There is an international financial storm that is rapidly gaining strength. Where and when it makes landfall, it will topple an already unstable and overextended banking system. The amount of international debt has now surpassed $200 trillion USD (United States Dollar) and is rising fast.
Instead of permitting the last global contagion in 2008 and 2009, to provide some market correction to a bloated and unsteady framework, policy makers decided on an alternative. They would flood the world with liquidity and it has not stopped since.
Eye Of A Hurricane Storm
Governments have become addicted to fiscal deficits and sovereign debt on a massive scale. Furthermore monetary policy is now being engaged not only to limit deflation and unemployment, but to actually stimulate growth. There is no longer any attempt to be fiscally prudent, as governments around the world continue to issue debt as bonds in enormous amounts.
Since there is now more debt than investors, central banks in country after country are engaged in buying these bonds. This monetizing of the debt, is extremely dangerous to the financial well being of global markets.
Panic Caused By A Bank Failure
In the attempt to stimulate growth, these same central banks have reduced interest rates to historical and unsustainable levels. In numerous countries it is at or below zero. This cheapening of money disincentives any savings on the part of individuals. It also encourages increasingly reckless behavior on the part of businesses both large and small, to take on much more debt than its fiscally prudent.
The consumer market as well, is taking on ever higher amounts of debt. In the United States alone, household and credit card debt increased by $306 billion USD in 2014. Total personal debt in the country has now reached $16,780 trillion USD. It shows no sign of ebbing.
National Bank Of Denmark
The same is true in most of Europe. Interest rates continue to be lowered which encourages consumers to take on ever heavier loads of debt. It will be unsustainable if interest rates reverse and begin to rise. The 19 nations there that have adopted the common monetary system are now part of the spreading currency war. The ECB (European Central Bank) has begun quantitative easing (QE) with a plan to purchase 1.4 trillion Euros ($1.27 trillion USD) of government debt at a rate of 60 billion Euros a month, until at least September 2016.
Berlin Germany
Even in economically conservative Germany, long term interest rates have been reduced to just 0.39%. These levels make government debt uninviting to investors, who are looking for a higher rate of return. It also encourages money to be poured into assets and stocks. This in itself, creates another bubble in the economy.
There is no money to be made in safer government bonds. Higher rates of sovereign debt are available, for example Greece. At 9.48% one would assume there would be plenty of investment interest, but the rate in this case merely indicates how close the country is to default.
Riksbank The Central Bank Of Sweden
Elsewhere in Europe outside the Euro-zone nations are trying to remain competitive with their domestic currencies. In Denmark overnight deposit rates are at -0.35%. The lending rate has been reduced to just 0.05%. Sweden has reduced interest rates from 0% to -0.1%. Both nations have decided to continue to maintain a similar rate of exchange with the Euro.
Some countries in Europe have already decided it is not worth the effort. Switzerland has already divorced the Swiss franc from the traditional peg with the Euro and is now allowing appreciation. However, interest rates ares still heading down throughout most of the continent and quantitative easing in one form or another is continuing apace.
China has recently reversed direction and is now trying to stimulate the domestic economy. A credit bubble had developed in the real estate market. The Chinese government was trying to design a soft landing to prevent a crash in this sector. The policy was to gradually tighten credit markets through rising interest rates and making it harder to borrow money. The problem is that much of the debt in China is secured through the mortgages and value contained in Chinese real estate. Prices in this vital sector are now falling faster than anticipated. The biggest annual decline was just recorded in modern Chinese history, hence the change in monetary course.
Chinese real estate which had been booming for the last few years is now in rapid decline. The 0.3% price drop in December of last year, is now accelerating with a 0.4% drop last month. There are some areas in China where prices have already plunged by 10% in the past year. Many financial experts in the past would of suggested that a market correction would economically be necessary for China. Not any longer. Economists in China and elsewhere are advising the government that there is a way to minimize the hazards ahead by a further calibration of fiscal and monetary policy.
Japan
has gone the furthest with quantitative easing. The BOJ (Bank of Japan) is buying the equivalent of $108 billion USD of debt per month. It is estimated that by 2018 the BOJ will own more than 50% of all government debt. At that point there will be questions concerning the solvency of the country. Governmental debt in Japan is already a whopping 175% above the GDP (Gross Domestic Product) of the country. It is by far the highest in the industrialized world.
Despite the monumental effort by the BOJ the economy remains mired in deflation and near zero growth. Why is this the case? Economists may have different theories, but the reality is the infusion of liquidity is not working. It is however, keeping banks that are insolvent known as zombie banks in business. In addition, it is allowing the bigger banks to speculate in the markets were bigger returns are possible.
Bank Of Japan Headquarters
Lending to smaller businesses and individuals is no where near as lucrative in Japan. The historical low rates of interest at this juncture, make lending to these 2 sectors far less attractive. The continuing lack of lending to the private sector, is adding to the deflation. So in Japan as in many other countries, QE is actually doing very little to alleviate deflation and the lack of growth in the economy.
The United Kingdom (UK) began its own version of QE as the United States did back in 2009. Interest rates were cut to a record low of 0.5% and the asset purchases began. In 2 years some 200 billion pounds ($310 billion USD), were pumped into the British economy. It ended with the Bank of England (BOE) holding the equivalent 14% of the economy of GDP in new debt. When growth faltered in 2011, it was decided to add 75 billion pounds more. Later another 100 billion pounds was added, bringing the total to 375 billion which is the equivalent of $581 billion USD.
Bank Of England Headquarters In London
It is true that the British economy did better in 2014 than the other advanced nations in the world, but growth is now slowing again. Inflation is well below the BOE target of 2%, in fact it is now at 0.5%. What else can be done? A further devaluation of the British pound sterling, seems the next logical step in the minds of policy makers. The problem with that decision is any rate cuts in the UK are being matched elsewhere, as central banks globally continue with devaluation. The currency wars are clearly intensifying.
Economic planners around the world are becoming ever more desperate to maintain growth. It is quite obvious that many nations are now entering uncharted territory in lowering rates of interest and the accumulation of debt. Most of the recent actions are clearly unsustainable for any length of time. Every round of rate cuts and more asset purchases by central banks, only forestall the inevitable. Worse yet, it makes the coming financial storm and the resulting meltdown of the markets ever larger in magnitude and scope.
Although the 2008 and 2009 financial disaster was one of the worst crises of the post World War II era, the causes and lessons from that episode have been largely missed. The outcome was certainly realized. It was the absence of sustained economic growth. To avert the calamity of that time with a huge increase of debt throughout the economy of the industrialized world, did not actually deal with the underlining problem.
The Collapse Of An Investment Giant
The immediate cause of this period titled in the United States as the Great Recession was the mortgage implosion. Its origin was unsecured debt that was sold in bundles as investments, that later became known as toxic assets. Bankers throughout the world unwittingly and sometimes knowingly, sold them to ever larger groups of investors.
The Great Recession and the resulting financial panic was clearly caused by too much debt. Taking on even greater amounts of debt will not solve the problem. The world is now awash in levels of unsustainable debt and fiscal liabilities. The next crisis when it arrives, will be beyond the ability of the current leaders of the banking and political community to solve. The foundation for a modern financial catastrophe has already been created. It is no longer a matter of if it will happen, it is a question of when?