“There is something strange about fighting debt by incentivizing more debt”

We have had no recovery from 2008-09. Instead of recovery which a business cycle should bring following a downturn, we are on a precipice of even worse. This is from an interview with the head of the Bank for International Settlements:

The world economy is just as vulnerable to a financial crisis as it was in 2007, with the added danger that debt ratios are now far higher and emerging markets have been drawn into the fire as well, the Bank for International Settlements has warned.

Jaime Caruana, head of the Swiss-based financial watchdog, said investors were ignoring the risk of monetary tightening in their voracious hunt for yield.

“Markets seem to be considering only a very narrow spectrum of potential outcomes. They have become convinced that monetary conditions will remain easy for a very long time, and may be taking more assurance than central banks wish to give,” he told The Telegraph.

Mr Caruana said the international system is in many ways more fragile than it was in the build-up to the Lehman crisis.

Nothing like the path to recovery that has been pursued over the past five years. Everything not only unimproved but a massive potential fall now before us. And might I say, with this economic disaster there has been not a thing apparently learned from the policy errors made in 2009. What would be done if another recession comes to pass? This is the world now unlike how it was then.

Credit spreads have fallen to to wafer-thin levels. Companies are borrowing heavily to buy back their own shares. The BIS said 40pc of syndicated loans are to sub-investment grade borrowers, a higher ratio than in 2007, with ever fewer protection covenants for creditors.

The disturbing twist in this cycle is that China, Brazil, Turkey and other emerging economies have succumbed to private credit booms of their own, partly as a spill-over from quantitative easing in the West.

Private credit booms, as in a flood of credit with no real return.

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20 Responses to “There is something strange about fighting debt by incentivizing more debt”

  1. .

    We’re in the 1970s part deux, Steve.

    The disturbing twist in this cycle is that China, Brazil, Turkey and other emerging economies have succumbed to private credit booms of their own, partly as a spill-over from quantitative easing in the West.

    It is disturbing but to be completely expected.

    The US’s loose monetary policy before 2007 was transmitted through their XCP and did lead to credit booms elsewhere.

  2. Tel

    Inflation will be the next step, you cannot indefinitely expand the money supply without seeing prices go up. To some extent this is going into assets, and at least in the USA we have had steady debt deflation as mortgages go under and people walk away. The debt deflation works against the QE inflation, but that won’t happen much longer.

    Since government itself is in debt, rising interest rates are going to result in a showdown when the major governments simply cannot pay. Then they must continue the QE.

  3. Alfonso

    ‘They have become convinced that monetary conditions will remain easy for a very long time.’
    Hee, hee….it’s easy Jaime. The US QEs or dies.
    Find the trend whose premise is false, old mate. Money to be made.

  4. Paul

    Inflation is already on the way up. One way it is being concealed at consumer level is reduced quantities for the same prices.

    Official figures released by governments are (as always) a complete fiction.

  5. Saltwater

    Bring it on. A lot of people have had cash sitting in bank accounts earning next to nothing for almost a decade now. An increase in interest rates will bring out the stronger hands at the poker table, and in australia hopefully deflate the property bubble before it well and truly bursts, leaving so many people exposed

  6. MartinG

    The EU is on the brink of collapse, far from quantitative easing it has introduced negative interest rates. They are trying to force private equity into make risky lending decisions, thereby setting up conditions that led to the last Global Financial Crisis. (GFC). It might be that private capital will start to withdraw from the EU but if it can’t it will start to lend to unsound projects that will fall behind in repayments.

    How long will it be before these under the water projects are bundled up and sold as high yielding B grade assets?
    Another GFC is in the making but when will it manifest itself?

    As for the US, it has debauched its currency. What will happen when global currencies fall against the Dollar is anybodies guess.

  7. H B Bear

    The pricing of risk is even more distorted than before the GFC.

    This should come as no surprise when banking systems are able to socialize losses via government guarantees and bailouts while keeping profits private. Until banks are allowed to fail this situation will not change.

  8. .Dr.Sir Fred Lenin

    I have no economic knowlege,but does Quantitative Easing mean printing money which has no sound backing? Monopoly money? Love the word ,sounds like one of Rudds bullshit words. Bit like Extensively Leveraged,meaning Deeply in Debt,sounds better at the AGM.

  9. Alfonso

    The Third Secret of Fatima reveals how it is rationally possible to have a privately run US central reserve Bank.
    It’s beyond human understanding thus far.

  10. .

    Alfonso.

    The Fed is a private bank where the US Government has an interest. 100% interest, there are no other shareholders.

    Please don’t fall for this paranoid conspiracy crap.

    I wish the Fed would end, but there is no need to facilitate the spreading of nonsense.

  11. Alfonso

    The Fed is run by representatives of private US merchant and trading banks.
    They meet to decide US policy in the interests of the US not their own operations…..try not to smile.
    Hardly a chance of moral hazard there, eh .

  12. .

    I never said there wasn’t moral hazard. It is despicably visible.

  13. Alfonso

    Then “spreading” what “nonsense”?

    It is certain that executives of the US mega banks sitting as the Fed Reserve were holding the paper of the ‘too big too fails.’

  14. brc

    I have no economic knowlege,but does Quantitative Easing mean printing money which has no sound backing? Monopoly money?

    Yes.

  15. Paul

    They meet to decide US policy in the interests of the US not their own operations…..

    Nice bit of comedy there Alf.

  16. daggers

    Sounds as if we should all be buying gold now.

  17. Squirrel

    “There is something strange about fighting debt by incentivizing more debt” – I’m not sure they’re fighting debt, or even pretending to – it’s just a desperate, dangerous scramble to delay the inevitable.

  18. Tel

    I have no economic knowlege,but does Quantitative Easing mean printing money which has no sound backing?

    All modern printed money has no sound backing. You don’t seriously think that the Reserve Bank of Australia has massive reserves of gold to back every Australian dollar. They sold off most of the gold back in the 90′s and the rest is just nominal accounts held in London that serve the purpose of making transactions easier with our trading partners. There is no actual “backing”, the only thing you can do with any paper money is either pay your tax with it, or exchange it with someone else who needs to pay their tax.

  19. wreckage

    the only thing you can do with any paper money is either pay your tax with it

    Well I buy stuff with it, so I don’t much care if it has zero gold backing. Shares don’t either. Better not invest in anything! None of it is backed by gold!

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