution of house prices indicators in order to detect overheating, with the most common indicators being price-to-rent and price-to-income ratios. Some countries use econometric models to compare house prices to values predicted by fundamentals. Fewer central banks monitor other indicators of overvaluations such as indicators of speculative activity, such as flipping trades</p></blockquote><p>But when it comes to the problematic tail of borrowers, the coverage is more scanty:</p><blockquote><p>Only eleven countries monitor at least two of the following indicators: net debt to income; net worth to liabilities; liquid assets to liabilities; or gross interest payments to disposable income. Six central banks monitor none of these indicators. More than half of central banks nevertheless indicate that they monitor vulnerable households, using indicators such as debt to income or debt service to income to define this group. A few central banks also monitor the share of riskier households and loans.</p></blockquote><p>As the Working Group notes</p><blockquote><p>In this regard, greater use of granular household debt data has been a major development since the GFC, helping to shine light on those vulnerabilities most associated with macroeconomic stability. Central banks have been innovative in sourcing such data, collecting it from credit bureaus and banks as well as data collected in the course of other central bank operations (see Appendix C). However, there are often specific challenges related to gathering such data, not least with respect to cost and privacy.</p></blockquote><p>Not only have central banks pioneered the mobilization of new types of data for monitoring and supervision. They have also devised new methods for aggregating the data to inform the policy-making process. </p><blockquote><p>More than three quarters of central bank respondents report the use of indicator dashboards. These dashboards bring together multiple indicators (often between 50 and 100) covering several specific sectors or types of risk, with the aim of providing an overview of the main vulnerabilities in the financial system.</p><p>…. While dashboards and composite indicators allow information from several potential areas to be combined, it is important to assess the degree to which identified vulnerabilities translate into systemic risks. In this respect, thresholds for composite indicators or individual dashboard indicators are often used to signal areas of emerging or increasing risk. Growth-at-risk models provide estimates of the severity of potential systemic risk in terms of downside risks to GDP growth. </p></blockquote><p>Setting thresholds is a way of guiding policy-makers’ attention towards emerging critical risks. </p><blockquote><p>Virtually all central banks that use dashboards establish thresholds for indicator categories in the dashboards. The thresholds are used to assign colour codes to indicators or groups of indicators within the dashboard in order to signal areas of vulnerability. The colour codes may derive from thresholds defined either at the level of individual indicators or at the level of indicator groups or categories. … One statistical method is based on crisis prediction models where the indicators and corresponding thresholds are chosen to minimise the risk of false positives or false negatives when predicting historical banking crises. Another method combines statistical methods with expert judgment by utilising graphical analysis to identify points of non-linearity at which debt vulnerabilities often turn into actual debt distress. </p></blockquote><p>A more elaborate type of risk analysis known as growth-at-risk models links financial indicators directly to macroeconomic metrics</p><blockquote><p>Growth-at-risk (GaR) is a statistical method to measure systemic risk. It is used by two-thirds of the responding central banks. GaR models use macroeconomic and financial variables to estimate a probability distribution of future real GDP growth. One important advantage is that GaR models map the effects of different vulnerabilities into one easy-to-understand measure: potential GDP losses. GaR models can also illustrate how current debt vulnerabilities affect downside GDP growth risk at various horizons. … Most central banks tend to focus on both the near term (one month or one quarter) and medium-to-long term (one to three years) GDP risks. Medium-to-long horizon models may be more useful to guide policy actions to manage the build-up of debt vulnerabilities. </p></blockquote><p>Finally, closing the loop back to bank regulation, central banks use statistical models to guide their decisions with regard to the counter-cyclical capital buffers that big banks are required to hold. When there is a risk of severe recession, bank lending can be released. In the current moment, one would expect those buffers to be tightened.</p><blockquote><p>Beyond debt monitoring frameworks, central banks also use statistical methods in the context of the CCyB framework. The methods include: quantile regressions that provide estimates of future NPLs; statistical filters to identify excessive credit growth; stress tests to review the adequacy of the CCyB; and models measuring the long-term trade-off between efficiency and stability. </p></blockquote><p>For obvious reasons, in the current debate about central bank policy and inflation, it is the classic macroeconomic questions of a hard landing that hog the headlines. How much unemployment may be necessary to bring inflation down to the desired level? This is the question first formulated by the Phillips curve in 1958 and reformulated with the expectations augmented Phillips curve in the 1970s. It is - now as then - a hugely important trade off. But we should not mistake the era that we are in. What is being put to the test in the current moment is the entire regime of policy instruments, tools and priorities that has emerged since the financial crisis of 2008. That regime was created under the sign of low inflation and low interest rates. The question now is how well it will function as central banks wage a struggle to bring inflation down from close to ten percent and interest rates rise as they have not done since the early 2000s. </p><p>****</p><p>I love putting out Chartbook and I am particularly pleased that it goes out free to thousands of readers all over the world. But it takes a lot of work and what sustains the effort is the support of paying subscribers. If you appreciate the newsletter and can afford a subscription, please hit the button and pick one of the three options.