BIS: The debt trap – Interest rates are too low

June 30, 2014 admin Australian Economy, Australian Housing 43

The Bank for International Settlements (BIS) has warned record low interest rates could fuel a new global financial crisis, one much more severe and prolonged than experienced in 2008.

In the bank’s 84th Annual report, released on Saturday, it raises the phenomenon it calls the debt trap. When debt bubbles started bursting in 2008, central banks were supposedly forced to dramatically reduce interest rates to stimulate and cushion the economy. These low interest rates are now fuelling significantly larger asset bubbles that will also eventually burst. Global private debt outside of the banking sector is now 30 per cent larger than prior to the GFC.

“More generally, countries could at some point find themselves in a debt trap: seeking to stimulate the economy through low interest rates encourages even more debt, ultimately adding to the problem it is meant to solve,” the BIS report said.

Ironically, it was low interest rates after the bursting of the Tech Bubble in 2000 that ultimately lead to the GFC in the first place.

This phenomenon is clearly evident in Australia with our 50 year low interest rates causing property speculators to leverage up into the property bubble like never before. Data released today by the Reserve Bank of Australia show loans for housing hitting a record high of 60.6 percent in May, at the detriment of more productive lending to business now representing only 33.2 percent – an all time low.

» Bank for International Settlements warns low interest rate policies may generate next global financial crisis – ABC, 29th June 2014.

» 84th Annual Report – 1 April 2013–31 March 2014 – Bank of International Settlement, 29 June 2014.




43 Comments

  1. Productive lending at an all time low….You should see the bank ladies face when I tell her I’m not interested in a line of credit, overdraft, home loan….or any other form of debt. Poor thing, she’ll never make her bonus off of me. LOL.

  4. Maybe Glenn Stevens and the board should do a conference call to Graeme Wheeler for some advice.

  5. No surprise here. Every country that has artificially low interest rates finds itself in this position sooner or later, so why would the entire planet be any different?

    Interest rates should always be floating for this exact reason. But then the banks would cry foul…

  6. Isn’t the BIS the body that should regulate all central banks activities? have they all of a suddenly discovered that their central banks servants have been blowing even bigger bubbles post GFC. It looks like a GFC2 with an even bigger crash is on the horizon.
    when all the dust settles is will be shown that this private central banking cartel never knew what they were doing in the first place. i’m surprised why people think the central banks have an relevance as their track records shows mistake after mistake.

  7. The world’s central banks dig an even bigger hole for themselves – they are doing the opposite to what they should be doing. Not only do we have mass printing of fiat currencies but the central banks are engaged in a financial war and are buying masses of stocks – at a point at which they are most expensive to buy.

    Zero or near zero interest rates means that many assets cannot be valued. No one knows where the floor is now for many assets. When interest rates move up it will trigger interest rate derivatives and increase the cost of debt.

    The major US banks are insolvent and this is being masked by the policies of the Federal Reserve which is now stuck between a rock and a hard place – protect the Dollar or the US financial system. In reality they can do neither. They appear to be buying more and more of their own debt to kick the can down the road a few more times.

    The whole system is like a guy running around a table manically trying to keep multiple plates spinning on the end of sticks.

  8. You are all forgetting that the reporting on prices is at a misguided macro level not micro. Macro makes the prices look much higher – for example – Sydney which consists of approximately 18 micro markets. They are never listed individually as the results would be minimal.

    By using the macro Sydney data this includes all the $5.000M, $10.000M, $20.000M and $30.000M sales from the harbor suburbs – even though Sydney includes west of Parramatta.

    The reason why we don’t get Micro?

  9. Why, after approximately six comments do I still require moderating? Beyond a joke!

  10. Nobody is even mentioning NEGATIVE interest rates which the ECB has just introduced (-.01%) I just can’t wait for the bank to tell me they will be charging for depositing cash. (Meanwhile my credit card charges 20%) Apparently a 3% interest rate would sink many major countries with central bank systems as their debt servicing alone would surpass their tax revenues. And then there is the derivatives market of $1quadrillion + based on interest rate swaps contracts which would collapse.
    Well I guess the only solution is world wide debt forgiveness. Sorry not for you and I just the banks.

