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Warnings Continue: Crash Coming of Central Bank-Fueled Debt

Nov. 26, 2017 (EIRNS)—It has become widely recognized—though not among government or central bank officials in the United States or Europe—that the central banks of America, Europe and Japan have blown up an immense global corporate debt bubble which is soon going to crash.

The Organization for Economic Cooperation and Development (OECD), for example, announced a forthcoming report that finds that

"Household and corporate debt in many advanced and emerging market economies is too high. While higher indebtedness does not necessarily imply that problems are just around the corner, it does increase vulnerability to shocks."

On corporate borrowing, the OECD warned risk had been shifted from banks to the credit markets themselves while there has been a "substantial decrease in credit quality." Their full report is due out this week.

More blunt is a European fund manager, Francesco Filia, whose company has developed metrics for measuring overpricing or underpricing of financial assets. Filia reported "There are a number of different metrics. They all convene that this is a market bubble that has not been seen before in history." That is for the stock markets bubble. But the bond markets bubble—the corporate debt bubble—is worse.

"What makes modern markets so uniquely precarious is the fact that investors are struggling with twin bubbles in bonds and equities.... NIRP and ZIRP [the policies of the Federal Reserve, the European Central Bank (ECB), and the Bank of Japan] have created distortions in bond valuations that have left them extremely overvalued compared with history, meaning that the inevitable regression to the mean will likely take the form of a vicious selloff.... We are in totally uncharted territory."

The Wall Street Journal, in a Nov. 16 article on Europe’s unpayable corporate debts, wrote "10% of the companies in six Eurozone countries including France, Germany, Italy and Spain are zombies, according to the [European] Central Bank’s latest data" —that is, they are incapable of paying even the interest on their debts. But much of the lending which private banks actually do, with the vast money-printing the ECB pumps into them, goes to these same zombies, to "extend and pretend" on their debts.