BIS: Global credit excesses worse now than pre-GFC

ScreenHunter_71 Sep. 17 07.20

By Leith van Onselen

Last week, Houses & Holes noted how the global economy appeared to be in a cyclical upswing – thanks to a coordinated effort of monetary stimulus by authorities – but that there was nothing to suggest that structural imbalances had improved.

Over the weekend, the Bank for International Settlements (BIS) former chief economist, William White, delivered a similar prognosis, arguing that credit excesses across the globe have reached or surpassed levels seen shortly before the Lehman crisis five years ago. From the Telegraph:

…a hunt for yield was luring investors en masse into high-risk instruments, “a phenomenon reminiscent of exuberance prior to the global financial crisis”…

“This looks like to me like 2007 all over again, but even worse,” said William White, the BIS’s former chief economist, famous for flagging the wild behaviour in the debt markets before the global storm hit in 2008.

“All the previous imbalances are still there. Total public and private debt levels are 30pc higher as a share of GDP in the advanced economies than they were then, and we have added a whole new problem with bubbles in emerging markets that are ending in a boom-bust cycle,” said Mr White, now chairman of the OECD’s Economic Development and Review Committee.

…nobody knows how far global borrowing costs will rise as the Fed tightens or “how disorderly the process might be”…

The BIS enjoys great authority. It was the only major global body that clearly foresaw the global banking crisis, calling early for a change of policy at a time when others were being swept along by the euphoria of the era.

Mr White said the five years since Lehman have largely been wasted, leaving a global system that is even more unbalanced, and may be running out of lifelines. “The ultimate driver for the whole world is the US interest rate and as this goes up there will be fall-out for everybody. The trigger could be Fed tapering but there are a lot of things that can go wrong…”

Mr White said the world has become addicted to easy money, with rates falling ever lower with each cycle and each crisis. There is little ammunition left if the system buckles again. “I don’t know what they will do: Abenomics for the world I suppose, but this is the last refuge of the scoundrel,” he said.

Another factor underpinning risks to the global economy is the ageing populations across the developed world and China. As the ratio of workers to non-workers falls, it will make it more difficult for these economies to grow, national incomes to rise, and debt to be serviced and repaid, heightening risks of a disorderly unwind at some stage in the future.

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  1. “a hunt for yield was luring investors en masse into high-risk instruments, “a phenomenon reminiscent of exuberance prior to the global financial crisis”…

    “Mr White said the world has become addicted to easy money, with rates falling ever lower with each cycle and each crisis. There is little ammunition left if the system buckles again. “I don’t know what they will do: Abenomics for the world I suppose, but this is the last refuge of the scoundrel,” he said.”

    So who are these damned psychopathic scoundrels who don’t give a stuff about anything or any of the damage they have done…I’ll tell ya!!!

    First Damned Bankers including our own revered members of our society!

    Second CB’s, Bernanke King Stevens et al who just go on and on with the same stupid simplisitic myopic misplaced mentally deficient policies.

    Third A moronic myopic stupid conceited university academia whose modern theories have been shown to be clearly baloney yet continue to pursue them ad nauseum just to keep their own academic identity, pay scales and retirement benefits!

    This negative RAT rate baloney has to go!!!!! Without that nothing will ever change.

  2. Hey, why wouldn’t you punt, eh?

    I mean, the govts and CBs of the world effectively pick up the tab for most of the punters, in one way or another, say your risk is greatly reduced, even for traditionally “risky” ventures/

    Alternatively, just lever-up on those trades that the Feds are almost 100% behind – that way your risk is even further reduced – and, heck, the cheap leverage helps make up for the poorer nominal unit returns anyway, right?

    What else is leverage for?

    Don’t fight the Fed, right?


    Disclosure: I don’t endorse my own views here 😛

  3. It is nice to know that there is a good Mr White.

    The Mr Whites of the world have been getting a bad rap lately.

  4. Unlike the great depressions of centuries gone by there have been very few write downs of private debt. Some public debt haircuts, but really not very much, so almost all of the pre-gfc debt is still out there.

