The Elephant In The Room: Debt

Chinese banks are reporting a sharp rise in delinquencies and bad loans. Pension funds that are already globally underfunded hold a considerable amount of debt of not only countries but also corporations. Consumer debt and others have been bundled and securitized much as sub-prime mortgages were before the financial collapse of 2008. Rising delinquency rates could eventually have a negative impact on them and a whole host of loans. Banks are tightening their lending criteria as they become nervous. Financial panics and depressions are usually debt collapse panics. They always say that “this time it’s different.” The only thing that is usually different is the ultimate cause and trigger.

The Bank of England (BOE) recently issued a report expressing concern about systemic risk in global markets. The report centered on a concern for the huge exposure of non-bank lenders and huge amounts of corporate loans outstanding. There was concern that markets could become disorderly if there were large redemptions and how that could negatively affect mutual funds and hedge funds. Runs on funds are not unusual. The BOE expressed concern about a pullback in QE from the ECB and the shaky Italian banking system (they should have noted Spain and Greece too). As well, they noted the propensity for corporations to “dress up” their balance sheets, a problem that was prevalent before the 2000–2002 dotcom collapse. Central banks may issue warnings (here in Canada the BofC has as well) but does anyone heed them?

Delinquency rate on commercial and industrial loans, all commercial banks - US

Rising, but not yet a problem.

Source: www.stlouisfed.org

A significant risk that is no doubt being overlooked is ongoing geopolitical confrontation. Geopolitical risk is real and rising. A recent Pentagon study concludes the US-backed international order that was established after WW2 is “fraying” and may even be “collapsing.” What it is saying is US power is in decline and in that respect the international order is unravelling. The main power confrontations come from China and Russia both of who are showing “resistance to authority,” meaning US authority. US global hegemony is under stress led by China and Russia, as they both want to get out from under US control with their creation of the “New Silk Road,” the creation of their own IMF, World Bank, and SWIFT system for international payments. The Asian continent, the Mid-East and Africa and parts of Europe would join as they have all chafed under US hegemony. The IMF, the World Bank, SWIFT, and even global trade are currently US-dominated with the US often deciding who gets what or if they don’t play by their rules they kick them out as has happened with the global SWIFT system. As well, there would be a major shift away from the US$ as the global reserve currency. Already much of Asia and others are conducting business in Chinese Yuan. In turn, both China and Russia have been building up their gold reserves to back their currencies with tangible assets.

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Moon Kil Woong 4 years ago Contributor's comment

Debt is the Whale in the room not an elephant. The weird thing is that low rates do 2 things. As we all know it encourages undue amounts of debt and lowers savings, but even worse it decreases the amount of money generated by savings, thus adding to further credit erosion and weakening spending further.

This is the mess the central banks have gotten us in which is the same as Japan got into. We now have mass asset inflation which means unaffordable housing, a close to dead economy, artificial money production through the central bank (QE), and mass debt. As the British would say, a fine mess. It is exactly that type of mess they hoped to get out of by exiting the EU. Economically speaking they are not our friends. They are running away from the planned economy socialist ideas that are destroying America and Europe disguised as capitalism. It is far from it.