The combination of low interest rates and "an explosion of debt" has become the biggest risk to the world’s economies, according to the head of Canada’s Global Risk Institute.
"These low interest rates could have the potential to be the next serious issue faced by countries and it’s because debt is exploding everywhere," Richard Nesbitt, 60, chief executive officer of the group that researches risks to the financial industry, said Monday in an interview in Bloomberg’s Toronto bureau.
“There’s debt being piled upon debt being piled upon debt."
Since the middle of 2015, central bank balance sheet expansion has once again led to a collapse in sovereign bond yields, further encouraging global corporate debt to surge...
As the majors plunge into negative rates...
Global debt has climbed about 37 percent since the 2008 financial crisis, Nesbitt said, as central banks around the world have pushed interest rates down to stoke growth and even below zero in the case of Japan and some of Europe’s central banks.
Enticed by record-low interest rates, companies increased total debt by $2.81 trillion over the past five years to a record $6.64 trillion. In 2015 alone, liabilities jumped by $850 billion, 50 times the increase in cash by S&P’s reckoning.
And as SocGen showed last year, all the newly created debt in the 21th century has gone for just one thing: to fund stock buybacks.
Which, as Nesbit exclaims (via Bloomberg)...
“That is an Alice in Wonderland world, and if you go into negative interest rates, you are going through the looking glass and no one knows what will really happen," Nesbitt said.
The fact that Europeans and Japanese policymakers have pursued negative interest rates “should be a signal to people that things are very wrong," said Nesbitt, who was formerly head of capital markets business at Canadian Imperial Bank of Commerce. "Europeans do not seem to have a way out in my view, so it’s quite a broken situation."
Raising rates brings its own problems including a cascading effect of people being unable to meet bloated debt payments. The only way out, which is the most likely outcome, is leadership from the U.S., Nesbitt said. “We start to see the Federal Reserve in the United States start to raise interest rates and other economies such as Canada and Australia that can do it will follow."
"I think the ‘Goldilocks-just-right’ scenario is one where central banks can begin to raise interest rates on a slow systematic basis over a period of many years and the economy is able to absorb that."
Good luck with that... as economic growth forecasts are collapsing...