With rapidly rising global debt and inflation figures that don’t reflect the reality following an overkill of QE, no wonder the Bank for International Settlements senses pending financial disaster
The Bank for International Settlements sits in its alpine eyrie, with the ultra-safe Swiss franc for a comfortable cushion, and surveys the global economy with dispassion and equanimity: so the fact that it has gone from buy to sell on the global recovery is significant.
Many of my recent blogs have pointed out the reasons why: the state of the slumping EU and its zombie banks, how the numbers for China can’t and don’t add up, how inflation figures don’t reflect the reality, how the central bankers are behind the interest rate curve, why QE has gone on too long, not to mention the UK’s Help-to-Go-Broke scheme.
To these givens, the BIS now adds total debt, which is far higher now than in 2007: in the developed nations up 20 per cent to 275 per cent of GDP, and in the emerging countries, led by China and Brazil, up 20 per cent to 175 per cent.
The BIS sees a disconnect between booming QE-driven markets – the S&P is on a p/e of 25 – and the underlying global realities. The real question is where are interest rates now, as opposed to where they should be. The BIS smells a crash building up, somewhere.
The crash could be China with its bust shadow banking system of $7 trillion at book value, but with an unknown realisable value; China’s public revenues are declining as land sales fall; with its reserves at $4 trillion, it faces wipe-out.
It could be the eurozone’s lack of growth: it’s bad in Greece, Italy, France and Portugal, where banking crises are also lurking. Banco Espirito Sancto in Lisbon is believed to be insolvent, while at KTB in the EU newly-accepted Bulgaria, all the loan records have gone missing, along with $136 million cash from the vaults, allegedly liberated by the bank’s biggest shareholder.
Mario ‘I will do everything to save the euro’ Draghi has his own problem: how to do the splits. He has to set an interest rate that is right for booming Germany and bust Cyprus and Lisbon and all those in between. The Bundesbank is saying that interest rates are far too low for Germany, which they clearly are.
Meanwhile, the Greek government could collapse any day, triggering an election which will result in a coalition of the extremists, leading to unrest over euro-driven unemployment, currently over 25 per cent in Greece generally and over 50 per cent among those aged under 25.
And Mario has his teams trawling through the EU’s busted banks’ balance sheets, tripping over the unrecognised losses just about everywhere, in advance of his autumn review of bank capitalisation, which threatens to be a parade of the walking wounded from the Great Collapse of 2008-12.
The ECB, responsibly, only engaged in one dose of QE to prevent a total banking collapse in June 2012, unlike the Fed’s and BoE’s QE which drove up asset prices, helping the asset security of their bank balance sheets but at the expense of savers, consumption and investment.
QE is a curate’s egg, a final throw of the dice in the Last Chance Saloon – and no one yet knows the final cost of all this money-printing. Financial crises have a nasty habit of erupting in August, and this year could be further confirmation of this long trend, beginning in Greece, the EU, or China, or just about anywhere. You have been warned – not just by me now, but by BIS too.