  11. @MosmanAgent – Nothing personal. All comments are moderated. Many of your colleagues (Double Bay for example) feel threatened by this site and like to issue cease and desist notices willy nilly for the smallest of things.

  12. @ Admin:

    Really, you get that sort of behaviour. I was unaware that they would target a blog such as this.

    Ha, you can only imagine the conversations held with the big press then.

    First they ignore you, then they laugh at you, then they fight you, then you win.

    PS I would love to see these, feel free to email them to me for a laugh.

  13. @MosmanAgent

    Don’t worry mate, I’m sure the angle you feed us is appreciated by all. We are from all corners of society and it’s good when we all talk on topic and seem to see the same things going down. Keep posting, I like reading what everyone has to say.

    @Admin..

    I bet there’s some real crackers that get withheld. Would love to see too.

  14. @Nexus 789
    The banks are not out of control. Quite the opposite. Remember that since the beginning of the GFC in 2008 the chosen cartel banks have become bigger and more profitable. In simple terms the name of the game is create money from nothing. Then you lend it out at interest until the debtors default. Subsequently you get real assets for nothing. The banks, who now own controlling interests in most of the worlds corporations go onto bankrupting and asset stripping countries. (Starting with small ones like Greece) This strategy has not changed since the first banks lent money to the kings to fight their wars. Hence the saying “Give me control of a nation’s money and I care not who makes its laws” M.A. Rothschild.

  15. The BIS has to be the 2nd biggest hypocritical institution after the privately owned Reserve Bank of Australia in the world. On one hand it warns of impending doom about low interest rates but on the other it allows interest rates to remain low. These so called ‘educated’ and well off elite do not have a clue to what they are really doing. How could they when they come from a life of privilege and wealth. went to the best schools, lived in the most expensive homes, grew up in the best suburbs, have never known what it is like to live on a minimum wage and have never been denied anything in their lives. These are the type of ‘elitists’ I hear my friends and family constantly complain about and yet they vote for the same people=politicians. Correction WE!! are the biggest hypocrites in the world after the Reserve bank of Australia and the BIS

  16. I find it extremely interesting that when you see commentary on Foreign Investors those quoted have never sold a property at all. Yet, those at the coal face are dismissed.

    I am fast coming to the conclusion that the government does not want us to see the true figures even though at this stage they too, have no idea either.

  17. @bubbles

    The central banks know exactly what they are doing; they are all independent company’s that only answer to their respective shareholders. Including bis

    They are inflating assets based on debt to the point of unsustainable levels with the only outcome. Bust.

    This has been a work in progress for over 100 years.

    The majority of assets will be in the hands the central bankers when the dust settles.

    The fed holds more mortgages than any other company in the us.

    prepper

  19. @prepper

    Thank you for sharing a very interesting, eye-opening interview. I’m greatly appreciated.

    Nixon.

  20. I am confused, very confused about what the contradictory and ambiguous information the media put out with regards to the true state of the Australian economy.

    Last night, as I was listening to Sydney talk back station 2GB, some economist (sorry, I can’t remember his name), was saying that the Aussie economy was picking up, and that things are getting better. A few minutes later, they were then discussing the end of the mining boom, and how between 75,000 to 150,000 Aussie jobs will be lost as a result.

    Perhaps I am bit “slow”, I don’t know, but it’s very hard to take any of these economists seriously, when on one hand they say everything is ok, then one the other hand there’s yet another news story about some company closing its doors, or moving offshore/or outsourcing their operations to some low cost country. And then you only have to walk in any shopping centre to see the abnormally high number of vacant shops with “for lease” signs displayed in their windows.

    This site is great in exposing the BS the media try and fool us with, but help me out guys, is it just me, or does anybody else feel that the Aussie economy is in deep poop?

