Last week, Houses & Holes noted how the global economy appeared to be in a cyclical upswing – thanks to a coordinated effort of monetary stimulus by authorities – but that there was nothing to suggest that structural imbalances had improved.
Over the weekend, the Bank for International Settlements (BIS) former chief economist, William White, delivered a similar prognosis, arguing that credit excesses across the globe have reached or surpassed levels seen shortly before the Lehman crisis five years ago. From the Telegraph:
…a hunt for yield was luring investors en masse into high-risk instruments, “a phenomenon reminiscent of exuberance prior to the global financial crisis”…
“This looks like to me like 2007 all over again, but even worse,” said William White, the BIS’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 30pc 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.
…nobody knows how far global borrowing costs will rise as the Fed tightens or “how disorderly the process might be”…
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 Lehman 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…”
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.
Another factor underpinning risks to the global economy is the ageing populations across the developed world and China. As the ratio of workers to non-workers falls, it will make it more difficult for these economies to grow, national incomes to rise, and debt to be serviced and repaid, heightening risks of a disorderly unwind at some stage in the future.
