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