Book summary – Fault lines

Fault lines

Fault line category 1: Domestic political stresses.

Almost every financial crisis has political roots. Easy credit has been used as a palliative throughout history by governments unable to address deeper anxieties of the middle class directly. Growing income inequality is driving this anxiety in the US.

Fault line category 2: Trade imbalances between countries

This is resultant on prior patterns of growth. Developed countries like US helping developing countries like China grow their GDP and the latter became to reliant on the export economy even after its GDP has grew too large to stay reliant on foreign aid.

  • Governments in the latter group (China, Japan, etc…) start favoring some firms over others in an export focused economy leading to unequal distribution of wealth and reduced domestic consumption. This hampers ability to switch over to domestic focus economy latter on
  • households find it hard to obtain retail credit. Government forced to step in as credit provider

Fault line category 3: The meeting of different financial systems

When different types of financial system come into contact to finance trade imbalance. Example when transparent, contractually based arm’s length financial systems in countries like United States and the UK finance or are financed by less transparent financial systems in much of the rest of the world.

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