More Signs of Global Pandemic of Bubbles

You just got to love today’s entropic financial conditions that has been edified from the “this time is different” mindset.

From Central Bank News: (bold mine)

Households worldwide have boosted their borrowing since the 1970s and in some countries, such as the United States and Australia, the total amount now exceeds that of companies, the Bank for International Settlements (BIS) said, introducing a new public database for total credit in 40 countries…

In addition to the growth of household borrowing, the data shows how credit has substantially outgrown economic growth in nearly all countries.

In the 1950s, total credit was around 50 percent of Gross Domestic Product in many advanced economies and then grew over the next 20-30 years and started to top 100 percent in the 1960s and 1970s. By the late 1980s, credit boomed in some countries, such as the United States and the United Kingdom.

Other countries, like Germany and Canada, saw modest credit growth while Ireland is the extreme case: In 1995 it had a credit-to-GDP ratio of around 100 percent. Fifteen years later, the ratio peaked at 317 percent and hasn’t dropped much since.

The explosion of credit with accompanying boom-bust episodes is hardly limited to advanced economies. In Thailand, for example, private sector borrowing rose from 12 percent of GDP in 1958 to 75 percent 30 years later, BIS said.

“A rapid expansion in credit then followed that ended in the 1997 Asian crisis. Thailand’s credit-to-GDP ratio nearly halved over the subsequent 13 years, but started to increase again from 2010 onwards,” BIS said.

In general, emerging economies have tracked advanced economies in increasing the level of household credit. In the 1990s, when data are first collected for emerging economies, household borrowing made up 10-20 percent of total credit. Now, it has risen to 30-60 percent, corresponding to the current levels of many advanced economies.

Yet despite easy money environment which has entailed a monstrous increase in debt, governments have failed to institute necessary reforms

Again from another article from Central Bank News: (bold mine)

Global debt by households, governments and non-financial enterprises has mushroomed by some $30 trillion since 2007, but governments in advanced economies are not taking advantage of the flood of cheap money to carry out necessary structural reforms that will pay off over time, warned the BIS…

“Combining households, non-financial enterprises and government since 2007, global debt has risen a combined $30 trillion dollars, or roughly 40 percent of global GDP, “ Cecchetti told journalists in connection with the publication of BIS’ March quarterly review.
“One reason to be sceptical about the efficacy of further monetary or fiscal easing is that debt levels are very high and continue to rise,” he said, adding: “It is telling that as asset prices are rallying and firms are issuing more debt, investment in the major advanced economies is not picking up."

Regardless of economic or political persuasion, it is clear that economic growth is driven by investment and this is financed through borrowing, either by governments or the private sector.

But households are overburdened, firms are hoarding cash, and governments have reached their borrowing limits. No one wants to borrow more, nor should they, Cechetti said.

With monetary and fiscal policies reaching their limits, Cecchetti appealed to policy makers to get busy with structural reform, such as addressing the time bomb in the pension and healthcare systems and reducing barriers to the reallocation of capital or workers across sectors.

Why change when the good times have been rollin'? 

Central bank policies only provide the incentives of moral hazard to political authorities, thus the reluctance to reform. This shouldn't be hard to understand.

All these "kicking the can down the road" policies have been designed to maintain the status quo of the cartel of the political triumvirate institutions of the welfare-warfare state (notice the "time bomb"), banking system and central banking.

Oh surging local currency bond markets in Asia heightens the risks of a bubble, says the ADB… (bold mine)

Emerging East Asia’s local currency bond markets continued to expand in 2012, signaling ongoing investor interest in the region’s fast-growing economies but also raising the risk of asset price bubbles, said the Asian Development Bank’s (ADB) latest Asia Bond Monitor…

By the end of 2012, emerging East Asia had $6.5 trillion in outstanding local currency bonds versus $5.7 trillion at the end of 2011. That marked a quarterly increase of 3.0% and an annual increase of 12.1% in local currency terms. The corporate markets, though smaller than the government bond markets, drove the increase, growing 6.2% on quarter and 18.6% on year to $2.3 trillion.

Emerging East Asia is defined as the People’s Republic of China (PRC); Hong Kong, China; Indonesia; the Republic of Korea; Malaysia; the Philippines; Singapore; Thailand; and Viet Nam.

Investors have been putting their money to work in emerging East Asia since the early 1990s, but the flows have picked up pace in recent years because of low interest rates and slow or negative economic growth in developed economies while emerging East Asia has enjoyed high growth rates and appreciating currencies.

Investment is increasingly coming from overseas, with foreign ownership in most emerging East Asia local currency bond markets increasing in the second half of 2012. In Indonesia, for example, overseas investors held 33% of outstanding government bonds at the end 2012, while foreign holdings of Malaysian government bonds had reached 28.5% of the total at the end of September 2012.

The fastest-growing bond market in emerging East Asia in 2012 was Viet Nam, 42.7% bigger than at end 2011, largely due to the rapid expansion in the country’s government bond market. The Philippine and Malaysian markets grew 20.5% and 19.9% respectively, while India’s market expanded by a strong 24.3% to $1.0 trillion. Japan still has the largest market in Asia at $11.7 trillion, followed by the PRC at $3.8 trillion.

Governments in emerging East Asia are increasingly opting to sell longer-dated bonds – another sign of strong market confidence in the economies of the region – which is making them more resilient to possible volatile capital flows. This is particularly the case in Indonesia and the Philippines. Maturities tend to be shorter in the corporate bond markets of the region.

Contra ADB, confidence is transient and can snap anytime. Yet the Asian-ASEAN bubble has been staring right on our faces.

 

Yet if something can’t go on forever, it will stop (Ben Stein’s law).

Don’t worry. Be happy.