Debt time bomb risks crisis like Depression, says ‘Black Swan’ fund
A DEBT time bomb risks pushing the global economy into a downturn rivalling the Great Depression, a US hedge fund has warned its clients.
Mark Spitznagel, chief investment officer of Miami-based Universa Investments, said a decade of low interest rates had left borrowing levels so high that they now risked triggering a “contagious inferno” that could envelop the financial system.
“It is objectively the greatest tinderbox-time bomb in financial history – greater than the late 1920s and likely with similar market consequences,” the 51-year-old told his clients in a letter reported by Bloomberg. Mr Spitznagel’s firm is advised by Nassim Nicholas Taleb, a Wall Street trader turned economics professor who is well known in financial circles for his 2007 book, The Black Swan, which warned of failings in the banking system ahead of the global financial crisis.
The pessimistic prediction comes after Nouriel Roubini – another economist, known as “Dr Doom”, who accurately predicted the 2008 crisis – also warned that rising rates threatened to trigger a crash as companies struggled with higher borrowing costs.
Insolvencies are already running at their highest levels since 2009 in the UK, official figures published yesterday showed. The figures also revealed that the number of firms opting voluntarily to be wound up reached its highest level since records began in 1960.
A total of 22,109 companies became insolvent in 2022 in England and Wales. Numbers peaked in quarter of the year, as inflation, rising borrowing costs and the cost of living crisis pushed 5,938 businesses into insolvency.
Christina Fitzgerald, president of insolvency and restructuring trade body R3, said that after two years of government support suppressing the numbers: “2022 was the year the insolvency dam burst”.
Last night, Kitty Ussher, at the Institute of Directors, said: “The Government needs to do more to sharpen investment incentives in capital, people and net zero in the forthcoming Budget to get our economy back on to a firm path towards growth.”
It came as the Iod’s survey of members showed most were deeply pessimistic about the prospects for the year ahead. Its economic confidence index rose to minus 28 in January, from a nearrecord low of minus 58 in December.
Mr Spitznagel is a well-known critic of central banks, having long argued that they kept interest rates too low for too long. Last year he warned: “If this credit bubble ever pops, it’s going to be the most catastrophic market failure that anyone has ever read about.”
In his latest letter to clients, he ramped up his warnings further, pointing to current debt levels. Global debt stood at $290trillion (£236trillion), or 343pc of GDP, in the third quarter of 2022, according to the Institute of International Finance (IIF).
In November, the IIF warned that rising interest rates could trigger a “dangerous increase in debt service costs” that could tip businesses and governments over the edge.
Mr Spitznagel told Universa clients: “The correction that was once natural and healthy has instead become a contagious inferno capable of destroying the system entirely.
“The world is just too levered today, the debt construct is just too big.”
Universa has a record of issuing dire market predictions, not all of which have come to pass. Despite his latest prediction, many other economists believe the global economy will avoid a recession this year. The IMF yesterday upgraded its global growth forecast for 2023 to 2.9pc, from 2.7pc.