Macklem: Global imbalances fuel financial stability risks

Macklem highlighted renewed G7 focus on global imbalances, noting their potential to affect employment, inflation, and financial security.

He specifically pointed to China's large trade surplus and overinvestment creating excess capacity, leading to deflationary forces and trade tensions.

The US trade deficit, conversely, requires large capital inflows.

Macklem stressed that these imbalances interact with a financial system that is faster, more complex, and increasingly dominated by less regulated non-bank intermediaries.

This shift means risks have migrated, and current surveillance frameworks struggle to keep pace, posing challenges for global standard-setters and central banks.

He warned that large capital inflows into the United States could lead to misallocation and a painful correction, or reverse suddenly, sending stress globally.

Macklem drew lessons from history, citing the failures of the gold standard and the Bretton Woods system.

Both systems eventually succumbed when excessive imbalances developed and domestic goals overwhelmed international rules.

He noted that attempts to shift costs through tariffs and devaluations, like the Smoot-Hawley tariffs, only led to mutual harm and global growth collapse.

The 2008-09 global financial crisis further demonstrated how quickly stress travels through interlinked financial systems.

The key takeaway: adjustments don't happen on their own in a good way; change tends to come in moments of costly crisis.