It is not known when, but it is the elephant in the middle of the china shop that nobody wants to disturb, I mean the inevitability of the bursting of the giant bubble of liquidity and debt, which haunts the global financial system. The crisis caused by the COVID pandemic has brought nothing new to the financial landscape, it has only made it substantially worse, central banks have turned on the “money printing machines” turbo and their balance sheets are now plagued with sovereign debt, which in in many cases it is not known when or how it can ever be paid, and the trick of hoarding debt obligations to keep debt service costs low, unbalances the equation of good management, since the associated premium for greater risk there is no such addition.
The numbers are absolutely overwhelming, just in the last year and according to a study by the Institute of International Finance, the global debt increased by $23 trillion to an impressive $281 trillion, or 355% of world GDP, after a 35% rise, and growth that surpasses that registered in the financial crisis of 2008/2009, when the ratio increased by an accumulated of 25% in those two years. In terms of public debt, the amount is expected to grow by another $10 trillion this year, to a record $92 trillion, which will cause further difficulties if it is necessary to halt the rise in inflation when it arises. Even a simple increase in interest rates will be problematic, since with these levels of indebtedness the financial costs are likely to be too great a burden, both for individuals and companies, as well as for States.
Hence an epic battle between central banks, but particularly the Fed, is anticipated, as it is the best placed to initiate an eventual normalization of monetary policy. This conflict will be a Deja Vu of what happened in October 2018, when Wall Street reacted violently when the Fed decided to continue to reduce its balance sheet. The result was a strong market correction that led to a reversal of the central bank’s mentality. This time, with the bubble even more inflated, an even more violent reaction is expected, perhaps within the movement of March 2020, for now the market is more likely to win the dispute, given the media importance it has achieved. We will see if that will be the case, but certainly it will be very interesting to watch.
