Thursday, 19 September 2013

Crash + 5 years of “stimulus” = “2007 all over again, but worse”

It’s like 2007  all over again, says the banker who picked the 2008 global financial storm, only worse. The “irrational exuberance” for debt instruments is the same, based as before on gobs of cheap money, only this time (after all those gobs of failed stimulus spending) debt levels for every over-spending government are even higher than before, and there is nowhere for interest rates on those borrowings to go but up.

Which means the global economy is on the edge of the same cliff as six years ago, only higher up—and it’s ready to jump.

William White, former economist for “the bankers’ bank, the Bank of International Settlements, reckons the low interest rates set by desperate central bankers have sent investors on a desperate search for returns—leading them to credit instruments and derivatives even more risky than the ones that blew up five years ago, "a phenomenon reminiscent of exuberance prior to the global financial crisis."


The Swiss-based 'bank of central banks' says a hunt for yield is luring investors en masse into high-risk instruments, "a phenomenon reminiscent of exuberance prior to the global financial crisis."
    This is happening just as the US Federal Reserve prepares to wind down stimulus and starts to drain dollar liquidity from global markets, an inflexion point that is fraught with danger and could go badly wrong.
    "This looks like to me like 2007 all over again, but even worse," said William White, the Bank for International Settlement's former chief economist, famous for flagging the wild behaviour in the debt markets before the global storm hit in 2008.
    "All the previous imbalances are still there. Total public and private debt levels are 30 per cent higher as a share of GDP in the advanced economies than they were then, and we have added a whole new problem with bubbles in emerging markets that are ending in a boom-bust cycle," said Mr White, now chairman of the OECD's Economic Development and Review Committee… 

When interest rates go up, and they have to, every heavy borrower—which is every one of the world’s heavily spending governments—is going to be caught short, says the Bank of International Settlements (BIS).

The BIS enjoys great authority. It was the only major global body that clearly foresaw the global banking crisis, calling early for a change of policy at a time when others were being swept along by the euphoria of the era. 
    Mr White said the five years since [the 2008 crash] have largely been wasted, leaving a global system that is even more unbalanced, and may be running out of lifelines. "The ultimate driver for the whole world is the US interest rate and as this goes up there will be fall-out for everybody. The trigger could be Fed tapering but there are a lot of things that can go wrong. I very am worried that "Abenomics" could go awry in Japan, and Europe remains exceedingly vulnerable to outside shocks."
    Mr White said the world has become addicted to easy money, with rates falling ever lower with each cycle and each crisis. There is little ammunition left if the system buckles again. "I don't know what they will do: "Abenomics" for the world I suppose, but this is the last refuge of the scoundrel," he said.

Read more: Worldwide credit excess 'worse' than pre-GFC: expert

[Hat tip Russel W. Pic from The Age.]

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