Who’s in the mood for another financial crisis?

You guys ready for another financial crisis? Coz one is surely on its way.

So says the Bank for International Settlements, the global monetary watchdog owned by central banks.

“That end may come to resemble more closely a financial boom gone wrong, just as the latest recession showed, with a vengeance,” said Claudio Borio, Head of the Monetary and Economic Department at the BIS.

This is the conclusion of the latest and most contradictory BIS report in years. On the one hand it claims the economic conditions of the last year are the most favourable they have been since the Global Financial Crisis, and that unemployment rates have fallen back to levels consistent with full employment. (I do not know how it reaches this conclusion unless it counts the creation of casual and part time jobs towards full employment, despite the fact that at least two-to-three of said jobs are likely going to the same people, struggling to make ends meet).

In reality, there has been no true economic recovery since the end of the Global Financial Crisis, as countries relied on a sharp increase in personal and business debt, rather than addressing banking malfeasance and employment conditions as a whole. In fact the BIS claims the future is likely to bring with it an almost permanent state of boom-to-bust crises. Rather than those that were at the centre of the last crisis (the US and UK), the countries most vulnerable to the next financial crisis include those that have accumulated high levels of household debt and emerging market economies, “including some of the largest, and some advanced economies largely spared by the GFC”.

Japan’s central bank has made large net purchases of government bonds, in order to hold the interest rate on government debt at 0%, while emerging markets such as China are showing private debt to GDP ratios much higher than what existed in the US and UK prior to the crash of 2008. China’s ongoing private and public debt is nearly 270% of GDP, according to Goldman Sachs, with the great majority of this debt in the non-government sector, and its economy is slowing.

Incidentally, the US is not far away from this figure, but a much higher percentage of US debt is government debt. Australia’s debt is also close to this amount, but with much more household debt than China. And the Chinese economy is growing much faster than the US or Australian economies. Australia’s Debt Service Ratio is at 15% nationwide, according to the latest LF Economics report, “far higher than the US, UK and Spain at the peaks of their housing bubbles”, and with household debt to GDP of 125% and private debt to GDP over 200%. The housing bubble which helped Australia stave off the worst of the global financial crisis may in fact only have delayed an inevitable downturn, or even a crash.

“I don’t believe there is another mortgage market globally where a banking system leveraged their household sector as much as ours is without a systemic collapse,” says economist and LF Economics co-founder, Lindsay David.

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