The Guardian: Has the next financial crash begun
Duncan Richardson, News Editor
4 Nov 2015, 3:52 p.m.
Many investors believe the economy has turn downwards while others believe the world economy is already in the process of crashing. This may be alarming to many, but is there any evidence to support these claims?
Firstly and perhaps most importantly global debt has grown by £37 trillion to over $200 trillion since the crash of 2007. That’s a compound rate of over 5% per annum and well above the annual global growth rate. Emerging markets have borrowed in dollars and more than doubled their debt levels, whilst in the developed world debts have increased by a third. Total U.S. auto loan debt now exceeds $1 trillion, whilst outstanding student debt has surpassed $1.2 trillion.
The Bank of International Settlements has warned a number of major economies are experiencing a rapid rise in debt to GDP ratios. Private sector debt in Brazil, China and Asia has accelerated so fast that default rates will inevitably rise and eventually test the solvency of the banking system. By driving interest rates down to zero and making money so cheap, consumers, business and governments are now swimming in an ocean of debt. Any meaningful rise in interest rates would cause mass defaults in nearly every sector of the economy.
The $12 trillion printed by the world’s central banks has pushed up financial assets and pushed equity valuations to unsustainable levels. The rich have become richer whilst the middle class have seen their living standards squeezed. Commodity prices have collapsed, oil has fallen from over $100 dollars a barrel to under $50. Nearly all base metal prices have fallen and agriculture commodities are in free fall.
The Chinese economy is grinding to a halt, Japan has revised its growth figures down and despite Mario Draghi firing up the printing press the Eurozone is stagnant at best. The U.S is no better and is struggling without its monthly injection of QE.
In short, debt levels are too high, productivity to low and risks to the financial system are high. This does not mean the economy will crash today, but what we do know there is a disconnect between falling growth, trade and prices and rising debt.
Geopolitical risk is everywhere. The oil price collapsed because the Saudis wanted to kill off the U.S. fracking industry. Russia and the U.S. are fighting over the skies of Syria and Europe is in turmoil dealing with the refugee crisis. More worryingly like in the 1930’s the world’s political and economic problems are converging and becoming harder to separate.