    It does depend on who holds the debt. Is it largely the section who earn the most income? If it is then fine, but if it isn’t then inflating the debt away is probably the only option that CB’s have to make up for the policy failures of our politicians.

    • Inflation as a cure for debt is extremely dangerous – and also unfair.

      Debasing the currency will do much more damage and will be harder and more painful to fix than the inflationista think.

      Considering we have a massive welfare system that can provide income support and sustenance – which is what did not exist in the 1930s – the best approach is to clear the system of bad debts ( and that is really what we are talking about) is to allow malinvestments to be liquidated and the assets allowed to move to new owners not burdened by debt.

      If you are concerned about home owners who can’t pay their mortgages let them default to the government and their homes converted to state housing – they can switch from paying a mortgage to paying rent and stay in their own house. The govt will pay the bank whatever the market rate is at the time of default less a haircut.

      Keeping bad debts alive with manipulated interest rates is a fools errand and slowly people are starting to realise that – they should have observed Japan.

      The debt jubilee concept whereby everyone is given a massive lump sum which the debtors must use to pay down debts is a good idea but will never happen. A good idea because it will allow a massive amount of debt to be extinguished fairly.

      • The debt jubilee concept only represents a band aid, unless you also address the problem which caused the wound in the first place (usury). See Hudson’s research essay linked below:

        “What were the Babylonians (and for that mater, the Judaeans and Israelites) thinking of? I think they knew something that modern economic theory does not acknowledge: if “market forces” are left to themselves, they lead to widening economic polarization and growing disequilibrium as financial claims on wealth and income tend inexorably to exceed the ability to pay (the Frederick Soddy principle). Interest rates exceeded profit and crop-surplus (“real rent”) rates.

        One is reminded of Samuel Kramer’s complaint that Urukagina’s reforms were fruitless, for the usury and impoverishment problem simply began again.”

        As Hudson correctly identifies, the Hebrews/Judaeans/Israelites got it right. They learned from ancient history. Hence, why we read in the Bible that Moses laid down in the “divine law” that they could not lend anything at usury to each other.

        However, they could lend at usury to foreigners, in the land they were going to conquer.

        i.e., Usury is a weapon of war and conquest.

      • We should try to apply a band-aid while you are trying to convince the patient to go through with a complete amputation.


      • I agree with you pfh, but still think Peter’s predictions will be the most likely. Shit will hit the fan, and we will inflate to buggery to try to reboot the debt levels. This will cause massive problems and misallocation of resources, with some making ludicrous amounts of profit in the process and the great many seeing their purchasing power eroded. But it seems the best bet at keeping the current order running, and in the end of the day, that is what governments do. They may be elected by the people but they are sponsored by the elite.

        Op8red, i am interested in your views on how to make capital available for growing and productive business ventures without usury.

      • JohnsonM

        Yes – I should have made it clear. I fully agree with Peter’s prediction of what will happen. When it comes to what will happen he is usually close to the mark. Running a business requires a programmatic acceptance of the cards that are being played.

        I was staying into the fanciful fields of what IMHO ‘ought’ happen.

      • JohnsonM,

        There are many ways to do it. Here’s one example:

        That’s all fine if you are happy to trust government with currency control (ie, full public banking). I don’t.

        My own preference is to completely decentralise banking and currency issuance, as far as humanly possible. Here’s a necessarily brief précis from past discussions:

        FWIW, I’ve run my idea in more detail by Steve Keen, who observed that it is “about the best” alternative currency system he’d heard of yet. [EDIT: in part, because it enables viable levels of liquidity; a failing of many alternate currency systems]

        “Money” is now around 97% digital bookkeeping entries anyway.

        All I am proposing is (per the views of infrequent MB blogger ‘Sell On News’) to change the rules, and eliminate usury from the core process of currency creation.

      • I should add that I’m not making predictions, just running through possibilities and probabilities in my mind, and sifting them through my own little filter.

    • Correctemindo Peter. the debt is still out there and all we have done with all the credit creation is fill that monstrous debt hole. We have left in place the institutions, the policies, and more important the culture (including our own over-consumption) that created all the distortion and debt in the first place.
      But it will go on that way until it can’t. For an idea of what then follows listen to Marc Faber!

