"These are dangerous times — far more so than many now recognise" - Martin Wolf
October 18, 2018
Martin Wolf warns of the high risk investors and the economy faces:
Valuations of risky assets are, in many cases, stretched and balance sheet vulnerability is pandemic, as the (IMF's) Global Financial Stability Report ( https://www.imf.org/en/Publications/WEO/Issues/2018/09/24/world-economic-outlook-october-2018 )makes plain. Just a small shift in global financial conditions managed to damage some emerging economies. But, as the financial stability report points out, the aggregate debt of households, non-financial companies and governments in countries “with systemically important financial sectors now stands at $167tn, or over 250 per cent of aggregate gross domestic product”, compared with 210 per cent in 2008. Many debtors must be vulnerable to rising interest rates.
And remember, this is critically important because "too much private debt" was the ultimate cause of the Global Financial Crisis:
In the context of the above extreme levels of private debt, currently rising international interests rates (see below) will be very painful for many highly indebted private borrowers .. and default rates will increase - potentially crushing asset price bubbles that are supported by this debt.
Martin Wolf continues:
The US government has not helped by embarking on a highly irresponsible, pro-cyclical fiscal expansion on top of what the IMF labels “already unsustainable debt dynamics”
Meanwhile, important asset prices remain elevated. In the US, the (Shiller) cyclically adjusted price/earnings ratio (BB: Shiller's P/E10 is one of the most useful share market valuation metrics), developed by the Nobel laureate Robert Shiller, remains higher than it has been at any time in 137 years — except in 1929 and in the late 1990s and early 2000s.
The world’s economy and financial systems are fragile — nobody can know how fragile until they are really tested. Yet the most important source of fragility is political; a lagged legacy of the financial crisis.
This folly might not matter so much in good times. But what will occur in the next crisis? Will policymakers co-operate as they did in 2008 and 2009? This question holds force within countries, within groupings such as the eurozone, and across the world as a whole. The open world economy might collapse. These are dangerous times — far more so than many now recognise. The IMF’s warnings are timely, but predictably understated. Our world is being turned upside down. The idea that the economy will motor on regardless while this happens is a fantasy.