It's becoming increasingly possible that over the past few decades all central banks have done is fuel a rolling cycle of credit booms and busts. Since inflation targeting began in the 1980s, global debt has gone only one way – up.

Credit bubbles

"It's evident that central banks have made up for a lack of demand [in the economy] through a series of different credit bubbles," says Matthew King, Citigroup global head of credit strategy. These credit binges haven't flowed through into runaway inflation, King points out, but price bubbles in the likes of dot com stocks, then real estate, then eurozone sovereigns and, most recently, emerging markets and commodities.

King thinks that perhaps low inflation has been the result of underlying structural trends that have tended to reduce potential economic growth in the developed world – factors such as globalisation, demographics and technological change. This is how credit creation can stop correlating with inflation.

But this has left us with an uneven approach to monetary policy.

"Policies that do not lean against the booms – but ease aggressively and persistently during busts – induce a downward bias in interest rates over time, and an upward bias in debt levels," wrote Claudio Borio, head of the monetary and economic department at the Bank for International Settlements, and Piti Disyatat, director of research at the Bank of Thailand all the way back in 2014.

"This creates something akin to a debt trap, in which it is difficult to raise rates without damaging the economy," they continued. "The accumulation of debt and the distortions in production and investment patterns induced by persistently low interest rates hinder the return of those rates to more normal levels. Low rates thus become self-reinforcing."

Even more debt


And then the killer line: "It is no coincidence that the secular decline in real interest rates has occurred against a backdrop of a sustained build up of debt."

In other words, the solution for many years to too much debt has been even more debt.

Not convinced? Credit-fuelled real estate bubbles were behind the global financial crisis of 2008. Yet since 2007, when borrowing was at its peak, the ratio of global debt to GDP has actually increased by 20 percentage points.

It may have moved into different areas – for example into emerging markets and from the private to public sector – but the fact is that the overall burden is heavier now than it ever was.

And it's not just on government balance sheets.

The median ratios of net debt to EBITDA for listed companies in both the US and in Europe are at the highest levels outside a recession, on Citigroup research.

Record gearing

A key driver of that has been the enthusiastic buying back of shares, particularly in America, in an attempt to artificially boost earnings on a per share basis. That trend is showing no signs of slowing. Only three months in and already 2016 is the biggest year for buybacks since at least 2000.


In Australia households have geared up to record levels while our economy has begun to re-leverage again, with the ratio of private sector credit to GDP at around 150 per cent, on UBS numbers.

By now it looks like central banks, rather than pursuing policies to spur economic growth, are simply trying to stave off a crash – hopefully long enough for the return of animal spirits and the growth, spending and consumption they bring with them.

"The risk is [central banks] are trying to please the market too much," says Luca Paolini, the London-based chief investment officer at Pictet Asset Management. "[These policies] are more like market-pleasing measures than the real ones that will make a difference."

If in a crazy world the "fools" are the only ones talking sense, let's hear from SG's Albert Edwards.

"Newly-released US whole economy profits data shows a gut-wrenching slump," Edwards writes in his latest note. "Whole economy profits never normally fall this deeply without a recession unfolding.

"And with the US corporate sector up to its eyes in debt, the one asset class to be avoided – even more so than the ridiculously overvalued equity market - is US corporate debt. The economy will surely be swept away by a tidal wave of corporate default."

Sounds crazy?