</p><p class="button-wrapper" data-attrs="{"url":"https://adamtooze.substack.com/subscribe?","text":"Subscribe now","action":null,"class":null}" data-component-name="ButtonCreateButton"><a class="button primary" href="https://adamtooze.substack.com/subscribe?"><span>Subscribe now</span></a></p><p></p><!--
{
"post_id": "64633662.chartbook-142-the-dollar-systems",
"post_date": "2022-08-13T12:00:57.335Z",
"is_published": true,
"email_sent_at": "2022-08-13T12:00:57.618Z",
"inbox_sent_at": "2022-08-13T12:00:57.618Z",
"type": "newsletter",
"audience": "everyone",
"title": "Chartbook #142: The dollar system's resilience",
"subtitle": ""
}
-->
<p class="button-wrapper" data-attrs="{"url":"https://adamtooze.substack.com/subscribe?","text":"Subscribe now","action":null,"class":null}" data-component-name="ButtonCreateButton"><a class="button primary" href="https://adamtooze.substack.com/subscribe?"><span>Subscribe now</span></a></p><p></p><div class="captioned-image-container"><figure><a class="image-link image2 is-viewable-img" target="_blank" href="https://substackcdn.com/image/fetch/$s_!tOsi!,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F182bc03d-54c7-41a6-9ea5-f98a5174ecb9_650x1108.png" data-component-name="Image2ToDOM"><div class="image2-inset"><picture><source type="image/webp" srcset="https://substackcdn.com/image/fetch/$s_!tOsi!,w_424,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F182bc03d-54c7-41a6-9ea5-f98a5174ecb9_650x1108.png 424w, https://substackcdn.com/image/fetch/$s_!tOsi!,w_848,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F182bc03d-54c7-41a6-9ea5-f98a5174ecb9_650x1108.png 848w, https://substackcdn.com/image/fetch/$s_!tOsi!,w_1272,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F182bc03d-54c7-41a6-9ea5-f98a5174ecb9_650x1108.png 1272w, https://substackcdn.com/image/fetch/$s_!tOsi!,w_1456,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F182bc03d-54c7-41a6-9ea5-f98a5174ecb9_650x1108.png 1456w" sizes="100vw"><img src="https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/182bc03d-54c7-41a6-9ea5-f98a5174ecb9_650x1108.png" width="354" height="603.4338461538462" data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/182bc03d-54c7-41a6-9ea5-f98a5174ecb9_650x1108.png","srcNoWatermark":null,"fullscreen":null,"imageSize":null,"height":1108,"width":650,"resizeWidth":354,"bytes":493330,"alt":null,"title":null,"type":"image/png","href":null,"belowTheFold":false,"topImage":true,"internalRedirect":null,"isProcessing":false,"align":null,"offset":false}" class="sizing-normal" alt="" srcset="https://substackcdn.com/image/fetch/$s_!tOsi!,w_424,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F182bc03d-54c7-41a6-9ea5-f98a5174ecb9_650x1108.png 424w, https://substackcdn.com/image/fetch/$s_!tOsi!,w_848,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F182bc03d-54c7-41a6-9ea5-f98a5174ecb9_650x1108.png 848w, https://substackcdn.com/image/fetch/$s_!tOsi!,w_1272,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F182bc03d-54c7-41a6-9ea5-f98a5174ecb9_650x1108.png 1272w, https://substackcdn.com/image/fetch/$s_!tOsi!,w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F182bc03d-54c7-41a6-9ea5-f98a5174ecb9_650x1108.png 1456w" sizes="100vw" fetchpriority="high"></picture><div class="image-link-expand"><div class="pencraft pc-display-flex pc-gap-8 pc-reset"><div class="pencraft pc-reset icon-container restack-image"><svg xmlns="http://www.w3.org/2000/svg" width="20" height="20" viewBox="0 0 24 24" fill="none" stroke="currentColor" stroke-width="2" stroke-linecap="round" stroke-linejoin="round" class="lucide lucide-refresh-cw"><path d="M3 12a9 9 0 0 1 9-9 9.75 9.75 0 0 1 6.74 2.74L21 8"></path><path d="M21 3v5h-5"></path><path d="M21 12a9 9 0 0 1-9 9 9.75 9.75 0 0 1-6.74-2.74L3 16"></path><path d="M8 16H3v5"></path></svg></div><div class="pencraft pc-reset icon-container view-image"><svg xmlns="http://www.w3.org/2000/svg" width="20" height="20" viewBox="0 0 24 24" fill="none" stroke="currentColor" stroke-width="2" stroke-linecap="round" stroke-linejoin="round" class="lucide lucide-maximize2 lucide-maximize-2"><polyline points="15 3 21 3 21 9"></polyline><polyline points="9 21 3 21 3 15"></polyline><line x1="21" x2="14" y1="3" y2="10"></line><line x1="3" x2="10" y1="21" y2="14"></line></svg></div></div></div></div></a><figcaption class="image-caption"></figcaption></figure></div><p>This week I did a piece for <em><a href="https://foreignpolicy.com/2022/08/12/fed-interest-rates-dollar-system-currency/">Foreign Policy </a></em>on the current strength of the dollar and what it tells us about how the dollar system operates under stress. You could see it as an updating of a longer essay I did back in early <a href="https://foreignpolicy.com/2021/01/15/rise-fall-united-states-financial-empire-dollar-global-currency/">2021 for </a><em><a href="https://foreignpolicy.com/2021/01/15/rise-fall-united-states-financial-empire-dollar-global-currency/">Foreign