Posted by: Matthias Paul Kuhlmey
It’s never a dull moment when the Quarterly Review by the Bank for International Settlement (BIS), aka the “bank of central banks,” is published. Alongside the Sunday bacon, yesterday was that day to read through the latest sobering data, and, “luckily,” we had to do so on an hour less of sleep than usual.
The BIS media briefing, supporting the recent research, stated a disappointing element of déjà-vu: “Countries have already been taking macroprudential measures to fend off risks. But these may well be insufficient. It is critical to further strengthen the financial system, so that it can withstand losses should asset prices fall and loans go sour.” As the Quarterly Review details, global debt issued (as of June 2013) has reached $100 Trillion, an increase of more than 40 percent, since governments started fighting deflationary pressures resulting from the financial crisis. The $30 Trillion increase since mid-2007 amounts to nearly twice U.S. GDP and is equal to about half of the world’s total stock market capitalization ($64 Trillion at the end of 2013). We are “talking” really big numbers in support of an ailing global economy, and, yet, growth in 2014 is projected to be only 3.7 percent for all economies and 2.8 percent for the U.S. – clearly not a desirable outcome, given the enormous accommodative measure.
A far more interesting, but likely troubling, aspect of the BIS research is related to debt (lending/financing) and growth: “Up to a point, banks and markets both foster economic growth. Beyond that limit, expanded bank lending or market-based financing no longer adds to real growth. … In normal downturns, healthy banks help to cushion the shock but, when recessions have coincided with financial crises, we find that the impact on GDP has been three times as severe for bank-oriented economies as it has for market-oriented ones.” The BIS findings are very much in line with research we had discussed several years ago, in Not an Ordinary Recession. Related work done by Richard Koo, with the Nomura Research Institute, concluded that there are times and circumstances when Governments must borrow and spend the private sector’s excess savings. Monetary policies as provided by Central Banks, on the other hand, are simply ineffective, as low rates will not entice a deleveraging private sector to borrow (to effectively stimulate the economy).
In summary, the BIS report is solemn evidence that the economic system is only healing under great accommodative measures and future debt accumulation. It is not quite clear if stimulus provided is truly supporting the deleveraging process and economic stability, or if capital flows have simply ignited asset-price inflation, predominantly observed in real estate and equity markets, especially in the U.S.
P.S. Our previous blog entry, Notoriously BIG, covered the somewhat insane exposure of derivatives in the global marketplace. The BIS Quarterly Review provides an update in this respect, but is “beating around the bush” with insights into trading locations, year-over-year growth, etc. Latest estimates for the global total derivative exposure range from $700 Trillion to 1.2 Quadrillion – how is that for really BIG?