Monday, September 29, 2014

Another Prestigious Organization Voices Concern Over Global Debt

We have linked to many articles here where global institutions such as the IMF, the BIS, the World Bank and others have expressed concern over whether the conditions for another financial crisis might be building up. Concerns have ranged from possible asset bubbles forming to the threat of deflation to the overall global debt to GDP ratio. We can add another voice to that today based on this article in the Financial Times.

This time it is the International Centre for Monetary and Banking Sudies annual "Geneva Report" that expresses the concern.

The first couple paragraphs summarize things:

"A "poisonous combination" of record debt and slowing growth suggest the global economy could heading for another crisis, a hard hitting report will warn on Monday.

The article says the authors (including 3 former Central Bankers) of the report predict "interest rates across the world will have to stay low for a very, very, long time to enable households, companies and governments to service their debts and avoid another crash."
Add to this a statement this morning by Chicago Fed Chief Charles Evans that he thinks interest rates will have to stay low a long time. Here is the lead paragraph from this article:

"The Federal Reserve should be "exceptionally patient" in removing monetary policy accommodation, delaying interest-rate hikes until it is confident the U.S. economy can withstand them and only raising rates slowly once it starts, a top Fed official said on Monday."
It is very clear that there is very real concern about deflation and another financial crisis despite constant news articles saying the US is in strong recovery. If the US were in strong recovery, you would not see all these statements that they cannot afford to raise interest rates for a long time "until the US economy can withstand them". And you would not have all these continued warnings of the potential for another financial crisis.
Perhaps by spring of 2015, we will find out if there is any actual recovery or not. By then the Fed will either be saying that interest rates will be raised (and the economy can withstand that) or will have to admit they still cannot raise them. Some are even predicting they will have to go back to their bond buying program. That would amount to a disaster for the Fed in terms of credibility. All we can do is watch and see what actually happens.

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