Executive Intelligence Review


Former BIS Chief Economist: Central Banks Are in a Catch-22 Dilemma as Crash Approaches

Jan. 23, 2018 (EIRNS)—“Central banks are now caught in a ‘debt trap.’ They cannot keep holding rates near zero as global inflation pressures build because that will lead to an even more perilous financial bubble, but they cannot easily raise rates either because it risks blowing up the system.”

Sounds familiar? For decades now, Lyndon LaRouche and EIR have warned that the system was doomed either to implode via hyperinflation or explode through bankruptcy. This “Catch-22” situation as above described was exposed by William White, head of the review board of the Organization for Economic Cooperation and Development, and former chief economist for the Bank for International Settlements, in an interview from Davos with the Daily Telegraph’s International Business Editor Ambrose Evans-Pritchard.

White says that the collapse is inevitable as a result of central bank quantitative easing (QE) policies that have made the system more dangerous than in 2008. “All the market indicators right now look very similar to what we saw before the Lehman crisis, but the lesson has somehow been forgotten,” White says. Debt global rations have surged by a further 51 percentage points of GDP since the Lehman crisis, reaching a record 327% according to data from the Institute of International Finance (IIF).

With QE, “central banks have been pouring more fuel on the fire,” White says.

“Nobody knows what is going to happen when they unwind QE. The markets had better be very careful because there are a lot of fracture points out there.”

He points to the unwinding already going on, with the Fed selling now $50 billion a month of Treasuries. And as for interest rates, the latest stability report by the U.S. Treasury’s Office of Financial Research (OFR) warned that a 100 basis point rate rise would slash $1.2 trillion of value of bonds (referenced to the Barclays U.S. Aggregate Bond Index). Ten-year Treasuries have already risen to a three-year high of 2.66% last week.

Credit in dollars beyond U.S. jurisdiction has risen fivefold in 15 years to over $10 trillion. “This is a very big number. As soon as the world gets into trouble, a lot of people are going to have trouble servicing that dollar debt.”

To show how credit quality has deteriorated, White mentions at the onset the spreading of an unregulated debt tool, the “German Schuldschein bonds” (GSB). Schuldscheine are IOUs whose market has been historically restricted to German companies, but it has recently expanded to international customers who have no access to other forms of credit where a rating is required, and has turned into a form of high-risk shadow banking. Schuldscheine require no rating. The German Schuldschein debt is now 50% abroad.

A case in point is the just-bankrupted British company Carillion, which had raised £112 million through GSBs.

“Pharmaceutical companies are subject to laws forcing them to test for unintended consequences before they launch a drug, but central banks launched the huge social experiment of QE with carelessly little thought about the side-effects,”

White said. “We are running out of ammunition. I am afraid that at some point this is going to be resolved with a lot of debt defaults.”