Policy</a></em> on the history of the dollar as the world’s anchor currency. The illustration was kinda great. </p><div class="captioned-image-container"><figure><a class="image-link image2 is-viewable-img" target="_blank" href="https://substackcdn.com/image/fetch/$s_!5gzi!,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F904b682d-eebc-4d02-929b-0d71fbd44190_746x702.png" data-component-name="Image2ToDOM"><div class="image2-inset"><picture><source type="image/webp" srcset="https://substackcdn.com/image/fetch/$s_!5gzi!,w_424,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F904b682d-eebc-4d02-929b-0d71fbd44190_746x702.png 424w, https://substackcdn.com/image/fetch/$s_!5gzi!,w_848,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F904b682d-eebc-4d02-929b-0d71fbd44190_746x702.png 848w, https://substackcdn.com/image/fetch/$s_!5gzi!,w_1272,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F904b682d-eebc-4d02-929b-0d71fbd44190_746x702.png 1272w, https://substackcdn.com/image/fetch/$s_!5gzi!,w_1456,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F904b682d-eebc-4d02-929b-0d71fbd44190_746x702.png 1456w" sizes="100vw"><img src="https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/904b682d-eebc-4d02-929b-0d71fbd44190_746x702.png" width="746" height="702" data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/904b682d-eebc-4d02-929b-0d71fbd44190_746x702.png","srcNoWatermark":null,"fullscreen":null,"imageSize":null,"height":702,"width":746,"resizeWidth":null,"bytes":685637,"alt":null,"title":null,"type":"image/png","href":null,"belowTheFold":false,"topImage":false,"internalRedirect":null,"isProcessing":false,"align":null,"offset":false}" class="sizing-normal" alt="" srcset="https://substackcdn.com/image/fetch/$s_!5gzi!,w_424,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F904b682d-eebc-4d02-929b-0d71fbd44190_746x702.png 424w, https://substackcdn.com/image/fetch/$s_!5gzi!,w_848,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F904b682d-eebc-4d02-929b-0d71fbd44190_746x702.png 848w, https://substackcdn.com/image/fetch/$s_!5gzi!,w_1272,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F904b682d-eebc-4d02-929b-0d71fbd44190_746x702.png 1272w, https://substackcdn.com/image/fetch/$s_!5gzi!,w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F904b682d-eebc-4d02-929b-0d71fbd44190_746x702.png 1456w" sizes="100vw"></picture><div class="image-link-expand"><div class="pencraft pc-display-flex pc-gap-8 pc-reset"><div class="pencraft pc-reset icon-container restack-image"><svg xmlns="http://www.w3.org/2000/svg" width="20" height="20" viewBox="0 0 24 24" fill="none" stroke="currentColor" stroke-width="2" stroke-linecap="round" stroke-linejoin="round" class="lucide lucide-refresh-cw"><path d="M3 12a9 9 0 0 1 9-9 9.75 9.75 0 0 1 6.74 2.74L21 8"></path><path d="M21 3v5h-5"></path><path d="M21 12a9 9 0 0 1-9 9 9.75 9.75 0 0 1-6.74-2.74L3 16"></path><path d="M8 16H3v5"></path></svg></div><div class="pencraft pc-reset icon-container view-image"><svg xmlns="http://www.w3.org/2000/svg" width="20" height="20" viewBox="0 0 24 24" fill="none" stroke="currentColor" stroke-width="2" stroke-linecap="round" stroke-linejoin="round" class="lucide lucide-maximize2 lucide-maximize-2"><polyline points="15 3 21 3 21 9"></polyline><polyline points="9 21 3 21 3 15"></polyline><line x1="21" x2="14" y1="3" y2="10"></line><line x1="3" x2="10" y1="21" y2="14"></line></svg></div></div></div></div></a></figure></div><p>The 2021 piece was an an attempt to write a history of the dollar that did without a dramatic ending. It postulated more and more policy improvisation in a context of growing multipolarity as the likely future of the dollar as the leading global currency. </p><p>That deliberately low-key interpretation, postulating a future of open-ended, “muddling through”, in turn informed my reaction to the feverish debate about the future of the dollar system unleashed by Putin’s attack on Ukraine in February 2022. </p><p>Whereas many analysts were prompted by the war and the dramatic financial sanctions imposed on Russia to imagine futures radically different from the present - scenarios I dubbed finance fiction of “fin-fi” - I argued in <a href="https://adamtooze.substack.com/p/chartbook-107-the-future-of-the-dollar?s=w">Chartbook #107</a> that we should read this kind of speculative financial writing as symptomatic rather than predictive or realistic. It is a symptom of the following tension: </p><blockquote><p>(2) The world <em><strong>is</strong></em> multipolar and so is global trade. Western policy must adjust to that.</p><p>(3) There is a huge asymmetry in the world right now between the financial system that remains spectacularly euro-dollar centered and the new multipolarity of power, trade and economic activity.</p><p>(4) Given this asymmetry there is a fascination in the cultural and political sphere with the way this glaring asymmetry could be overcome. Not only that, there is a positive desire to see the asymmetry overcome. There is a relish in the discomfiture of the West. The euro-dollar lock feels like the final frontier of Western power, long overdue for overthrow.</p><p>(5) Fin-fi is one of the media in which that sense of impending historical change expresses itself.</p><p>(6) Given the situation from which it emerges we should read the proliferating genre of Fin-fin symptomatically. It expresses a world historic tension. In some cases it delineates trajectories and seeks to map strategies for policy and investors. In other cases these texts are better read are acts of diplomacy (Larry Fink) motivated by complex constellations of interests.</p><p>(7) We should guard against taking Fin-fi literally as a guide to the future rather than as a fascinating expression of the tensions inherent in our current moment.