"I’m from the government and I’m here to help."

The title quote by Ronald Reagan is found in a good piece on the changing Western financial system in the Financial Times, Liberalisation sews its own distruction.  This excerpt provides a macro view on the deleveraging that continues to sweep through all asset markets.

By intervening to keep their exchange rates down and accumulating foreign currency reserves, governments of emerging economies generated huge current account surpluses, which they recycled, together with inflows of private capital, into official capital outflows: between the end of the 1990s and the peak in July 2008, their currency reserves alone rose by $5,300bn.

These huge flows of capital, on top of the traditional surpluses of a number of high-income countries and the burgeoning surpluses of oil exporters, largely ended up in a small number of high-income countries and particularly in the US. At the peak, America absorbed about 70 per cent of the rest of the world’s surplus savings.

Meanwhile, inside the US the ratio of household debt to GDP rose from 66 per cent in 1997 to 100 per cent a decade later. Even bigger jumps in household indebtedness occurred in the UK. These surges in household debt were supported, in turn, by highly elastic and innovative financial systems and, in the US, by government programmes.

The article discusses the Western financial policies since WWII and revists the 1930s and the  resulting changes to the global economy including trade protectionism, socialism and communism.  The whole piece is lengthy but an interesting read as we sit in the mist of this economic storm.