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Bindi Hypothesis



The Bindi Hypothesis:
A New Global Financial Crisis and a Flow of Capital from the Core of the Eurozone to the Periphery?

The Implications of a Current Account Deficit o Surplus, Asset Inflation and Deflation, Speculative Bubbles, Suppression of Volatility, Restrictive Fiscal Policies, Expansionary Monetary Policies, Currency Devaluation and Overvaluation, Speculative Foreign Lending, Aggressive Commercial Policies, Foreign Debt
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The current account surplus of the eurozone (+3.3% of the GDP), the current account deficit of the United States (-2.6% of the GDP), the UK (-4.4%), Canada (-3.3%), Australia (-2.7%), the reduction of the current account surplus of China (+1.8% of GDP, it was 10.1% in 2007), indicate the productivity growth – with respect to the remuneration of the productive factors – and competitiveness of the first economy and a loss of competitiveness – with the respect to the remuneration of the productive factors – and competitiveness of the others. 

The US stock markets have been growing for almost a decade, recording one of the longest expansions of the recorded history. The S&P 500 grew from a minimum at approximately 800 in January 2009 to a maximum at circa 2500 in September 2017, while the Nasdaq Composite passed from a minimum at approximately 1300 in November 2008 to a maximum at circa 6500 in September 2017 (Source: Yahoo! Finanza).

The volatility of the S&P 500 (VIX) has signed a minimum at 9.37 in October 2017, from a maximum at 89.53 reached in October 2008 (Source: Yahoo! Finanza). The US stock markets have reached levels of Price-Earnings ratio (the ratio between the market value of the share and the earnings per share) indicating an overvaluation with respect to the historical average of the indicator. 

The Shiller Ratio is a Cyclically Adjusted PE or CAPE – according to which the earning is weighted by the average inflation of the last 10 years – has reached quota 30.70, with a mean of 16.78 and a median of 16.12 from 1880 until today. [1] The S&P 500 PE Ratio has signed quota 25.01, with a mean of 15.67 and a median of 14.66 from 1870 until now. [2]

According to a report published by the McKinsey Global Institute in February 2015, the global debt was augmented by $57 trillion from the beginning of the financial crisis in the fourth quarter of 2007 to the second quarter of 2014, passing from $142 trillion (269% of the GDP) in the Q4 of 2007 to $199 trillion (286% of GDP) in the Q2 of 2014. [3] According to the Global Shadow Banking Monitoring Report of 2016, the total financial assets stand at $321 trillion. [4]

The strengthening of the euro indicates the inflow of capital into the eurozone and the outflow of capital from the other currency areas. Capital generally flees from the overvalued currency areas with overpriced financial and real assets, for flowing into the undervalued currency areas with underpriced financial and real assets.

It is therefore hypothesized that the eurozone may function as a “safe haven” for the outflow of capital from the overpriced financial markets and the overvalued currency areas thus in a turbulence.

The strengthening of the euro may render less competitive the export from the eurozone, damaging the manufacturing industry producing exportable goods in the eurozone – also that one of the northern core of the eurozone.

An inflow of foreign capital into the eurozone and the consequent strengthening of the euro currency may indicate a transfer of financial wealth – through the asset inflation of wealth and the strengthening of the currency that follows the inflow of capital – from abroad to the eurozone, damaging the foreign demand of the goods imported from the eurozone. 

It is hypothesized also that the northern “core” of the eurozone will finance the credit expansion in the southern periphery for generating a wealth effect there, in order to fund the consumption on borrowed credit of the imported goods from the northern “core” of the eurozone; thus compensating the contraction of the exports towards the economies with weakening currencies.



[1] http://www.multpl.com/shiller-pe/
[2] http://www.multpl.com
[3] Dobbs Richard, Lund Susan, Mutafchieva Mina and Woetzel Jonathan, Debt and (not much) deleveraging, McKinsey Global Institute, February 2015, http://www.mckinsey.com/global-themes/employment-and-growth/debt-and-not-much-deleveraging
[4] Global Shadow Banking Monitoring Report 2016, Financial Stability Board, 10th May 2017, p. 4, http://www.fsb.org/wp-content/uploads/global-shadow-banking-monitoring-report-2016.pdf

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