Banker warns of financial bubble risks

Since recovering from the Global Financial Crisis in 2008 and the impact of the Christchurch earthquakes the economy has been humming along nicely in New Zealand for the last couple of years, allowing for political promises of increased spending. Some caution may be prudent.

However the world economic risks have risen – President Donald Trump claims to have lifted the US stock market and business confidence, but a world banker claims there is a bubble that is at risk of bursting.

NZH – Breaking point: World financial system as stretched as before 2008 crash, says banker

The 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.

Prof White said disturbing evidence of credit degradation is emerging almost daily.

Prof White said there was an intoxicating optimism at the top of every unstable boom when people convince themselves that risk is fading, but that is when the worst mistakes are made. Stress indicators were equally depres-sed in 2007 just before the storm broke.

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).

“Central banks have been pouring more fuel on the fire,” he told The Daily Telegraph, speaking before the World Economic Forum in Davos.

The US Federal Reserve is already reversing bond purchases – ignoring warnings by former Fed chair Ben Bernanke – and will ratchet up the pace to US$50b a month this year. It will lead to a surge in supply of US Treasury bonds just as the Trump Administration’s tax and spending blitz pushes the US budget deficit toward US$1 trillion, and China and Japan trim Treasury holdings.

It has the makings of a perfect storm. At best, the implication is that yields on 10-year Treasuries – the world’s benchmark price of money – will spike enough to send tremors through credit markets.

The world economy is always at risk of catastrophe. There are always people predicting imminent financial collapse.

The edifice of inflated equity and asset markets is built on the premise that interest rates will remain pinned to the floor. The latest stability report by the US Treasury’s Office of Financial Research warned that a 100 basis point rate rise would slash US$1.2 trillion of value from the Barclays US Aggregate Bond Index, with further losses once junk bonds, fixed-rate mortgages, and derivatives are included.

The global fall-out could be violent.

If that happens it will impact on New Zealand. If interest rates rise or property prices fall it will create difficulties many property owners. If interest rates rise and property prices fall the damage will be greater.

While higher inflation is needed in one sense to right the global ship – since it lifts nominal GDP faster, and whittles down debt – the danger is that the shock of higher rates will hit first.

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 Prof White.

The authorities may not yet have reached the end of the road but this strategy is clearly pregnant with danger. Global finance has become so sensitive to monetary policy that central banks risk triggering a downturn long before they have built up the safety buffer of 400 to 500 basis points in interest rate cuts needed to fight recessions.

“We are running out of ammunition. I am afraid that at some point this is going to be resolved with a lot of debt defaults. And what did we do with the demographic dividend? We wasted it,” he said.

Financial hiccups are inevitable, it’s just a matter of when and how drastic.

The New Zealand Government has committed to ‘fiscal responsibility’ – it may be wise for them to stick to that aim.

11 Comments

  1. Blazer

     /  January 25, 2018

    NZ is a cork floating on an international ocean of unpayable debt.The reality is the whole fantastic, Capitalist template’s continued existence is predicated on ‘too big to..fail’.Q.E by Central banks and its effects on inflating property prices and creating a bigger rentier class,maintain the continuation of ‘socialise the losses and privatise the profits’.Should there be a major loss of confidence in U.S dollar …a major distraction will be needed.Bombs and…boltholes loom large on the radar of the money changers.

  2. Zedd

     /  January 25, 2018

    There are still ‘rumors’ that Mr T is really ‘spoiling for WAR’ with either NK, Iran or Syria.. because it is USAs biggest industry & during the Iraq war (under GWB) it became a HUGE corporate profit making machine: Halliburton, Blackwater etc.

    watch this space NZ… we could get ‘dragged into it’,, for the profit too ?? 😦

    • Joe Bloggs

       /  January 25, 2018

      … and not just for the profit he and his cronies will scalp… an all-out war might just help his plummeting approval rating – nothing like spilling the blood of foreigners to tune up the Good Ole Southern Boys…

      A war with NK or Iran is the perfect trumpian-style dog-whistle appeals to the racism and xenophobia that an overwhelmingly white Republican party has relied on since the early 60s.

      • Zedd

         /  January 25, 2018

        tautoko JB 🙂

        when in trouble (political).. ‘create a crisis’, that you can then, offer the solution to ! WAR !!

        • Corky

           /  January 25, 2018

          A little one-eyed if you ask me.

          • Blazer

             /  January 25, 2018

            a big one eye..coming from you Cyclops ..in your perfect..Darwinian..world.

            • Corky

               /  January 25, 2018

              I don’t believe in evolution. It’s one of many mainstay science theories that is crap.

            • Gezza

               /  January 25, 2018

              Interesting, Corky.

              Abiogenesis, & what caused the first single celled organism to divide & replicate still haven’t been satisfactorily explained, as far as I know.

              But the fossil record (continually expanding) & now the mapping of hundreds of thousands (might be millions now they’re using massive computers) of genomes show that plants & animals share genetic code to the extent animal genes can be spliced into plants and will continue to be transcribed into proteins in the same way as in the original host (for example, using jellyfish genes to make a tomato glow in the dark via recombinant DNA technology).

              This points more strongly than ever to every living thing having diverged from a common ancestor, & to the theory of evolution by natural selection (which is not survival of the fittest) being correct.

              Do you have an alternative theory?

            • phantom snowflake

               /  January 26, 2018

              Reminds me; Abiogenesis is also the title of a cool 4 minute NZ short film:

    • PartisanZ

       /  January 25, 2018

      Minor correction Zedd, notwithstanding the entire colonial history of the United States being one of war, vis –

      https://en.wikipedia.org/wiki/Timeline_of_United_States_at_war#1770%E2%80%931900

      – modern warfare became a huge corporate profit-making machine sometime before World War One and has been repeatedly up-scaled since, especially from the late-depression/pre-WW2 years to the present-day, with regular military-industrial-and-political ‘reboots’ …

      https://en.wikipedia.org/wiki/Timeline_of_United_States_at_war#1900%E2%80%93Present

      Your rationale still applies, “when in trouble”, but there is also a significant component of outright US imperialism as well …

  3. kiwicando

     /  January 27, 2018

    History repeats itself is all we can say,, as these bubbles always come around again, so hold onto your gold and jewelry may help at this time.