A Global Debt Crisis? BIS Warns Of ‘Gathering Storm’ Over Excessive Borrowing

A Global Debt Crisis? BIS Warns Of ‘Gathering Storm’ Over Excessive Borrowing. The Bank for International Settlements (BIS), the “central bank of central banks”, said central banks like the U.S. Federal Reserve are running out of policy room. Its chief economist, Claudio Borio, said

[market participants’] confidence in central banks’ healing powers has — probably for the first time — been faltering. … signs of a gathering storm that has been building for a long time.

The usual response of central banks to an economic slowdown is to lower interest rates to encourage more creation of debt and money by commercial banks. But interest rates are already low, near zero in most of the western world. Some central banks are trying to extend that process with negative interest rates, but so far it is not working because people just hoard cash (why leave your money in a bank if it is going to shrink?) — which is why governments are now moving to eliminate large notes.

The big picture of the amount of debt shows that debt levels remain elevated well above historic norms and well above the previous period of excess money creation in the 1920s:

Graph of debt to gdp

Click to enlarge. Nearly all debt is “credit”, which is the money in bank accounts at commercial banks, created when a bank loan is made.