Macklem warns global imbalances fuel financial stability risks

Macklem reviewed historical periods where global imbalances led to systemic instability.

Under the gold standard before World War I, stable exchange rates came at the cost of painful domestic adjustments like rising unemployment.

The Bretton Woods system, established after World War II, also faltered when persistent imbalances and domestic imperatives overwhelmed the fixed exchange rate regime, leading to its collapse in 1971.

These historical failures highlight that excessive trade and capital flow imbalances create tensions, undermine stability when unaddressed, and that protectionist measures like tariffs ultimately harm everyone.

The lesson is clear: adjustment delayed becomes adjustment imposed, often disruptively.

Global imbalances are widening again, with China's surplus and the US deficit, within a faster, more complex, and less transparent financial system.

Non-bank intermediaries, operating with less regulation, increasingly dominate capital flows, shifting risks outside traditional banking oversight.

The US dollar's reserve status can delay necessary adjustments, allowing pressures to build and distort asset prices.

Macklem warned of two clear risks: capital misallocation in the US leading to painful corrections, or sudden reversals of these flows, both capable of transmitting stress globally.

Opacity amplifies these dangers.