</p><p>(8) Identifying and grasping a tension conceptually, is illuminating and engaging for the reasons stated. But the satisfaction thus derived should not be confused with gauging realistically the likelihood of that tension actually being resolved, certainly not in a “logical” direction.</p></blockquote><p>Despite the obvious interest of certain key players in the global economy in finding alternatives to the dollar, its preeminence in global trade and finance is well buttressed. </p><div class="embedded-post-wrap" data-attrs="{"id":51158276,"url":"https://adamtooze.substack.com/p/chartbook-106-the-new-buttresses","publication_id":192845,"publication_name":"Chartbook","publication_logo_url":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/a8e73950-03bb-4589-afaf-d9cdd55ab61b_500x500.png","title":"Chartbook #106: The new buttresses of the dollar system. ","truncated_body_text":"Triggered by the sanctions imposed on Russia’s central bank there is a lot of excited talk right now about the possibility of major holders of reserves diversifying away from the dollar. I’ve been a skeptic. My sense is that the main lesson from Russia’s experience is that there is nowhere else to go. If you diversify out of dollars the only large-scale…","date":"2022-03-29T14:15:25.753Z","like_count":55,"comment_count":20,"bylines":[{"id":2779232,"name":"Adam Tooze","previous_name":null,"photo_url":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/dafd8e86-5f2d-40e3-b2b3-583e237dfab6_48x48.png","bio":"Columbia University ","profile_set_up_at":"2021-07-12T13:37:26.858Z","publicationUsers":[{"id":178707,"user_id":2779232,"publication_id":192845,"role":"admin","public":true,"is_primary":false,"publication":{"id":192845,"name":"Chartbook","subdomain":"adamtooze","custom_domain":null,"custom_domain_optional":false,"hero_text":"Economic data, images, stories that matter from Adam Tooze. More organized and coherent than twitter. More freewheeling than what you might read from me in FT, Guardian, Foreign Policy, LRB, SocialEurope etc. ","logo_url":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/a8e73950-03bb-4589-afaf-d9cdd55ab61b_500x500.png","author_id":2779232,"theme_var_background_pop":"#009b50","created_at":"2020-11-15T19:00:43.713Z","rss_website_url":null,"email_from_name":null,"copyright":"Adam Tooze","founding_plan_name":"Founding Member","community_enabled":true,"invite_only":false,"payments_state":"enabled"}}],"twitter_screen_name":"adam_tooze","is_guest":false}],"utm_campaign":null,"belowTheFold":true,"type":null,"language":"en"}" data-component-name="EmbeddedPostToDOM"><a class="embedded-post" native="true" href="https://adamtooze.substack.com/p/chartbook-106-the-new-buttresses?utm_source=substack&utm_campaign=post_embed&utm_medium=web"><div class="embedded-post-header"><img class="embedded-post-publication-logo" src="https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/a8e73950-03bb-4589-afaf-d9cdd55ab61b_500x500.png" loading="lazy"><span class="embedded-post-publication-name">Chartbook</span></div><div class="embedded-post-title-wrapper"><div class="embedded-post-title">Chartbook #106: The new buttresses of the dollar system. </div></div><div class="embedded-post-body">Triggered by the sanctions imposed on Russia’s central bank there is a lot of excited talk right now about the possibility of major holders of reserves diversifying away from the dollar. I’ve been a skeptic. My sense is that the main lesson from Russia’s experience is that there is nowhere else to go. If you diversify out of dollars the only large-scale…</div><div class="embedded-post-cta-wrapper"><span class="embedded-post-cta">Read more</span></div><div class="embedded-post-meta">3 years ago · 55 likes · 20 comments · Adam Tooze</div></a></div><p>If rather than speculating in Fin-Fiction mode about future currency systems, we stay with the troubles of the actually existing dollar system, what became more and more evident from the spring of 2022 was that the dominating story of the coming year would not by new alternatives to the dollar, but the strength of the US currency. In July 2022 the dollar hit the highest level in two decades.</p><div class="captioned-image-container"><figure><a class="image-link image2 is-viewable-img" target="_blank" href="https://substackcdn.com/image/fetch/$s_!Fzx5!,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Ffa7fcf96-8698-4355-8dd0-3bee4d7473e5_1338x1056.png" data-component-name="Image2ToDOM"><div class="image2-inset"><picture><source type="image/webp" srcset="https://substackcdn.com/image/fetch/$s_!Fzx5!,w_424,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Ffa7fcf96-8698-4355-8dd0-3bee4d7473e5_1338x1056.png 424w, https://substackcdn.com/image/fetch/$s_!Fzx5!,w_848,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Ffa7fcf96-8698-4355-8dd0-3bee4d7473e5_1338x1056.png 848w, https://substackcdn.com/image/fetch/$s_!Fzx5!,w_1272,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Ffa7fcf96-8698-4355-8dd0-3bee4d7473e5_1338x1056.png 1272w, https://substackcdn.com/image/fetch/$s_!Fzx5!,w_1456,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Ffa7fcf96-8698-4355-8dd0-3bee4d7473e5_1338x1056.png 1456w" sizes="100vw"><img src="https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/fa7fcf96-8698-4355-8dd0-3bee4d7473e5_1338x1056.png" width="1338" height="1056" data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/fa7fcf96-8698-4355-8dd0-3bee4d7473e5_1338x1056.png","srcNoWatermark":null,"fullscreen":null,"imageSize":null,"height":1056,"width":1338,"resizeWidth":null,"bytes":286606,"alt":null,"title":null,"type":"image/png","href":null,"belowTheFold":true,"topImage":false,"internalRedirect":null,"isProcessing":false,"align":null,"offset":false}" class="sizing-normal" alt="" srcset="https://substackcdn.com/image/fetch/$s_!Fzx5!,w_424,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Ffa7fcf96-8698-4355-8dd0-3bee4d7473e5_1338x1056.png 