      • Hm debt doesn’t get inflated away. Debt is real not just money numbers. it represents wasted and over-use of resources. With inflation the assets of the prudent are stolen and we also steal from the future as the normal social supports provided by Govt can no longer be afforded. Inflation is NOT a solution…sorry!
        Further the history of the last 40 years show that all inflation and accompanying negative RAT interest rates rates manage to achieve is a further explosion of debt. We can’t in anyone’s right mind that if we PAY people to take on debt and steal everything from those who save that you won’t get more debt. it is just plainly irrational.

      • Actually Flawse, that monstrous debt hole has not been filled. Most of those trillions in recent “credit” creation has gone directly to making banksters’ whole. With excess parked at the CB’s, or diverted to speculation / inflating various bubble “markets” by the so-called “investment” banks (“primary dealers”). Indeed, the total debt problem is now worse than ever, because so many governments have been forced/conned into borrowing .. at usury .. to prop up their banking systems, and/or to “stimulate” “growth”.

      • Yep Op8 that’s what I was meaning. We just filled a bit of the hole to let them get going with even m ore leverage.
        Sorry for being unclear!

  5. You’ve got Scott Sumner running around saying money is too tight, and then you’ve got Will White saying it is too loose. What a profession

    • The contradictions serve a higher purpose.

      Keeping all the plebs — even the “expert” highly educated commentariat/analyst plebs — arguing endlessly and impotently, trying to parse the true meaning of it all.


      None look up from their obsessions with various trees, to see the forest. The real problem is staring us right in the face, all the time, every day . The language of usury (“interest”, “yield”, “return”) has become so common, so “accepted” a wisdom, as to be overlooked as being THE original problem.

  6. “…a hunt for yield was luring investors en masse…”

    Ban Usury. Again. Problem Solved.

    “Usury became the major force polarizing ancient society as credit passed out of the hands of public institutions into those of private households. By classical Greek and Roman times, no palace rulers were left to cancel agrarian debts and otherwise keep creditor power in check. Thus, what seems to have begun as justifiable debt in third‑millennium Mesopotamia evolved into classical usury. Its corrosive dynamics polarized ancient society more than any other factor, destroying the archaic social balance between rich and poor, mercantile creditors and cultivators, despite the nominal decline in interest rates.

    The power of creditors increased in the face of declining royal authority. Although the normal lending rate declined from Bronze Age Mesopotamia through classical Greece and Rome, creditors were able to render irreversible the forfeiture of land and personal freedom which debtors traditionally had been obliged to pledge as a condition for obtaining loans. In sum, what is first documented in Sumer is a revolutionary institution, revolutionary in that interest-bearing debt ended up by inciting populations to revolution at the end of antiquity, in the second and first centuries BC throughout the Romanized Mediterranean world.”

    – Prof. Michael Hudson, How Interest Rates Were Set, 2500BC to 1000AD

  7. Time for a debt JUBILEE?

    There is this concept in law called a Jubilee, whereby the debts of a debtor are forgiven after 7years.

    Alternatively, if one chooses to remain indebted to someone for an extended period of time their debts must then be forgiven at 7×7 years = 49 years, the second period of JUBILEE.

    e.g. A person can legally start work at age 16, 49 years later at age 65 they are able to “retire” – something (fiat money) equivalent to the jubilee as recognized in the law.

    Perhaps it is time for a global debt Jubilee?

    Give everything a fresh start.

    Forgive others their debts and start again and this time try to do it right.

    • In principle, I agree.

      However, after all, the vested interests are not interested in seeing this happen.

      And, vested interest now extends pervasively throughout the global society – most would be happy to kick the can when they realise what their vestedness actually is, and the (self-serving) consequences of no longer having it.

      My 2c

    • *Very* scary to me. A debt jubilee represents a free pass to all the risk takers and a whack on the wrists for all the responsible and prudent savers. The crazier, more dangerous and more reckless, the more reward we provide you.

      In a world with debt jubilees the rational behaviour for an individual is undoubtedly to join camp reckless and borrow and borrow and leverage as much as you possibly can. When everything falls down and exuberance cannot push prices any higher, you get rewarded with the assets and walk away from the debt. It is institutionalised moral hazard.

