The world is facing a new crisis caused by an explosion in debt. So warns William White, the central banker who famously predicted the crisis of 2008.

The world is now facing a crunch that could see a collapse in property prices; a new global banking crisis; waves of cheap commodities savaging Western industrial centers; and the need for debts to be written off on a grand scale.

Rather than being better placed to survive, the world is actually worse off than it was in 2008, he argues. White, of late, has been warning that the global financial system has become dangerously unstable and faces an avalanche of bankruptcies that will test social and political stability.

“What’s been happening at each stage is that imbalances in the global economy have been getting worse and worse.”

White issued his first warning to central bankers in 2003, at their regular meeting in Jackson Hole, US. At the time, White was economic adviser to the Swiss-based Bank of International Settlements – often dubbed ‘the central bankers’ central bank’. Today, White works part-time at the equally prestigious Organisation for Economic Co-operation and Development (OECD).

"Debts have continued to build up over the last eight years and they have reached such levels in every part of the world that they have become a potent cause for mischief. It will become obvious in the next recession that many of these debts will never be serviced or repaid, and this will be uncomfortable for a lot of people who think they own assets that are worth something. The only question is whether we are able to look reality in the eye and face what is coming in an orderly fashion, or whether it will be disorderly."

The next task awaiting the global authorities is how to manage debt write-offs - and therefore a massive reordering of winners and losers in society - without setting off a political storm. European banks have already admitted to $1 trillion of non-performing loans: they are heavily exposed to emerging markets and are almost certainly rolling over further bad debts that have never been disclosed. The European banking system may have to be recapitalized on a scale yet unimagined, and new "bail-in" rules mean that any deposit holder above the guarantee of €100,000 will have to help pay for it.

Cheap money has led to an explosion in debt, taken on by governments, households and companies – and despite the 2008 crisis being caused by too much debt, levels have since risen, points White. “Overall debt has gone from 200 per cent of global GDP in 2007 to 250 per cent now. Deleveraging hasn’t happened.

“I would consider all of these financial and real assets, where they have risen to historically high levels, to be vulnerable. The banks are going to say the whole world has become very risky. Consumers are going to say I may have a job today, but maybe not tomorrow, and they will focus on repaying debt. Everybody tries to save at the same time,” White warns.

Emerging Markets

Mr White said stimulus from quantitative easing and zero rates by the big central banks after the Lehman crisis leaked out across east Asia and emerging markets, stoking credit bubbles and a surge in dollar borrowing that was hard to control in a world of free capital flows. The result is that these countries have now been drawn into the chaos as well. Combined public and private debt has surged to all-time highs of 185% of GDP in emerging markets and to 265% of GDP in the OECD club, both up by 35 percentage points since the peak of the last credit cycle in 2007. "Emerging markets were a part of the solution after the Lehman crisis. Now they are part of the problem too.”

A devaluation of the Chinese currency clearly has the potential to metastasize. "Every major country is engaged in currency wars, even though they insist that QE has nothing to do with competitive depreciation. They have all been playing the game except for China - so far - and it is a zero-sum game. China could really up the ante." The recent economic worries and the slump in stock markets and commodity prices have been widely laid at the door of China and other emerging economies whose breakneck growth may finally be slowing. For White, it is again the debt these economies have built up – mostly borrowed in dollars – that is part of the threat. “The total US dollar denominated credit to non-banks in the emerging markets is $3.3 trillion (£2.3 trillion). That’s up from less than $1 trillion (£690 million) at the beginning of the century. It has exploded since 2009. In Brazil and China that debt has gone from 150 per cent of GDP to 200 per cent of GDP.”

Some argue that if those economies grow quickly they may be easily able to pay those debt bills, but White is not so sure as the value of the currencies of these emerging economies has fallen, making it harder for them to pay their debts. White thinks governments need to invest in infrastructure, and that those governments without big debts need to spend. “You need more public investment and infrastructure investment.”

He worries too about a wave of deflation from China, arguing the world is facing an oversupply of things it does not need. “Look at China, where they have got a massive overcapacity in steel, glass, ceramics. They are going to send this our way; you can already see this with the closure of the steel plants and mills,” says White.

White is convinced a debt reckoning is coming; he is less sure, however, when it will happen. He admits he has repeatedly thought a crisis would come sooner, and that recessions are impossible to predict. It is impossible to know what the trigger will be for the next crisis since the global system has lost its anchor and is inherently prone to breakdown. “What you can say is that everywhere you look, you see is economies laboring under growing difficulties. You can see potential trigger points, but there are real limits to our understanding.”

