World’s Financial System is the ‘Most Stretched Since 2008’, Warns OECD EconomistThe world financial system is as dangerously stretched today as it was at the peak of the last bubble but this time the authorities are caught in a ‘policy trap’ with few defences left, a veteran central banker has warned.
Nine years of emergency money has had a string of perverse effects and lured emerging markets into debt dependency, without addressing the structural causes of the global disorder.
“All the market indicators right now look very similar to what we saw before the Lehman crisis, but the lesson has somehow been forgotten,” said William White, the Swiss-based head of the OECD’s review board and ex-chief economist for the Bank for International Settlements.
This time central banks are holding a particularly ferocious tiger by the tail. Global debt ratios have surged by a further 51 percentage points of GDP since the Lehman crisis, reaching a record 327 per cent (IIF data).
This is a new phenomenon in economic history and can be tracked to QE liquidity leakage from the West, which flooded East Asia, Latin America, and other emerging markets, with a huge push from China pursuing its own venture. “Central banks have been pouring more fuel on the fire,” he told The Daily Telegraph, speaking before the World Economic Forum in Davos.
“Should regulators really be congratulating themselves that the system is now safer? Nobody knows what is going to happen when they unwind QE. The markets had better be very careful because there are a lot of fracture points out there,” he said.
“Pharmaceutical companies are subject to laws forcing them to test for unintended consequences before they launch a drug, but central banks launched the huge social experiment of QE with carelessly little thought about the side-effects,” he said.
The global fall-out could be violent. Credit in dollars beyond U.S. jurisdiction has risen fivefold in 15 years to over $10 trillion. “This is a very big number. As soon as the world gets into trouble, a lot of people are going to have trouble servicing that dollar debt,” said White. Borrowers would suffer the double shock of a rising dollar, and rising rates.
Central banks are now caught in a “debt trap.” They cannot hold rates near zero as inflation pressures build, but they cannot easily raise rates either because it risks blowing up the system. “It is frankly scary,” said White.
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