424w, https://substackcdn.com/image/fetch/$s_!Fzx5!,w_848,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Ffa7fcf96-8698-4355-8dd0-3bee4d7473e5_1338x1056.png 848w, https://substackcdn.com/image/fetch/$s_!Fzx5!,w_1272,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Ffa7fcf96-8698-4355-8dd0-3bee4d7473e5_1338x1056.png 1272w, https://substackcdn.com/image/fetch/$s_!Fzx5!,w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Ffa7fcf96-8698-4355-8dd0-3bee4d7473e5_1338x1056.png 1456w" sizes="100vw" loading="lazy"></picture><div class="image-link-expand"><div class="pencraft pc-display-flex pc-gap-8 pc-reset"><div class="pencraft pc-reset icon-container restack-image"><svg xmlns="http://www.w3.org/2000/svg" width="20" height="20" viewBox="0 0 24 24" fill="none" stroke="currentColor" stroke-width="2" stroke-linecap="round" stroke-linejoin="round" class="lucide lucide-refresh-cw"><path d="M3 12a9 9 0 0 1 9-9 9.75 9.75 0 0 1 6.74 2.74L21 8"></path><path d="M21 3v5h-5"></path><path d="M21 12a9 9 0 0 1-9 9 9.75 9.75 0 0 1-6.74-2.74L3 16"></path><path d="M8 16H3v5"></path></svg></div><div class="pencraft pc-reset icon-container view-image"><svg xmlns="http://www.w3.org/2000/svg" width="20" height="20" viewBox="0 0 24 24" fill="none" stroke="currentColor" stroke-width="2" stroke-linecap="round" stroke-linejoin="round" class="lucide lucide-maximize2 lucide-maximize-2"><polyline points="15 3 21 3 21 9"></polyline><polyline points="9 21 3 21 3 15"></polyline><line x1="21" x2="14" y1="3" y2="10"></line><line x1="3" x2="10" y1="21" y2="14"></line></svg></div></div></div></div></a></figure></div><p>This week’s piece in <em><a href="https://foreignpolicy.com/2022/08/12/fed-interest-rates-dollar-system-currency/">Foreign Policy</a> </em>picks up on the question of dollar strength and the tensions that it unleashes in the world economy. </p><p>For the world economy, the tightening of monetary policy by the Fed unleashes contradictory pressures. The currencies of major US trading partners like Japan have plunged to multi-decade lows. </p><div class="embedded-post-wrap" data-attrs="{"id":52064431,"url":"https://adamtooze.substack.com/p/chartbook-113-tension-in-the-dollar","publication_id":192845,"publication_name":"Chartbook","publication_logo_url":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/a8e73950-03bb-4589-afaf-d9cdd55ab61b_500x500.png","title":"Chartbook #113: Tension in the dollar-system. Could a plunging Japanese Yen upset the US Treasury market? ","truncated_body_text":"Every moment of stress in the global financial system is a test of lines of interconnection and power. The most obvious example of this right now is the sanctions regime imposed on Russia. That has provoked a surge in debate about possible alternatives to the dollar, ruble-yuan systems, commodity-based networks of finance etc. The line I have been takin…","date":"2022-04-17T14:10:45.259Z","like_count":56,"comment_count":19,"bylines":[{"id":2779232,"name":"Adam Tooze","previous_name":null,"photo_url":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/dafd8e86-5f2d-40e3-b2b3-583e237dfab6_48x48.png","bio":"Columbia University ","profile_set_up_at":"2021-07-12T13:37:26.858Z","publicationUsers":[{"id":178707,"user_id":2779232,"publication_id":192845,"role":"admin","public":true,"is_primary":false,"publication":{"id":192845,"name":"Chartbook","subdomain":"adamtooze","custom_domain":null,"custom_domain_optional":false,"hero_text":"Economic data, images, stories that matter from Adam Tooze. More organized and coherent than twitter. More freewheeling than what you might read from me in FT, Guardian, Foreign Policy, LRB, SocialEurope etc. ","logo_url":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/a8e73950-03bb-4589-afaf-d9cdd55ab61b_500x500.png","author_id":2779232,"theme_var_background_pop":"#009b50","created_at":"2020-11-15T19:00:43.713Z","rss_website_url":null,"email_from_name":null,"copyright":"Adam Tooze","founding_plan_name":"Founding Member","community_enabled":true,"invite_only":false,"payments_state":"enabled"}}],"twitter_screen_name":"adam_tooze","is_guest":false}],"utm_campaign":null,"belowTheFold":true,"type":null,"language":"en"}" data-component-name="EmbeddedPostToDOM"><a class="embedded-post" native="true" href="https://adamtooze.substack.com/p/chartbook-113-tension-in-the-dollar?utm_source=substack&utm_campaign=post_embed&utm_medium=web"><div class="embedded-post-header"><img class="embedded-post-publication-logo" src="https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/a8e73950-03bb-4589-afaf-d9cdd55ab61b_500x500.png" loading="lazy"><span class="embedded-post-publication-name">Chartbook</span></div><div class="embedded-post-title-wrapper"><div class="embedded-post-title">Chartbook #113: Tension in the dollar-system. Could a plunging Japanese Yen upset the US Treasury market? </div></div><div class="embedded-post-body">Every moment of stress in the global financial system is a test of lines of interconnection and power. The most obvious example of this right now is the sanctions regime imposed on Russia. That has provoked a surge in debate about possible alternatives to the dollar, ruble-yuan systems, commodity-based networks of finance etc. The line I have been takin…</div><div class="embedded-post-cta-wrapper"><span class="embedded-post-cta">Read more</span></div><div class="embedded-post-meta">3 years ago · 56 likes · 19 comments · Adam Tooze</div></a></div><p>For those with strong export sectors, selling goods not denominated in dollars, this can be a boon. But those heavily reliant on key imports, which are denominated in dollars, or those who are heavily indebted in dollars suffer an agonizing crunch. </p><p>For a typically excellent treatment of the question by the Odd Lots podcast hosted by Tracey Alloway and Joe Weisenthal, see this <a href="https://www.bloomberg.com/news/articles/2022-07-18/transcript-why-the-us-dollar-is-booming-and-creating-a-possible-doom-loop?srnd=oddlots&sref=wOrDP8KX">transcript</a> of their interview with Jon Turek. </p><p>In the US economy as well, the sudden appreciation of the dollar unleashes contradictory pressures.