question is whether we are able to look reality
in the eye and face what is coming in an orderly
fashion, or whether it will be disorderly. Debt
jubilees have been going on for 5,000 years, as
far back as the Sumerians."
next task awaiting the global authorities is how
to manage debt write-offs - and therefore a
massive reordering of winners and losers in
society - without setting off a political storm.
White said Europe's creditors are likely to face
some of the biggest haircuts. European banks
have already admitted to $1 trillion of
non-performing loans: they are heavily exposed
to emerging markets and are almost certainly
rolling over further bad debts that have never
European banking system may have to be
recapitalized on a scale yet unimagined, and new
"bail-in" rules mean that any deposit holder
above the guarantee of €100,000 will have to
help pay for it.
warnings have special resonance since Mr White
was one of the very few voices in the central
banking fraternity who stated loudly and clearly
between 2005 and 2008 that Western finance was
riding for a fall, and that the global economy
was susceptible to a violent crisis.
White said stimulus from quantitative easing and
zero rates by the big central banks after the
Lehman crisis leaked out across east Asia
and emerging markets, stoking credit bubbles and
a surge in dollar borrowing that was hard to
control in a world of free capital flows.
result is that these countries have now been
drawn into the morass as well. Combined public
and private debt has surged to all-time highs to
185pc of GDP in emerging markets and to 265pc of
GDP in the OECD club, both up by 35 percentage
points since the top of the last credit cycle in
"Emerging markets were part of the solution
after the Lehman crisis. Now they are part of
the problem too," Mr White said.
White, who also chief author of G30's recent
report on the post-crisis future of central
banking, said it is impossible know what the
trigger will be for the next crisis since the
global system has lost its anchor and is
inherently prone to breakdown.
Chinese devaluation clearly has the
potential to metastasize. "Every major country
is engaged in currency wars even though they
insist that QE has nothing to do with
competitive depreciation. They have all been
playing the game except for China - so far - and
it is a zero-sum game. China could really up the
White said QE and easy money policies by the US
Federal Reserve and its peers have had the
effect of bringing spending forward from the
future in what is known as "inter-temporal
smoothing". It becomes a toxic addiction over
time and ultimately loses traction. In the end,
the future catches up with you. "By definition,
this means you cannot spend the money tomorrow,"
reflex of "asymmetry" began when the Fed
injected too much stimulus to prevent a purge
after the 1987 crash. The authorities have since
allowed each boom to run its course - thinking
they could safely clean up later - while
responding to each shock with alacrity. The BIS
critique is that this has led to a perpetual
easing bias, with interest rates falling ever
further below their "Wicksellian natural rate"
with each credit cycle.
error was compounded in the 1990s when China and
eastern Europe suddenly joined the global
economy, flooding the world with cheap exports
in a "positive supply shock". Falling prices of
manufactured goods masked the rampant asset
inflation that was building up. "Policy makers
were seduced into inaction by a set of
comforting beliefs, all of which we now see were
false. They believed that if inflation was under
control, all was well," he said.
retrospect, central banks should have let the
benign deflation of this (temporary) phase of
globalisation run its course. By stoking debt
bubbles, they have instead incubated what may
prove to be a more malign variant, a classic
1930s-style "Fisherite" debt-deflation.
White said the Fed is now in a horrible quandary
as it tries to extract itself from QE and right
the ship again. "It is a debt trap. Things are
so bad that there is no right answer. If they
raise rates it'll be nasty. If they don't raise
rates, it just makes matters worse," he said.
is no easy way out of this tangle. But Mr White
said it would be a good start for governments to
stop depending on central banks to do their
dirty work. They should return to fiscal primacy
- call it Keynesian, if you wish - and launch an
investment blitz on infrastructure that pays for
itself through higher growth.
always dangerous to rely on central banks to
sort out a solvency problem when all they can do
is tackle liquidity problems. It is a recipe for
disorder, and now we are hitting the limit," he