World faces wave of epic debt defaults, fears central bank veteran
http://www.telegraph.co.uk/finance/financetopics/davos/12108569/World-faces-wave-of-epic-debt-defaults-fears-central-bank-veteran.html
Exclusive: Situation worse than it was in 2007,
says chairman of the OECD's review committee
By
<http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/>Ambrose
Evans-Pritchard, in Davos 9:00PM GMT 19 Jan 2016
[]
<http://www.telegraph.co.uk/finance/financetopics/davos/12108569/World-faces-wave-of-epic-debt-defaults-fears-central-bank-veteran.html#disqus_thread>1756
Comments http://www.911forum.org.uk/board/viewtopic.php?p=171819#171819
The global financial system has become
dangerously unstable and faces an avalanche of
bankruptcies that will test social and political
stability, a leading monetary theorist has warned.
"The situation is worse than it was in 2007. Our
macroeconomic ammunition to fight downturns is
essentially all used up," said William White, the
Swiss-based chairman of the OECD's review
committee and former chief economist of the
<https://www.bis.org/>Bank for International Settlements (BIS).
"Emerging markets were part of the solution after
the Lehman crisis. Now they are part of the problem, too."
William White, OECD
"Debts have continued to build up over the last
eight years and they have reached such levels in
every part of the world that they have become a
potent cause for mischief," he said.
"It will become obvious in the next recession
that many of these debts will never be serviced
or repaid, and this will be uncomfortable for a
lot of people who think they own assets that are
worth something," he told The Telegraph on the
eve of the World Economic Forum in
<http://www.telegraph.co.uk/finance/financetopics/davos/>Davos.
"The only question is whether we are able to look
reality in the eye and face what is coming in an
orderly fashion, or whether it will be
disorderly. Debt jubilees have been going on for
5,000 years, as far back as the Sumerians."
The next task awaiting the global authorities is
how to manage debt write-offs - and therefore a
massive reordering of winners and losers in
society - without setting off a political storm.
Mr White said Europe's creditors are likely to
face some of the biggest haircuts. European banks
have already admitted to $1 trillion of
non-performing loans: they are heavily exposed to
emerging markets and are almost certainly rolling
over further bad debts that have never been disclosed.
The European banking system may have to be
recapitalized on a scale yet unimagined, and new
"bail-in" rules mean that any deposit holder
above the guarantee of €100,000 will have to help pay for it.
The warnings have special resonance since Mr
White was one of the very few voices in the
central banking fraternity who stated loudly and
clearly between 2005 and 2008 that Western
finance was riding for a fall, and that the
global economy was susceptible to a violent crisis.
Mr White said stimulus from quantitative easing
and zero rates by the big central banks after the
<http://www.telegraph.co.uk/finance/financialcrisis/6173145/The-collapse-of-Lehman-Brothers.html>Lehman
crisis leaked out across east Asia and emerging
markets, stoking credit bubbles and a surge in
dollar borrowing that was hard to control in a world of free capital flows.
The result is that these countries have now been
drawn into the morass as well. Combined public
and private debt has surged to all-time highs to
185pc of GDP in emerging markets and to 265pc of
GDP in the OECD club, both up by 35 percentage
points since the top of the last credit cycle in 2007.
"Emerging markets were part of the solution after
the Lehman crisis. Now they are part of the problem too," Mr White said.
Mr White, who also chief author of G30's recent
report on the post-crisis future of central
banking, said it is impossible know what the
trigger will be for the next crisis since the
global system has lost its anchor and is inherently prone to breakdown.
A
<http://www.telegraph.co.uk/finance/economics/12040411/Chinese-devaluation-is-a-bigger-danger-than-Fed-rate-rises.html>Chinese
devaluation clearly has the potential to
metastasize. "Every major country is engaged in
currency wars even though they insist that QE has
nothing to do with competitive depreciation. They
have all been playing the game except for China -
so far - and it is a zero-sum game. China could really up the ante."
Mr White said QE and easy money policies by the
US Federal Reserve and its peers have had the
effect of bringing spending forward from the
future in what is known as "inter-temporal
smoothing". It becomes a toxic addiction over
time and ultimately loses traction. In the end,
the future catches up with you. "By definition,
this means you cannot spend the money tomorrow," he said.
A reflex of "asymmetry" began when the Fed
injected too much stimulus to prevent a purge
after the 1987 crash. The authorities have since
allowed each boom to run its course - thinking
they could safely clean up later - while
responding to each shock with alacrity. The BIS
critique is that this has led to a perpetual
easing bias, with interest rates falling ever
further below their "Wicksellian natural rate" with each credit cycle.
"It was always dangerous to rely on central banks
to sort out a solvency problem ... It is a recipe
for disorder, and now we are hitting the limit."
William White, OECD
The error was compounded in the 1990s when China
and eastern Europe suddenly joined the global
economy, flooding the world with cheap exports in
a "positive supply shock". Falling prices of
manufactured goods masked the rampant asset
inflation that was building up. "Policy makers
were seduced into inaction by a set of comforting
beliefs, all of which we now see were false. They
believed that if inflation was under control, all was well," he said.
In retrospect, central banks should have let the
benign deflation of this (temporary) phase of
globalisation run its course. By stoking debt
bubbles, they have instead incubated what may
prove to be a more malign variant, a classic
1930s-style "Fisherite" debt-deflation.
Mr White said the Fed is now in a horrible
quandary as it tries to extract itself from QE
and right the ship again. "It is a debt trap.
Things are so bad that there is no right answer.
If they raise rates it'll be nasty. If they don't
raise rates, it just makes matters worse," he said.
There is no easy way out of this tangle. But Mr
White said it would be a good start for
governments to stop depending on central banks to
do their dirty work. They should return to fiscal
primacy - call it Keynesian, if you wish - and
launch an investment blitz on infrastructure that
pays for itself through higher growth.
"It was always dangerous to rely on central banks
to sort out a solvency problem when all they can
do is tackle liquidity problems. It is a recipe
for disorder, and now we are hitting the limit," he said.
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Please consider seriously the reason why these elite institutions are not discussed in the mainstream press despite the immense financial and political power they wield?
There are sick and evil occultists running the Western World. They are power mad lunatics like something from a kids cartoon with their fingers on the nuclear button! Armageddon is closer than you thought. Only God can save our souls from their clutches, at least that's my considered opinion - Tony
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