</p><p>US consumers benefit from lower prices. In the second half of 2022 the strong dollar should be one of the forces helping to bring inflation - both by cheapening imports and slowing the world economy. </p><div class="captioned-image-container"><figure><a class="image-link image2 is-viewable-img" target="_blank" href="https://substackcdn.com/image/fetch/$s_!yglE!,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Feb7eec50-1da8-4ca6-8ce2-aa23f53cc198_1162x1168.png" data-component-name="Image2ToDOM"><div class="image2-inset"><picture><source type="image/webp" srcset="https://substackcdn.com/image/fetch/$s_!yglE!,w_424,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Feb7eec50-1da8-4ca6-8ce2-aa23f53cc198_1162x1168.png 424w, https://substackcdn.com/image/fetch/$s_!yglE!,w_848,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Feb7eec50-1da8-4ca6-8ce2-aa23f53cc198_1162x1168.png 848w, https://substackcdn.com/image/fetch/$s_!yglE!,w_1272,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Feb7eec50-1da8-4ca6-8ce2-aa23f53cc198_1162x1168.png 1272w, https://substackcdn.com/image/fetch/$s_!yglE!,w_1456,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Feb7eec50-1da8-4ca6-8ce2-aa23f53cc198_1162x1168.png 1456w" sizes="100vw"><img src="https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/eb7eec50-1da8-4ca6-8ce2-aa23f53cc198_1162x1168.png" width="1162" height="1168" data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/eb7eec50-1da8-4ca6-8ce2-aa23f53cc198_1162x1168.png","srcNoWatermark":null,"fullscreen":null,"imageSize":null,"height":1168,"width":1162,"resizeWidth":null,"bytes":553654,"alt":null,"title":null,"type":"image/png","href":null,"belowTheFold":true,"topImage":false,"internalRedirect":null,"isProcessing":false,"align":null,"offset":false}" class="sizing-normal" alt="" srcset="https://substackcdn.com/image/fetch/$s_!yglE!,w_424,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Feb7eec50-1da8-4ca6-8ce2-aa23f53cc198_1162x1168.png 424w, https://substackcdn.com/image/fetch/$s_!yglE!,w_848,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Feb7eec50-1da8-4ca6-8ce2-aa23f53cc198_1162x1168.png 848w, https://substackcdn.com/image/fetch/$s_!yglE!,w_1272,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Feb7eec50-1da8-4ca6-8ce2-aa23f53cc198_1162x1168.png 1272w, https://substackcdn.com/image/fetch/$s_!yglE!,w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2Feb7eec50-1da8-4ca6-8ce2-aa23f53cc198_1162x1168.png 1456w" sizes="100vw" loading="lazy"></picture><div class="image-link-expand"><div class="pencraft pc-display-flex pc-gap-8 pc-reset"><div class="pencraft pc-reset icon-container restack-image"><svg xmlns="http://www.w3.org/2000/svg" width="20" height="20" viewBox="0 0 24 24" fill="none" stroke="currentColor" stroke-width="2" stroke-linecap="round" stroke-linejoin="round" class="lucide lucide-refresh-cw"><path d="M3 12a9 9 0 0 1 9-9 9.75 9.75 0 0 1 6.74 2.74L21 8"></path><path d="M21 3v5h-5"></path><path d="M21 12a9 9 0 0 1-9 9 9.75 9.75 0 0 1-6.74-2.74L3 16"></path><path d="M8 16H3v5"></path></svg></div><div class="pencraft pc-reset icon-container view-image"><svg xmlns="http://www.w3.org/2000/svg" width="20" height="20" viewBox="0 0 24 24" fill="none" stroke="currentColor" stroke-width="2" stroke-linecap="round" stroke-linejoin="round" class="lucide lucide-maximize2 lucide-maximize-2"><polyline points="15 3 21 3 21 9"></polyline><polyline points="9 21 3 21 3 15"></polyline><line x1="21" x2="14" y1="3" y2="10"></line><line x1="3" x2="10" y1="21" y2="14"></line></svg></div></div></div></div></a></figure></div><p>Source: <a href="https://thedailyshot.com/2022/08/09/inflation-expectations-drop-sharply/">Daily Shot</a> </p><p>On the other hand, a strong dollar is not necessarily good news for US corporations that generate a lot of profit outside the US.</p><div data-component-name="Twitter2ToDOM" class="tweet" data-attrs="{"url":"https://twitter.com/MacroAlf/status/1550220917229473793?s=20&t=9QKot1vC5zLGkYzXURNL2w","full_text":"One of the reasons why earnings tend to be revised down across the board when the US Dollar is strong is that US companies generate a decent portion of their profits outside the United States.\n\nA stronger USD doesn't help there. ","username":"MacroAlf","name":"Alf","date":"Thu Jul 21 20:47:23 +0000 2022","photos":[{"img_url":"https://pbs.substack.com/media/FYN9EL7XgAIf-Q5.jpg","link_url":"https://t.co/eMwlUTpYue","alt_text":null}],"quoted_tweet":{},"retweet_count":40,"like_count":360,"expanded_url":{},"video_url":null,"belowTheFold":true}"><a class="tweet-link-top" href="https://twitter.com/MacroAlf/status/1550220917229473793?s=20&t=9QKot1vC5zLGkYzXURNL2w" target="_blank"><div class="tweet-header"><img class="tweet-header-avatar" src="https://substackcdn.com/image/twitter_name/w_96/MacroAlf.jpg" alt="Twitter avatar for @MacroAlf" loading="lazy"><div class="tweet-header-text"><span class="tweet-author-name">Alf </span><span class="tweet-author-handle">@MacroAlf</span></div></div><div class="tweet-text">One of the reasons why earnings tend to be revised down across the board when the US Dollar is strong is that US companies generate a decent portion of their profits outside the United States.