      Is it possible? Maybe in theory, with the right controls and measures. But in reality those who would design those controls and measures (those in the finance system) are the ones who would benefit the greatest from the jubilee. I cannot fathom human behaviour allowing this to run in a fair manner. It would be run in a way that covertly benefits the few at the expense of the many, and most of us wouldn’t even understand how.

      • A debt jubilee where only the debtors get a benefit would be outrageous for the reasons you outline.

        If however, everyone was given say $100K (the figure depends on how much debt we want to extinguish v the potential impact on inflation of lots of people having lots of extra cash) and those with debts were required to apply their $100K to their debts the result would be:

        1. Everyone with no debt would have $100K

        2. Everyone with debt will have had their debt reduced by $100K. Those with debt less than $100K will end up with a positive balance.

        Reducing just 500,000 mortgages by $100K will wipe $500B off the banks loan books.

        No moral risk arises because the debtors would probably regret that they did not end up with cash as a result of their past debts.

        If those with cash balances (because they had less than $100K debt) rush out and start spending and inflation results then that could be managed with taxes or interest rates.

        Probably sensible to start slowly with a small jubilee and see how it works.

        In a sense the GFC cash splash was a small jubilee but it lacked the requirement that debtors pay down debts.

        The major point of resistant will of course be the banks. Large outstanding loan books generating interest is their business model. The last thing they want is for a policy to come along that wipes out a major chunk of their loan book.

        Of course doing this while the RBA is running manipulated interest rates and while an asset ponzi economic model remains in place would be a waste of time. The debts would eventually be run up again.

        Best thing to do, with apologies to Op8, is to start moving to full reserve banking and limits on the role of banks as part of the Jubilee.

        Think of it as a massive dose of radiation applied to quickly shrink the size of a tumour.

        Radical – yes and the banks will fight it kicking and screaming but a lot quicker and less painful than trying to shrink debt using inflation.

      • “Large outstanding loan books generating interest is their business model”

        ‘Nuff said 😉

        [EDIT: No apologies necessary; what you suggest would be a huge improvement. Just woefully insufficient, in le longue durée]

      • Hm I’m having difficulty with the site.

        pfh there IS an external account and a thing called foreign debt. The debt jubilee proponents just ignore that little inconvenience. now let’s say PF is right and most of the debt is nominated in A$. Effectively in a debt jubilee we declare our currency worthless and the market will so declare it very quickly.

        If we are going to tax anyone with any money left over what has changed? the profligate keep all their money while the prudent get it taxed off them. How is that going to work?

        If you are going to mop up the excess with interest rates what has changed? What rates would you envisage would be necessary to mop up ALL the excess money?

        You have to think right through the whole loop. You don’t just give people money and it stops. Further we have now wiped out all the debts of the profligate how do we stop them spending and generating more debt. I’d be first in line to generate a bit more if debt jubilees are a solution.

      • Flawse and pfh – we can’t have a debt jubilee, that is just an invitation to load up on more debt A really bad message.

        What I expect is a long series of government deficits to help people pay down debts, thus transferring them to the public purse.

        I also expect CB’s to allow slightly higher than desireable inflation to erode the value of the debt and inflate wages and asset values. That also has to drive down the aussie.

        I don’t see any other options. Of course you know that there will be the winners and losers in that scenario.

        If you have alternate possibilities, then I’m all ears.

      • Peter
        We have alternate possibilities they are just not as acceptable and will not be adopted because they mean real debt reduction which requires less consumption and real actual saving. That will not be tolerated by our modern society!!!! We are entitled to our lifestyle!
        Your proposal still means more foreign debt and asset sales. That will go on until it can’t. I haven’t a clue when that is
        So I reckon your indicated track is likely. It will not however result in the benefits you perceive.
        I agree they will allow inflation and they will get plenty and they will still ignore it because they won’t be able to do anything else. As a result debt will get even further out of control. You can already see the beginning of this process. Consumption expenditure, including housing, is increasing. More debt is being taken on to increase consumption. This is happening ewven without inflation.
        Nor does Inflation make obligations disappear. It does make you less able to fulfil those obligations. As to govt taking on debt this is simply, again, forcing debt on the prudent to benefit the profligate.
        That said your outline seems to be the likely course and thank you for the opinion. That’s why I’m seriously looking at buying a house! 

