A near debt experience: New crisis approaching?
Five years after Lehman, the crisis may be back, bigger and brasher than ever before. “Taper Terror” may be only the beginning...
Central bankers are widely held to be boring. True, central bank
bosses can attract vast media speculation and, as Larry Summers
just learnt, it’s a harrowing process trying to gain
approval. New Central Bankers can be treated like financial rock
stars, as newly-appointed Governors in Britain and India have just discovered. Well, at least for the
Nevertheless, central bankers are broadly perceived as rather
dull, plodding individuals and their excitement at the minutiae
of Repo transactions can cure insomnia in many for whom sleep is
a difficult state to achieve. The Bank for International
Settlements, “the central bankers’ bank” is situated in Basel, a
lovely Swiss city but nonetheless not regarded as a hotspot of
excitement even amongst the Helvetic Cantons [Switzerland].
However, when somebody at the BIS breaks their silence and leads
what amounts to the banking equivalent of the monastic life, then
the world ought to be listening. This week William White the BIS
Chief Economist has made a chilling pronouncement to freeze
the autumnal Swiss air: “This looks to me like 2007 all over
again, but even worse.”
Given his office, such a brutal prognostication would be worrying enough. However, bear in mind Mr White’s pedigree - he foresaw the last financial crisis (and was widely ignored at the time). Should we be terrified?
This time around the world is sitting on a veritable mountain
rage of debt throughout the world. Low interest rates and ‘funny
money’ policies have fueled the mother of all multi-asset bubbles
and some frankly reckless lending at remarkably low interest
rates with little security. Total public and private debt is 30%
above the heady pre-crisis levels in the advanced economies,
while the world’s emerging markets, as shown by corporates in the
likes of Brazil and China, among others have gorged on debt.
Now the world teeters on a horrible precipice. “Taper terror” has
already struck as worries grow about when the Fed will tighten
their interest rate policy. One really worrying issue perhaps
driving an element of such volatility is that a whole
generation of US interest rate traders have grown up thinking it
normal to have rates semi-permanently as close to zero as makes
A vast swathe of the western money market now has little or no experience in trading when interest rates are increasing.
Meanwhile, spendthrift western governments providing more services than they can provide and then dumbly bailing out the banks and pumping trillions of stimulus into the system, have simply run out of firepower to deal with another crisis. In fact they could be in the first line of defaulters (and no it doesn’t help the outlook for the Euro no matter which discredited Eurocrat claims that crisis is over).
The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.