A former central bank chief economist warns that a deluge of global debt defaults will endanger social and political stability.
"The situation is worse than it was in 2007. Our macroeconomic ammunition to fight downturns is essentially all used up," William White, chairman of the Organization for Economic Co-operation and Development's review committee, recently told the U.K. Telegraph’s Ambrose Evans-Pritchard.
"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," said White, the former chief economist of the Bank for International Settlements (BIS).
"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," 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 just before the recent World Economic Forum in Davos.
Economic stimulus from quantitative easing and zero rates after the last recession inflated credit bubbles and sparked a surge in dollar borrowing that was hard to control, White said.
Combined public and private debt
has surged to all-time highs to 185 percent of GDP in emerging markets and to 265 percent of GDP in the OECD
club, both up by 35 percentage points since the top of the last credit cycle in 2007, Evans-Pritchard explained.
White, who also chief author of G-30'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.
"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,” White said.
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.
Meanwhile, Robert Skidelsky,
Professor Emeritus of Political Economy at Warwick University and a fellow of the British Academy in history and economics, is a member of the British House of Lords, wonders if there a “safe” debt/income ratio for households or debt/GDP ratio for governments.
According to a 2015 report by the McKinsey Global Institute, household
debt in many advanced countries doubled, to more than 200 percent of income, between 2000 and 2007. Since then, households in the countries hardest hit in the 2008-2009 economic crisis have deleveraged somewhat, but the household debt ratio in most advanced countries has continued to grow, he said.
The big upsurge in government debt followed the 2008-2009 collapse, he explained. British government debt rose from just over 40 percent of GDP in 2007 to 92 percent today. Persistent efforts by heavily indebted governments to eliminate their deficits have caused debt ratios to rise, by shrinking GDP, as in Greece, or by delaying recovery, as in the U.K.
"Debt crises are likelier if debt is being used to cover current spending. But now, when real interest rates are almost zero or negative, is the ideal time for governments to borrow for capital spending. Bondholders shouldn’t worry about debt if it gives rise to a productive asset," he wrote.
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