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A Warning About a New Financial and Stock Market Crisis

Last update on: Mar 14 2020

The veteran world economist who was among those who warned about trouble before the financial crisis is at it again. William White, formerly of the Bank of International Settlements, says he sees imbalances and extremes that are very similar to what was building up before 2007. He also says that central banks used up a lot of their ammunition to get us through tough times and have less limited options if another bad period occurs.

The edifice of inflated equity and asset markets is built on the premise that interest rates will remain pinned to the floor. The latest stability report by the US Treasury’s Office of Financial Research (OFR) warned that  a 100 basis point rate rise would slash $1.2 trillion of value from the Barclays US Aggregate Bond Index, with further losses once junk bonds, fixed-rate mortgages, and derivatives are included. It said losses could dwarf the “bond massacre” that bankrupted Orange County California in 1994 – and detonated Mexico’s Tequila Crisis.

The global fall-out from such a shock could be violent. Credit in dollars beyond US 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,” said Prof White. The offshore dollar funding markets would dry up, triggering a liquidity squeeze. Borrowers would suffer the double shock of a rising dollar, and rising rates.

 

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