Governor Tiff Macklem explains how financial risks could mix with uneven trade and investment to weaken the international system. He outlines the adjustments needed to keep it strong.
Watch Governor Macklem speak by webcast to Paris Europlace and Chambre de commerce France-Canada. Read the full speech.
Imbalances can lead to crisis
In an open global trading system, it’s normal to see big differences in how much some countries spend and save compared with other countries.
Global trade imbalances are typically matched by capital flows—investment that moves into and out of different countries. It’s normal for large amounts of money to move through the financial system. But sometimes the differences are too big and too one-sided for too long. These global imbalances can create pressures and tension and make the worldwide economy less stable.
Left unchecked, such imbalances can end in crisis. That’s partly what happened with the Great Depression in the 1930s and with the 2008–09 global financial crisis.
The system is vulnerable today
Global imbalances narrowed after the 2008–09 crisis but are now growing again.
The United States attracts a lot of foreign capital, because Americans tend to spend more than they save. So higher savings from China and Europe flow toward the United States.
But when the flows are too unbalanced, it can make trade imbalances bigger and fuel protectionism. It can also distort asset prices. The longer the imbalances persist, the greater the potential for pressures and risks to build.
The US dollar’s dominant role in global finance may be prolonging imbalances today because it encourages the flow of capital into the United States.
Further, global finance has become faster, more complex and more interconnected, with new, less-regulated players and new technologies playing a bigger role. This may be making the system more fragile.
How to build resilience
Global imbalances stem from domestic imbalances—such as low savings in the United States, low consumption in China and weak investment in Europe. Fixing these issues requires coordinated action.
Three priorities to focus on are:
- keeping trade and investment open
- creating more attractive opportunities for investment outside the United States
- improving transparency so financial system risks are easier to see and manage
Together, these steps can support smoother adjustment, build resilience and promote a more stable global economy.
Resilience is a choice. It doesn’t happen automatically, and it doesn’t come from good intentions. It comes from reinforcing systems so they don’t break in times of stress.”
Watch Governor Macklem answer questions from the media following his speech.