Why we should all be very worried about the economy
WE SHOULD all feel afraid. This is despite the world’s most powerful central banker having just declared that there won’t be another financial crisis in ‘our lifetimes’.
This comment by Janet Yellen, the 70year-old head of the U.S. Federal Reserve, reminds me how, before the crash of 2008, then Chancellor Gordon Brown announced ‘an end to boom and bust’.
Oh what hubris! Brown’s bravado was irresponsible fantasy. So is Yellen’s now.
Wiser heads would not have been so complacent or rash. For I believe the world currently faces a chilling future.
Last week, the annual report of the Bank for International Settlements (often known as the ‘central bank for central bankers’) warned of looming debt crises
in the Far East. It added that another recession could be on its way ‘with a vengeance’. This is terrifying language — particularly since the Bank was among few which predicted the 2008 crash.
Nor is that all. The Washington-based Institute of International Finance has released figures showing the scale of the global debt crisis. Accumulated debt has surged to a mind-boggling £168 trillion. Ten years ago, on the eve of the crash, global debt was much less. Regardless of the risks now being bigger, the world continues to indulge in a dizzying debt splurge.
Central to this crisis is the fact politicians and financiers failed to tackle the root cause of the problem in 2008.
Back then, the world’s bankers dealt with it by stimulating a fresh economic boom through the creation of limitless
credit — exactly how we got into trouble in the first place!
What makes the situation much worse today is the fact that national balance sheets are not healthy enough to bail out banks as they did ten years ago.
In Britain, national debt has more than doubled. If a major bank collapsed, there wouldn’t be enough resources to rescue it and its creditors. The same is true in the rest of Europe and the U.S.
So is Janet Yellen being feckless in her optimism or is she trying to inspire confidence at a time of supreme danger?
Since she’s not stupid, I believe the latter is the case. Even so — and with interest rates set to rise — we should all urgently prepare for the next economic downturn.