Category Archives: Systemic Risks

14/7/18: Elephants. China Shop, Enters a Mouse: Global Debt Bubble


Bank for International Settlements Annual Report for 2018 has a very interesting set of charts covering the growing global debt bubble, one of the key risks to the global economy highlighted in the report.

First, levels:

  • Global debt rose from 179% of GDP at the end of 2007 to 217% at the end of 2017 - adding 38 percentage points to the overall leverage carried by the global economy.
  • The rise has been more dramatic for the Emerging Economies, with debt levels rising from 113% of GDP to 176% between the end of 2007 and the end of 2017, a net addition of 63 percentage points.
  • Advanced economies faired somewhat better, posting an increase from 233% of GDP to 269%, a net rise of 36 percentage points.
  • As it stood at the end of 2017, Global Debt was well in excess of x3 the Global GDP - a degree of leverage not seen in the modern history.


As noted by BIS: “...financial markets are overstretched, as noted above, and we have seen a continuous rise in the global stock of debt, private plus public, in relation to GDP. This has extended a trend that goes back to well before the crisis and that has coincided with a long-term decline in interest rates".


Next, impacts of monetary policy normalization:

As the Central Banks embark on gradual, well-flagged in advance and 'orderly' overall rates and asset purchases 'normalization', the global economy is likely to bifurcate, based on individual countries debt exposures. As the chart above shows, impact from a modest, 100bps hike in rates, will be relatively significant for all economies, with greater impact on highly indebted countries.

Per BIS: "Since the mid-1980s, unsustainable economic expansions appear to have manifested themselves mainly in the shape of unsustainable increases in debt and asset prices. Thus, even in the absence of any near-term market disruptions, keeping interest rates too low for too long could raise financial and macroeconomic risks further down the road. In particular, there are reasons to believe that the downward trend in real rates and the upward trend in debt over the past two decades are related and even mutually reinforcing. True, lower equilibrium interest rates may have increased the sustainable level of debt. But, by reducing the cost of credit, they also actively encourage debt accumulation. In turn, high debt levels make it harder to raise interest rates, as asset markets and the economy become more interest rate-sensitive – a kind of “debt trap”."

Thus, the impetus for rates and monetary policies normalisation is the threat of continued debt bubble inflation, but the cost of such normalisation is the deflation of the debt bubble already present. In other words, there's an elephant and here's the china shop.

"A further complication in calibrating normalisation relates to the need to build policy buffers for the next downturn. Indeed, the room for policy manoeuvre is much narrower than it was before the crisis: policy rates are substantially lower and balance sheets much larger". And here's the mouse: cyclically, we are nearing the turning point in the current expansion. And despite all the PR releases about the 'robust recovery' current up-cycle in the global economy has been associated with lower growth rates, lower productivity growth, lower real investment (as opposed to financial flows), and more debt than equity (see http://trueeconomics.blogspot.com/2018/07/14718-second-longest-recovery.html).

In other words, things are risky, but also fragile. Elephants in a china shop. Enters a mouse...

25/4/18: Dombret on the Future of Europe


An interesting speech by y Dr Andreas Dombret, Member of the Executive Board of the Deutsche Bundesbank, on the future of Europe, with direct referencing to the issues of systemic financial risks (although some of these should qualify as uncertainties) and resilience of the regulatory/governance systems (I wish he focused more on these, however).

21/4/17: Millennials, Property ‘Ladders’ and Defaults


In a recent report, titled “Beyond the Bricks: The meaning of home”, HSBC lauded the virtues of the millennials in actively pursuing purchases of homes. Mind you - keep in mind the official definition of the millennials as someone born  1981 and 1998, or 28-36 years of age (the age when one is normally quite likely to acquire a mortgage and their first property).

So here are the HSBC stats:


As the above clearly shows, there is quite a range of variation across the geographies in terms of millennials propensity to purchase a house. However, two things jump out:

  1. Current generation is well behind the baby boomers (when the same age groups are taken for comparatives) in terms of home ownership in all advanced economies; and
  2. Millennials are finding it harder to purchase homes in the countries where homeownership is seen as the basic first step on the investment and savings ladder to the upper middle class (USA, Canada, UK and Australia).


All of which suggests that the millennials are severely lagging previous generations in terms of both savings and investment. This is especially true as the issues relating to preferences (as opposed to affordability) are clearly not at play here (see the gap between ‘ownership’ and intent to own).

That point - made above - concerning the lack of evidence that millennials are not purchasing homes because their preferences might have shifted in favour of renting and way from owning is also supported by a sky-high proportions of millennials who go to such lengths as borrow from parents and live with parents to save for the deposit on the house:


Now, normally, I would not spend so much time talking about property-related surveys by the banks. But here’s what is of added interest here. Recent evidence suggests that millennials are quite different to previous generations in terms of their willingness to default on loans. Watch U.S. car loans (https://www.ft.com/content/0f17d002-f3c1-11e6-8758-6876151821a6 and https://www.experian.com/blogs/insights/2017/02/auto-loan-delinquencies-extending-beyond-subprime-consumers/) going South and the millennials are behind the trend (http://newsroom.transunion.com/transunion-auto-loan-growth-driven-by-millennial-originations-auto-delinquencies-remain-stable) on the origination side and now on the default side too (http://www.zerohedge.com/news/2017-04-13/ubs-explains-whos-behind-surging-subprime-delinquencies-hint-rhymes-perennials).

Which, paired with the HSBC analysis that shows significant financial strains the millennials took on in an attempt to jump onto the homeownership ‘ladder’, suggests that we might be heading not only into another wave of high risk borrowing for property purchases, but that this time around, such borrowings are befalling and increasingly older cohort of first-time buyers (leaving them less time to recover from any adverse shock) and an increasingly willing to default cohort of first-time buyers (meaning they will shit some of the burden of default onto the banks, faster and more resolutely than the baby boomers before them). Of course, never pay any attention to the reality is the motto for the financial sector, where FHA mortgages drawdowns by the car loans and student loans defaulting millennials (https://debtorprotectors.com/lawyer/2017/04/06/Student-Loan-Debt/Student-Loan-Defaults-Rising,-Millions-Not-Making-Payments_bl29267.htm) are hitting all time highs (http://www.heraldtribune.com/news/20170326/kenneth-r-harney-why-millennials-are-flocking-to-fha-mortgages)

Good luck having a sturdy enough umbrella for that moment when that proverbial hits the fan… Or you can always hedge that risk by shorting the millennials' favourite Snapchat... no, wait...