The Shadows of the Money Trails
Shadow banking is occurring in both the United States and China at an increasing rate, with both nations trying to alleviate financial stress with unaccessible transactions. Alanna Petroff, a financial analyst for CNN, argues that China’s bankers and financial analysts are downplaying the risks of shadow banking to the global economy. On the other hand, economist Don Steinbock argues that it’s not only China’s shadow banking, but also the US and Europe’s shadow banking systems that are changing the global economy. In this blog, I will draw insights from both Petroff and Steinbock on the confounding effects of shadow banking and how it can either make or break the global economy in the next decade.
Shadow banking, as I’ve discussed in my last blog, culminates the variety of activities kept under wraps usually for increasing the amount of capital flow in an economy. In addition, the protection of financial institutions is critical to shadow banking’s networks. In China, Petroff argues that the fact the systems are hidden are dangerous for the global economy and especially the economy of the United States because the United States already owes a sum of money to China. Through shadow banking, China’s currency fluctuates along with the rises and dips in capital. These fluctuations cause others countries’ currencies to also rise and fall as well.
The interconnectedness of the economy on the global scale shows that shadow banking should really be monitored, yet no nation has stepped forward to have their shadow banking systems be openly monitored. The new “economic function” approach shows that certain kinds of credit intermediation are more susceptible to runs as it represents sixty per cent of the “narrow” measure of shadow banking and has grown more than ten per cent on average over the past four years.
A call to action for China, the United States, Europe, and all nations is to reduce shadow banking activity. From the analysis by economist Don Steinbock, it is very important nations come to see that shadow banking should only be used as a temporary means to an end. It disrupts natural flex and flow of the economy, contributing to a wider wealth gap around the world.
