Once again the Bank for International Settlements (BIS) is highlighting the potentially devastating problems that lie ahead as this c.100 year debt bubble heads towards bursting point.
Inevitably, the vast majority of those involved in the markets will remain oblivious to these warnings, and to the potentially awful outcomes for the world. Clearly therefore, the general public will also be totally in the dark as the next crisis draws nearer, and a majority of developed world economies go on to suffer purchasing power haircuts that will decimate living standards for generations to come.
Here is a link to a recent speech from BIS general manager Jaime Caruana:
Here are a few key sections for your consideration:
‘From the BIS perspective, the aftermath of the global financial crisis is a complex balance sheet
recession, linked to the bust phase of a long financial cycle. To understand and address the economic
challenges that this bust phase poses, we need to take a longer-term perspective, and to analyse and
internalise better the interplay between the real economy and finance.’
‘In advanced economies, government debt has risen by close to 40 percentage points of GDP
since end-2007 to over 110% of GDP, while private sector debt has fallen by about 10 percentage points.
In emerging market economies, the picture is reversed, with private sector debt growing by more than
40 points during the same period to over 120% of GDP, while government debt has risen only slightly.
The total debt levels in emerging market economies are mostly still significantly lower than those in
In other words, despite a damaging global financial crisis that resulted from excessive leverage,
and despite the deleveraging of specific sectors, there really has been little or no deleveraging in
aggregate. Some countries – for example, the United States, the United Kingdom and Spain – have
managed to reduce excessive household debt since the crisis, but their government debt has increased
substantially. Others, especially among the emerging market economies, have kept public sector
borrowing largely under control, but borrowing by their firms and households has run rampant.’
‘In my introduction, I said that the debt trouble comes in threes. At the origin is the build-up of financial
imbalances that leads to excessive credit growth. What are the three types of trouble?
The first and the most obvious: the build-up of financial imbalances risks a future financial crisis,
an impaired financial sector and a debt overhang.
The second, but less obvious, kind of trouble is that debt accumulation fosters misallocations of
Third, financial booms mask deficiencies in the real economy.’
It is very easy for anyone to quickly dismiss pessimistic thoughts about the future effects of a debt bubble and its bursting, until those thoughts turn into reality. We suggest to our clients that trouble is looming large, and that there is the potential for the final deflationary collapse to unfold within a relatively short timescale. Hedging for this possibility is very sensible, if you know how to hedge. The vast majority of assets are currently mis-priced.
We have already seen evidence that sovereign nations with full control of their own currencies (and their central banks) will do whatever is necessary to battle deflationary pressures. However, we haven’t seen anything yet when compared to what lies ahead. Their efforts will ultimately be futile, but very costly.
Put very bluntly, the viability of some of the major global currencies is at risk, and with it, your expectations of future living standards.
The clock is ticking, the oil and copper prices are reflecting a deepening global economic slowdown, and markets are living on borrowed time. The cycle is turning again. Are you ready for what comes next?