A stronger USD doesn't help there. </div><div class="tweet-photos-container one"><div class="tweet-photo-wrapper "><picture><source type="image/webp" srcset="https://substackcdn.com/image/fetch/$s_!zaXt!,w_600,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fpbs.substack.com%2Fmedia%2FFYN9EL7XgAIf-Q5.jpg"><img class="tweet-photo" src="https://pbs.substack.com/media/FYN9EL7XgAIf-Q5.jpg" alt="Image" loading="lazy"></picture></div></div></a><a class="tweet-link-bottom" href="https://twitter.com/MacroAlf/status/1550220917229473793?s=20&t=9QKot1vC5zLGkYzXURNL2w" target="_blank"><div class="tweet-footer"><span class="tweet-date">8:47 PM ∙ Jul 21, 2022</span><hr><div class="tweet-ufi"><span href="https://twitter.com/MacroAlf/status/1550220917229473793?s=20&t=9QKot1vC5zLGkYzXURNL2w/likes" class="likes"><span class="like-count">360</span>Likes</span><span href="https://twitter.com/MacroAlf/status/1550220917229473793?s=20&t=9QKot1vC5zLGkYzXURNL2w/retweets" class="retweets"><span class="rt-count">40</span>Retweets</span></div></div></a></div><p>And it bears repeating that there are still parts of the US economy - notably export-focused manufacturing - that lose competitiveness and market share when the dollar rises. On this score I once again recommend <a href="https://www.nytimes.com/2018/09/29/upshot/mini-recession-2016-little-known-big-impact.html">Neil Irwin</a>’s outstanding essay on the 2016 mini-recession in US manufacturing, which in November 2016 helped set the stage for the election of Donald Trump with the votes of the rustbelt. </p><div class="captioned-image-container"><figure><a class="image-link image2 is-viewable-img" target="_blank" href="https://substackcdn.com/image/fetch/$s_!HMOB!,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F425dae85-b3f5-47e4-af78-b20ef550a5c0_780x600.png" data-component-name="Image2ToDOM"><div class="image2-inset"><picture><source type="image/webp" srcset="https://substackcdn.com/image/fetch/$s_!HMOB!,w_424,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F425dae85-b3f5-47e4-af78-b20ef550a5c0_780x600.png 424w, https://substackcdn.com/image/fetch/$s_!HMOB!,w_848,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F425dae85-b3f5-47e4-af78-b20ef550a5c0_780x600.png 848w, https://substackcdn.com/image/fetch/$s_!HMOB!,w_1272,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F425dae85-b3f5-47e4-af78-b20ef550a5c0_780x600.png 1272w, https://substackcdn.com/image/fetch/$s_!HMOB!,w_1456,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F425dae85-b3f5-47e4-af78-b20ef550a5c0_780x600.png 1456w" sizes="100vw"><img src="https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/425dae85-b3f5-47e4-af78-b20ef550a5c0_780x600.png" width="780" height="600" data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/425dae85-b3f5-47e4-af78-b20ef550a5c0_780x600.png","srcNoWatermark":null,"fullscreen":null,"imageSize":null,"height":600,"width":780,"resizeWidth":null,"bytes":75611,"alt":null,"title":null,"type":"image/png","href":null,"belowTheFold":true,"topImage":false,"internalRedirect":null,"isProcessing":false,"align":null,"offset":false}" class="sizing-normal" alt="" srcset="https://substackcdn.com/image/fetch/$s_!HMOB!,w_424,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F425dae85-b3f5-47e4-af78-b20ef550a5c0_780x600.png 424w, https://substackcdn.com/image/fetch/$s_!HMOB!,w_848,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F425dae85-b3f5-47e4-af78-b20ef550a5c0_780x600.png 848w, https://substackcdn.com/image/fetch/$s_!HMOB!,w_1272,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F425dae85-b3f5-47e4-af78-b20ef550a5c0_780x600.png 1272w, https://substackcdn.com/image/fetch/$s_!HMOB!,w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F425dae85-b3f5-47e4-af78-b20ef550a5c0_780x600.png 1456w" sizes="100vw" loading="lazy"></picture><div class="image-link-expand"><div class="pencraft pc-display-flex pc-gap-8 pc-reset"><div class="pencraft pc-reset icon-container restack-image"><svg xmlns="http://www.w3.org/2000/svg" width="20" height="20" viewBox="0 0 24 24" fill="none" stroke="currentColor" stroke-width="2" stroke-linecap="round" stroke-linejoin="round" class="lucide lucide-refresh-cw"><path d="M3 12a9 9 0 0 1 9-9 9.75 9.75 0 0 1 6.74 2.74L21 8"></path><path d="M21 3v5h-5"></path><path d="M21 12a9 9 0 0 1-9 9 9.75 9.75 0 0 1-6.74-2.74L3 16"></path><path d="M8 16H3v5"></path></svg></div><div class="pencraft pc-reset icon-container view-image"><svg xmlns="http://www.w3.org/2000/svg" width="20" height="20" viewBox="0 0 24 24" fill="none" stroke="currentColor" stroke-width="2" stroke-linecap="round" stroke-linejoin="round" class="lucide lucide-maximize2 lucide-maximize-2"><polyline points="15 3 21 3 21 9"></polyline><polyline points="9 21 3 21 3 15"></polyline><line x1="21" x2="14" y1="3" y2="10"></line><line x1="3" x2="10" y1="21" y2="14"></line></svg></div></div></div></div></a></figure></div><p>Add all this up and you could once again spin a strong narrative of dollar strengthening that ends with a bang. You might even have the makings of a “dollar doom loop”.</p><div class="captioned-image-container"><figure><a class="image-link image2 is-viewable-img" target="_blank" href="https://substackcdn.com/image/fetch/$s_!zVeP!,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F725db2bc-1e77-499b-9023-8036e6eb9fdf_1000x466.png" data-component-name="Image2ToDOM"><div class="image2-inset"><picture><source type="image/webp" srcset="https://substackcdn.com/image/fetch/$s_!zVeP!,w_424,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F725db2bc-1e77-499b-9023-8036e6eb9fdf_1000x466.png 424w, https://substackcdn.com/image/fetch/$s_!zVeP!,w_848,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F725db2bc-1e77-499b-9023-8036e6eb9fdf_1000x466.png 848w, https://substackcdn.com/image/fetch/$s_!zVeP!,w_1272,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F725db2bc-1e77-499b-9023-8036e6eb9fdf_1000x466.png 1272w, https://substackcdn.com/image/fetch/$s_!zVeP!,w_1456,c_limit,f_webp,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F725db2bc-1e77-499b-9023-8036e6eb9fdf_1000x466.png 1456w" sizes="100vw"><img