Chuck Prince, the former Chairman and Chief Executive Officer of Citigroup, had famously told the Financial Times once: “As long as the music is playing, you’ve got to get up and dance. We’re still dancing”. A decade later, Alberto Gallo, Macro Strategist at Algebris Investments, wrote in a recent blog: “Today, the music is still playing and many are still dancing. We prefer to stay much closer to the exit door.” Chuck Prince had made the statement in reference to liquidity. He had observed back then that the party would end at some point, but the turmoil in the US subprime mortgage market would not affect the excess liquidity. “When the music stops, in terms of liquidity, things will be complicated,” he had said back then.
But Alberto Gallo has thrown in a spoiler. He thinks that the world may be witnessing another ‘Minsky moment’ now. American economist Hyman Minsky in his “Theory on financial markets’ fragility and instability” had propounded that “‘from time to time, capitalist economies exhibit inflations and debt deflations which seem to have the potential to spin out of control.” Thus, the term Minsky moment describes a sudden market collapse following the exhaustion of credit.
Alberto Gallo says that after the 2008 debt crisis, central bankers reacted with unconventional tools. In his blog, Alberto Gallo observes that if the problem was excess debt, the remedy applied was to lower interest rates and buy large quantities of it. The reputed scholar says that while quantitative easing helped to avoid an even deeper recession, it didn’t solve the root causes of the crisis.
Alberto Gallo goes on to point out that global debt levels have almost quadrupled, rising 276% in the last decade to $217 trillion, according to the Institute of International Finance. He says that the issue isn’t only excess debt — it is also that prolonged loose monetary policy has led to at least three collateral effects, namely: misallocation of economic resources; rise in wealth inequality and a suppression of risk premia; and volatility across financial markets.
While he may very well be dancing with everyone now, Alberto Gallo seems to be the first one to exit the party when music stops.