In its partly released Global Financial Stability Report this week, the International Monetary Fund (IMF) divides the world neatly into two halves: those who “create” liquidity— the US, UK, euro zone and Japan, a foursome IMF calls the G-4—and those who “receive” it—37 developing countries.
In 2003-09, the givers, with their low interest rates, got so generous with their liquidity that capital flooded the receivers. IMF notes that the liquidity that came from the G-4 is “positively associated with equity overvaluation and excessive credit growth” at the receivers’ end. India, which is already starting to worry again about bubbles, should note that G-4 liquidity has five times as much effect on asset prices as domestic factors.
Yes, the world’s developed and developing halves are coupled in an imbalanced form. In the narrative of Western central bankers, it’s a global savings glut, with Asian countries at its source, that’s at the root of the imbalance.
We can’t help but notice that there’s another imbalance called a global liquidity glut. Its source: the four most developed economies of the world.