  22. @Nixon

    some more interesting stuff for you

    https://www.youtube.com/watch?v=RK7g8nGkF8s

    http://www.youtube.com/watch?v=BfYazDsFMPU&feature=youtu.be

    http://www.larryhannigan.com/australian_government_frequently_unanswered_questions.htm

    http://youtu.be/yuC_4mGTs98

    http://fairdinkumradio.com/resources/13.06.13%20Romley%20Stover%2030m.mp3

    This one takes some time but worth a look

    https://www.youtube.com/watch?v=1-je56ImhAk

    https://www.youtube.com/watch?v=-4Lnze7O22g

    prepper

  23. @Master Yoda, for a start you should never listen to talkback radio if you want an accurate picture of anything.

    Secondly, Australia has some massive problems that it’s not addressing, such as very overpriced real estate. We also have a declining mining sector and declining manufacturing. In short the good times are coming to an end. The current government’s strategy is the tried and failed austerity approach combined with the tried and failed deregulation of the banking industry. Add to the top of that some phenomenal amounts of private debt and it’s hard to imagine how things are going to be improving any time soon.

    Let’s use this as a catalyst for some much needed political reform, shall we?

  24. The BIS has stated that low interest rates are creating asset bubbles. If the independent central banks answer to the BIS and need to take heed of the BIS why are central banks ignoring the recommendations of those they need to report?? Since they ignore the recommendations it shows the whole central bank cartel is a farce and disjointed. They have no credibility and time will show that they were merely experimenting as they have no control over the market’s or the deflationary forces that lay ahead. The power of 6 billion consumers is much greater than the interest rate levers of a cartel of central banker. When the mass consumer mood changes the light switch will go on and the Japanese style deflation will become entrenched which will be good for society and the little group of central bank “so called powers” will show that there interest rate lever pulling will have limited long term effects.

  25. The problem is on the surface the central banking cartel portray themselves as a calm and intelligent force for good, however if this was truly the case and if you had to look below the surface at all economic indicators and on the ground you would see a complete economic disaster and very little reward for major effort with massive risk attached. I do not sense how they can have any credibility or why anyone would take these people seriously. They failed to see the GFC in a proactive manner and warn everybody before hand. They only react to situations in panic. 6 billion consumers control the market. That is the fact. 6 billion consumers are into debt to their eyeballs, however the central bank wants you to go deeper into debt through low interest rates to stimulate growth. that is like pushing on a string hoping for growth. they have learned nothing from the Japanese.

  26. to master Yoda. yes your intuitive feelings are correct. much of the western world including australia is in big poop. What is happening is the last global shift in wealth from west to east and the west will have the hangover of “debt”.
    The only country in the east that matched the west economically was Japan. What they have gone through and are still going through is what the rest of the western countries await. it is a mix of global changes, demographics is one major one as well as globalisation, automation and lower levels of production in the east and the rising middle class in the east.

    In a nutshells the west is maxed out in debt and the east has the savings.

    So we are going full circle where the west needs to start to save again and the east will use the savings to obtain debt to accumulate their wealth.

  28. They only react to situations in panic.

    This is what Naomi Klein called the shock doctrine. I haven’t actually read her book but am aware of the idea.

    That is, a situation is deemed to be an emergency (natural or man made) and the authorities must introduce drastic measures to manage the event. The authorities are the experts and no matter how unfair or ridiculous their proposed solutions appear to be, the measures they propose must be adhered to.

    And when it is pointed out that others warned that this situation was going to occur they are dismissed as fringe elements. “The event was unforeseeable.” Instability is in the nature of the system.

    While not stated directly it is implied that the authorities won’t be able to prevent or mitigate similar situations in the future.

  32. Haha your country is so stuffed.

    Anyone stupid enough to get stuck in Australia and take out a home loan is basically a slave to pay off the baby boomer and gen x credit explosion of the 90-2000’s. Paying off homes that are falling apart lol. Living 2 hours from the city in peak hour to have a 5×10 patch of backyard

    How the fk can a country with UNLIMITED land and the LOWEST populated population density of any Continent have the most expensive housing ahhahaha Are your faucets made from gold and your bricks shat out by the Queen herself? haha If not you can pretty much guarantee you got ripped off.

