Debt | timiacono.com - Part 5

Debt and (Not Much) Deleveraging

This graphic from a new study at the McKinsey Global Institute makes the case that, despite the commonly accepted belief that the world has been deleveraging since the last credit bubble burst and the financial crisis/Great Recession followed, that’s really not the case.

Also see Doug Noland’s take on this important subject at his new blog and two related items that are referenced there in Bloomberg’s “A World Overflowing With Debt” and the Financial Times’ “Debt Mountains Spark Fears of Another Crisis“, all timely reminders that further expansion of credit and debt is not likely to result in a lasting solution to a crisis that was caused by a reckless expansion of credit and debt.

While awaiting the announcement by the European Central Bank about its much anticipated money printing extravaganza, it’s worth taking a quick look at the latest musings of William White, former head of the Bank of International Settlements and a regular topic at the old blog, via this Telegraph story by Ambrose Evans Pritchard.

The economic prophet who foresaw the Lehman crisis with uncanny accuracy is even more worried about the world’s financial system going into 2015.

“We are in a world that is dangerously unanchored,” said William White, the Swiss-based chairman of the OECD’s Review Committee. “We’re seeing true currency wars and everybody is doing it, and I have no idea where this is going to end.”

Mr White is a former chief economist to the Bank for International Settlements – the bank of central banks – and currently an advisor to German Chancellor Angela Merkel.

He warned that QE in Europe is doomed to failure at this late stage and may instead draw the region into deeper difficulties. “Sovereign bond yields haven’t been so low since the ‘Black Plague’: how much more bang can you get for your buck?”

Mr White’s warnings are ominous. He acquired great authority in his long years at the BIS arguing that global central banks were falling into a trap by holding real rates too low in the 1990s, effectively stealing growth from the future through “intertemporal” effects.

He argues that this created a treacherous dynamic…

And we know how the story went from there…

See also:

The IMF’s latest report on slowing growth in the global economy makes it easy for a skeptical reader to connect a few dots regarding the latest round of central bank sponsored malinvestment in general (a word that clearly doesn’t exist in the modern economists’ lexicon) and the shale oil boom/bust cycle in particular.

From this Reuters story we get the following summary about what’s ailing the world::

“New factors supporting growth, lower oil prices, but also depreciation of euro and yen, are more than offset by persistent negative forces, including the lingering legacies of the crisis and lower potential growth in many countries,” Olivier Blanchard, the IMF’s chief economist, said in a statement.

The IMF advised advanced economies to maintain accommodative monetary policies to avoid increasing real interest rates as cheaper oil heightens the risk of deflation.

If policy rates could not be reduced further, the IMF recommended pursuing an accommodative policy “through other means”.

Left unsaid was that cheap money gushing from the Federal Reserve in Washington and big banks on Wall Street was a major factor driving the shale oil boom that played a key role in recently plunging energy prices that, now, are raising the specter of world wide deflation that – you guessed it – should be countered by even more cheap money.

Vicious cycle anyone?

It seems former Bank of England governor Mervyn King is on to something in this report at the Telegraph when he notes the following:

We have had the biggest monetary stimulus that the world has ever seen … The idea that monetary stimulus after six years is the answer doesn’t seem (right) to me.

Why is it that central bankers suddenly seem to make much more sense when they are no longer central bankers? King joins suddenly lucid former Fed Chief Alan Greenspan who has recently been famously fond of a barbarous relic and makes you wonder where the heck central bankers still employed by central banks are steering the ship.

One-Third Supports Two-Thirds

From this item at My Budget 360 comes the graphic below depicting the lopsided nature of the U.S. workforce where private sector workers are far outnumbered by those who either don’t work at all or who work for the government, directly or indirectly.

Of course, to say that all those above the black line are supported by all those below the black line isn’t quite accurate. Many Americans who are not in the labor force support themselves and/or only get government benefits that they’ve already paid into (e.g., social security and Medicare), though they’re typically getting out much more than they put in.

Regardless of how the graphic is characterized, a system such as this looks quite unsustainable over the long-run … but let’s not worry about that right now.

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