“Some say the world will end in fire, Some say in ice.” These brilliant lines by the poet Robert Frost capture the world’s possible economic prospects. Some warn that the world of high debt and low interest rates will end in the fire of inflation. Others prophesy that it will end in the ice of deflation. Others, such as Ray Dalio of Bridgewater, are more optimistic: the economy will be neither burnt nor frozen. Instead, it will be neither too hot nor too cold, like the baby bear’s porridge, at least in countries that have had the fortune and wit to borrow in currencies they create freely.
William White, former chief economist of the Bank for International Settlements, presciently warned of financial risks before the 2007-09 financial crisis. Last year, he warned of another crisis, pointing to the continuing rise in non-financial sector debt, especially of governments in high-income countries and corporations in high-income and emerging economies. Those in emerging countries are particularly vulnerable, because much of their borrowing is in foreign currencies. This causes currency mismatches in their balance sheets. Meanwhile, monetary policy fosters risk-taking, while regulation discourages it — a recipe for instability.