    You guys didn’t even look at demand, supply or return on investment when buying housing did you.

    Have fun anyone under 30 being a slave to your parents/boomer debt paying off their insane house prices and funding their retirements while you’re stuck with the 50% of your wage home loan till you’re 70.

    PS your wage growth is going backwards so next year is 52% of your wage. So if you think its going to get easier think again…

    Enjoy a Japanese style 20 year deflation of assets and crappy opportunities for anyone under 30.

  36. The central banks are all independent company’s inflating assets based on debt to the point of unsustainable levels with the only outcome. Bust.The majority of assets will be in the hands the central bankers when the dust settles.@Paul
    Exactly. In west of Sydney, house prices are inflated around 20-25% within last 12-14 months. Most are panicked FHB sheeple or greedy specufesters. Banks are shockingly providing so much easy debt. Clearly its banksters & policies fueled asset inflation. Lot of newly arrived students & migrants can’t find even lowest-level labor jobs for months in Sydney now. Unemployment seems to keep rising steadily despite fabricated figures. Very interesting but dangerous times just to put roof over the family.
    http://www.theaustralian.com.au/business/jobs-to-go-in-minings-new-phase/story-e6frg8zx-1226974318684

  37. Any property trade is about liquidity. If this ongoing game starts from Fed to Central Banks to local banks, then surely its boom & bust game. Any thoughts?

  38. @Jas2u

    Your right about foreign students. A friend of mine owns a home service business. One of his customers is a young Chinese couple who got their degrees here in Aus and have since set up a pharmacy. The pharmacy is loosing money hand over fist as the big low cost chemists destroy the industry, but they continue to buy property. They are at 9 and still going for it.

    So you have to think: Where did the money for their education come from? Where is the cash that’s propping the pharmacy up coming from? & If the pharmacy is loosing money, where is the money for the properties coming from?

    There’s only 2 possible scenarios: Both as bad as each other.
    1: Massive bank loans with little or no equity (we know this is going on all over the country)
    2: Mum and Dad’s money from China

    I’ve said it before: Stay out of debt during this crazy debt cycle: It is completely unsustainable, and will come crashing down: Those who read and play the market will be rich beyond their wildest dreams at the end of this. I’m part of a group which has cash far in excess of what house prices now are: The interest on that money pays our rent easily. When this corrects we will have our house paid outright, with cash in the bank…and we’re only in our thirties….The baby boomers that know this about us are jealous as they are leveraged to the hilt, financed cars, financed PPOR, financed holiday & investment homes, crap superannuation balances and the forecast of late retirement. Idiots!

    Letting a disease grow never fixed anyone’s health, so why would increasing your debt on crap assets increase your wealth?

    The entire worlds view of money is 180 degrees wrong. They believe it’s only debt, and debt is nothing, it can be paid back easily. But the truth is it’s only money, and money is only paper or plastic with our governments blessing (oh goodie!). Money can easily disappear/loose it’s value: But debt, well that crap will follow you everywhere (except if you’re a banker or part of the elite).

  39. @Orla, you are mean spirited and bitter sounding, but what you say is probably spot on. I’d bet on a long, slow deflation instead on a short sharp crash, even if the latter would be preferable.

  41. Did Bowering really give a link to a petition to further lower rates on properties to help investors? Thick as a brick, mate. Thanks for pricing my entire generation out of a home and then complaining it costs you too much to do so. I’m all for varying views but honestly, some peoples greed knows no bounds. Wanker.

  43. @ Vino Veritas. Funny. I never said the ‘banks are out of control’. I commented on policy – the central banks policy of buying up stocks, the Fed taking on toxic debt via QE, etc. All policies that all will contribute to an eventual crisis.

    No serious commentators believe that the major US and European banks have sound balance sheets. If interstate rates move up then mayhem will result.

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