Home[1] | Wire[2] | Is 150 Years of Bank Credit Expansion Nearing Its End?
Since the turn of the millennium there have been two global bank credit crises: the first was the deflation of the dot-com bubble in 2001–2, and the second the 2008–9 financial crisis that wiped out Lehman Brothers. It was clear from these events that the debate over moral hazard was resolved in favour of supporting not just the banks, but big business and stock market valuations as well. Furthermore, America’s budget deficits were becoming a permanent fixture.
This brings us to the current situation, which increasingly appears to be on the edge of another cyclical crisis. If so, it marks the end of a period of far greater monetary and credit expansion than seen in previous cycles, coinciding with a Smoot-Hawley lookalike in the trade war between the two largest global economies.
The following big-picture factors are relevant to the likely timing for a credit crisis:...
- Global debt has accumulated to an estimated $255 trillion, up from about $173 trillion at the time of the Lehman Brothers crisis An alarming proportion of it is unproductive, being government debt, consumer loans, and funding for financial speculation as well as owed by unviable businesses.
- With annual debt payments already accounting for most of the US budget deficit and that deficit getting larger, any rise in dollar interest rates would be ruinous for Federal government finances. Eurozone governments are in a similarly precarious financial position. Governments are ensnared in a classic debt trap.
- An estimated $17 trillion of global bonds are negative yielding, which is unprecedented. This is a market distortion so extreme that it cannot be normalised without widespread financial disruption