src="https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/725db2bc-1e77-499b-9023-8036e6eb9fdf_1000x466.png" width="1000" height="466" data-attrs="{"src":"https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/725db2bc-1e77-499b-9023-8036e6eb9fdf_1000x466.png","srcNoWatermark":null,"fullscreen":null,"imageSize":null,"height":466,"width":1000,"resizeWidth":null,"bytes":null,"alt":"relates to This Could Be the Start of a Dollar ‘Doom Loop’ Like No Other","title":"relates to This Could Be the Start of a Dollar ‘Doom Loop’ Like No Other","type":null,"href":null,"belowTheFold":true,"topImage":false,"internalRedirect":null,"isProcessing":false,"align":null,"offset":false}" class="sizing-normal" alt="relates to This Could Be the Start of a Dollar ‘Doom Loop’ Like No Other" title="relates to This Could Be the Start of a Dollar ‘Doom Loop’ Like No Other" srcset="https://substackcdn.com/image/fetch/$s_!zVeP!,w_424,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F725db2bc-1e77-499b-9023-8036e6eb9fdf_1000x466.png 424w, https://substackcdn.com/image/fetch/$s_!zVeP!,w_848,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F725db2bc-1e77-499b-9023-8036e6eb9fdf_1000x466.png 848w, https://substackcdn.com/image/fetch/$s_!zVeP!,w_1272,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F725db2bc-1e77-499b-9023-8036e6eb9fdf_1000x466.png 1272w, https://substackcdn.com/image/fetch/$s_!zVeP!,w_1456,c_limit,f_auto,q_auto:good,fl_progressive:steep/https%3A%2F%2Fbucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com%2Fpublic%2Fimages%2F725db2bc-1e77-499b-9023-8036e6eb9fdf_1000x466.png 1456w" sizes="100vw" loading="lazy"></picture><div class="image-link-expand"><div class="pencraft pc-display-flex pc-gap-8 pc-reset"><div class="pencraft pc-reset icon-container restack-image"><svg xmlns="http://www.w3.org/2000/svg" width="20" height="20" viewBox="0 0 24 24" fill="none" stroke="currentColor" stroke-width="2" stroke-linecap="round" stroke-linejoin="round" class="lucide lucide-refresh-cw"><path d="M3 12a9 9 0 0 1 9-9 9.75 9.75 0 0 1 6.74 2.74L21 8"></path><path d="M21 3v5h-5"></path><path d="M21 12a9 9 0 0 1-9 9 9.75 9.75 0 0 1-6.74-2.74L3 16"></path><path d="M8 16H3v5"></path></svg></div><div class="pencraft pc-reset icon-container view-image"><svg xmlns="http://www.w3.org/2000/svg" width="20" height="20" viewBox="0 0 24 24" fill="none" stroke="currentColor" stroke-width="2" stroke-linecap="round" stroke-linejoin="round" class="lucide lucide-maximize2 lucide-maximize-2"><polyline points="15 3 21 3 21 9"></polyline><polyline points="9 21 3 21 3 15"></polyline><line x1="21" x2="14" y1="3" y2="10"></line><line x1="3" x2="10" y1="21" y2="14"></line></svg></div></div></div></div></a><figcaption class="image-caption">Source: Turek/Bloomberg</figcaption></figure></div><p>In Sri Lanka, of course, there has been a bang, a big bang. </p><p>But Sri Lanka suffered that fate because it is a weak, poor, vulnerable and badly governed part of the global economy. The rest of world economy may be fragile and unstable too, but it is not in Sri Lanka’s condition. </p><p>To return to an earlier point, the dollar system is well buttressed and it is well buttressed in part because it is enmeshed in a variety of strategies of de-risking. Some of these involve moderating the degree of attachment to dollar finance - by borrowing from foreign sources, for instance, but doing so not in dollars. The big EM markets have learned since the 1990s to manage their risks, a subject I take up (with all the necessary footnotes) in the chapter in <em>Shutdown</em> on the emerging market “toolkit”. </p><p>What holds the actually existing system of global finance together is not so much the dollar - pure and simple - so much as the sinews of finance, law and contractual construction knit by key players above all in Wall Street and - as <a href="https://press.princeton.edu/books/hardcover/9780691178974/the-code-of-capital">Katharina Pistor</a> has taught us - in London. The systems of English law and the legal code of the state of New York, are the preeminent codes for big debt deals. </p><p>To describe this nexus, the nerve center of the dollar system, in the recent <em>Foreign Policy</em> piece, I appropriate the term “Wall Street consensus” coined by Daniela Gabor, our <a href="https://twitter.com/adam_tooze/status/1555140248220438528">great guide in all things macrofinance</a>. The point of talking about Wall Street rather than the dollar is to highlight the players who actually make the system work, rather than the particular currencies they choose to operate in. But it is not by accident that 90 percent of global forex transactions - $6 trillion per day! - include the dollar as one currency in the pair. </p><p>The upshot is that the dollar system is not a giant anachronism with a bulls eye on its forehead - the conceit of the fin-fiction speculative genre. Nor is it a brittle and rigid system, prone to breaking whenever it stressed - as suggested by the doom-lop scenario. It is a sprawling, resilient network of state-backed, commercially driven, profit-orientated transactions, lubricated by the easy availability of dollars, interwoven with American geopolitical influence, a repeated game in which intelligent players continuously gauge their advantages and disadvantages and the (very few) alternatives open to them and then, when all is said and done, again and again come back for more. </p><p>****</p><p>I love putting out Chartbook and I am particularly pleased that it goes out free to thousands of readers all over the world. But it takes a lot of work and what sustains the effort is the support of paying subscribers. If you appreciate the newsletter and can afford a subscription, please hit the button and pick one of the three options.</p><p class="button-wrapper" data-attrs="{"url":"https://adamtooze.substack.com/subscribe?","text":"Subscribe now","action":null,"class":null}" data-component-name="ButtonCreateButton"><a class="button primary" href="https://adamtooze.substack.com/subscribe?"><span>Subscribe now</span></a></p><p></p><p></p><p></p>No children (leaf entity)