      • Not so. “Debt” is not real wealth. It is a digital, artificial construct. A contract; an “obligation to repay”.

        When you wipe out “debt”, you only wipe out (artificial) “buying power”. And even that “buying power” only exists (as a tool of social enslavement) because we permit legal tender laws to dictate that the only “buying power” available to us for use in trade and commerce, is that which is created at the click of a mouse and loaned at usury by government-sanctioned/licenced private banks.

        The “buying power” of the present form of “debt” dictated by our overlords can just as easily be replaced with a new form of “buying power”. Indeed, the long history of “national” (ie, enslaving) currencies shows that it happens all the time … at the behest of the wrong people. We need not be wedded to the idea that we cannot wipe out debt because it would mean loss of “buying power”.

      • Sorry Op8…but that is NOT true. Debt results from over-consumption. It has used up resources effectively borrowed from the future or from the prudent.
        Debt is REAL. All the bankers, economists et al now want us to thinkl it is just a number but it isn’t so.
        The process of that over-consumption causes wild misallocation of resources. Your whole economy is now geared to over-consume. Unless you wipe out all those structures that have caused that process then you still have the same problems after your jubilee. Such problems include your lack of real production, your education systems, your business systems, your consumer culture generated by a media gone wild on promotion of consumption….and of course the damned Banks.
        Fair dinkum people have to stop making up fairty tale stories just so we can fantasise about having a happy ending where nobody is hurt and we all get to keep our over-abundant lifestyles and our wealth. It ain’t gonna happen

      • Opinion8red, debt is money and as long as money is the general abstraction of a nation’s wealth, it is a claim on the real wealth by the lenders. Yes, this is a claim for the future productivity of the debtors too, but as a capital spend now today, it is a claim on today’s wealth too and that is the problem with QE, which creates unproductive wealth value growth, which is a simple hidden way of real wealth redistribution today and in the future.

        Money created by debt have self-determined value by their issuer, which means they don’t need market exchange for goods or productive capital to grow infinitely as capital. Their circulation is autonomous and detached from the productive economy, but they still are the only abstract representative of private property rights. That is why the one who has the power to issue debt/money actually will own everything in the not so far future.

      • Flawse,

        No, with respect, you are wrong.

        “Debt results from over-consumption.”

        1. I did not say what debt “results from”. I said what it IS.

        2. Debt is not a “result”. It is not an effect of over-consumption. It is the origin [edit: the enabler] of over-consumption.

        Respectfully, like most, you have Cause and Effect 100% backwards when it comes to “debt” (ie, the national “currency”).

      • Lori at 12:40pm,

        “…it is a claim on the real wealth by the lenders… That is why the one who has the power to issue debt/money actually will own everything in the not so far future.”

        That’s essentially what I said. It is an “obligation to repay”.

        Agree your observation.

      • Op8 It’s a loop! Cause and effect is somewhat confused. What we have to do is look at the things that make the loop get bigger or faster or whatever way you then want to look at it.

      • Op8, people go into debt so that they can have something now that they do not have the capacity to pay for now. If, as in Australia’s case, a nation goes into debt (ie runs a CAD) it is for the same reason. On the other side of the transaction are people (or nations) willing to forgo current consumption so that they can consume more in the future.

        When the future arrives, the borrowers will have to consume less than they produce, while the lenders will have the luxury of consuming more than they produce.

        It is a voluntary transaction on both sides. Nobody is forced to submit to “usury” as you put it.

  8. ” it will make it more difficult for these economies to grow, national incomes to rise, and debt to be serviced and repaid, heightening risks of a disorderly unwind at some stage in the future.”

    Unconventional, How can you heighten the risk of something that is already certainty, that is of a disorderly unwind? To my way of thinking it is more a question of when each country will commence their disorderly unwind and how serious that unwind will be. The developed countries have only just commenced their unwind.