THE head of the Bank of International Settlements (BIS) issued a chilling warning yesterday. . . that the world economic system is headed for a further global crash because of a ‘debt trap’.
Jaime Caruana, the General Manager of the BIS, warned that this is because the policies of Quantitative Easing and ultra low interest rates have failed to stop a massive surge in global debt.
Caruana points to the US national debt which has now risen to $17.5 trillion dollars, meanwhile debt in the developed economies has risen by 20 per cent to in many cases 275 per cent of their GDP, since the economic crisis of 2007-2008.
He said that ‘emerging markets’ have racked up $2 trillion in foreign currency debt since 2008.
Caruana warns that this means that the global financial system is currently ‘more fragile’ in many ways than it was before the 2007-2008 financial crisis, when the collapse of Lehman Brothers triggered the global crash.
After the crash, the BIS backed Quantitative Easing (QE), the electronic equivalent of simply printing money. However, the BIS only backed QE as an emergency measure to ‘avert a deflationary spiral’.
It has long since called for a return to ‘sound money’, and has also favoured raising interest rates.
The BIS says prolonged QE in the US, Europe, and Japan has led to a ‘leakage of liquidity, contaminating the rest of the world’.
‘Time and again, in both advanced and emerging market economies, seemingly strong bank balance sheets have turned out to mask unsuspected vulnerabilities that surface only after the financial boom has given way to bust,’ the BIS warned.
‘Policy does not lean against the booms but eases aggressively and persistently during busts. This induces a downward bias in interest rates and an upward bias in debt levels, which in turn makes it hard to raise rates without damaging the economy – a debt trap.’
‘Systemic financial crises do not become less frequent or intense, private and public debts continue to grow, the economy fails to climb onto a stronger sustainable path, and monetary and fiscal policies run out of ammunition. Over time, policies lose their effectiveness and may end up fostering the very conditions they seek to prevent’, the BIS said.
Speaking of the financial markets, Caruana ominously declared that ‘it is hard to avoid the sense of a puzzling disconnect between the markets’ buoyancy and underlying economic developments globally.’
He warned that ‘markets can stay irrational longer than you can stay solvent’.
He suggested that financial markets have become ‘completely divorced from economic reality’, and at some point there is going to be a ‘massive correction’.