Central Banks

White admits that in the past he has underestimated the extent to which central banks can reinvigorate economies with dramatic interest rate cuts. But, he argues, today there is one reason to think central banks may have reached the limit of their powers. With most central bank interest rates close to zero, there is little room for more action. White warns, however, they may actually make matters worse, if for example, the rates would be negative. He believes that low rates – and negative rates even more – may make a banking crisis more likely, rather than less. Banks will be charged to leave cash at central banks but may not realistically be able to charge ordinary customers for putting cash on deposit. They would need to make up the profit somewhere else. “It squeezes bank profit margins, so they might charge more to borrowers, which would be the opposite of what low interest rates might be expected to do.”

In his article, published in OECD Observer in January 2016, he points out:

“Central banks in the major advanced economies have been pursuing unusually lax monetary policies for many years. Moreover, the ways in which they have done this have become increasingly experimental. These expansionary policies bear the risk of ending unhappily. In large part, this single-minded pursuit has reflected the political reality that monetary policy has become “the only game in town”. Yet in no small measure, it also reflects some long-held but false beliefs about how the economy actually works. Moreover, absent of any discipline imposed by an international monetary system, virtually every central bank in the world became engaged in a process of unprecedented monetary easing – the so-called “currency wars”. As a result, the global economy could now be even more vulnerable than it was in 2007.

The fundamental problem is that modern macroeconomics is based upon a false belief: namely, that the workings of the economy can be understood and therefore closely controlled, just like a machine in the competent hands of its operator. A philosopher would say that we have made a profound ontological error. We have failed to realize that what one can know about a system depends upon its very nature. And the nature of our economies is simply too complex to be understood, much less controlled.

Consider that the analytical frameworks generally accepted by central banks totally failed to see the crisis coming or, despite concerted and persistent action, the weakness of the subsequent recovery. That alone should have been sufficient to raise some fundamental analytical questions. Moreover, support for scepticism is provided by reviewing the actual practice of monetary policy over the last 50 years. Every aspect of it – including its objectives, instruments and indicators – ­has been subject to repeated change. Generally, these changes have been in response to previous policies failing to deliver the intended results, or producing unintended and unwarranted side effects. In short, monetary policy has systematically got it wrong. There would then be nothing unwarranted about another fundamental rethink in response to recent events.

As in 2003, White’s view of a looming disaster is disputed by many economists. But he is confident that the imbalances in the world economy will lead to a new crisis. “At a certain point when something is unsustainable it will end“ he declares. Then he adds: “But it can also go on longer than you expect.”

There is no easy way out of this situation, but Mr White believes it would be a good start for governments to stop depending on central banks to do their dirty work. They should return to fiscal primacy and launch an investment blitz on infrastructure that pays for itself through higher growth.

Biography

William R. White is a Canadian economist born in Kenora, Ontario in 1943. Mr White was educated at the University of Windsor and received his PhD from the University of Manchester, in 1969. He is famous for flagging the wild behavior in the debt markets, before the global storm hit in 2008 .

In 1969, he began his career as an economist at the Bank of England, the central bank of the United Kingdom. In 1972 he joined the Bank of Canada, the central bank of Canada, where he spent 22 years. His first six years at the Bank of Canada were with the Department of Banking and Financial Analysis, first as an economist and finally as Deputy Chief. In 1978, White became Deputy Chief of the Research Department and was made Chief of the Department in 1979. He was appointed Adviser to the Governor in 1984 and Deputy Governor of the Bank of Canada in September 1988.

In 1994, he joined the Bank for International Settlements (BIS), the Swiss-based bank of central banks, as manager in the Monetary and Economic Department. From May 1995 to June 2008, he served as its Economic Adviser and Head of the Monetary and Economic Department.

He predicted the financial crisis of 2007–2010 before 2007's subprime meltdown (subprime mortgage crisis). He was one of the critics of Alan Greenspan's theory of the role of Monetary Policy as early as 1996. He challenged the former Federal Reserve chairman's view that central bankers can't effectively slow the causes of asset bubbles. In 2003, White made his argument directly to Greenspan, at the Kansas City Fed's annual meeting in Jackson Hole, Wyoming. White recommended to "raise interest rates when credit expands too fast and force banks to build up cash cushions in fat times, to use in lean years." Greenspan was unconvinced that this would work and said: "there has never been an instance, of which I'm aware, that leaning against the wind has been successfully done"

He retired from the BIS on 30 June, 2008. In October 2009 he was appointed chairman of the Economic Development and Review Committee at the Organisation for Economic Co-operation and Development (OECD) in Paris. This committee carries on regular evaluations of the policies of both member countries and aspiring members of the OECD. In his capacity as chairman, he also contributes to meetings of WP1 and the Economic Policy Committee of the OECD. He was a member of the Issuing Committee, advising the German chancellor on G-20 issues.

William White has published articles on topics related to monetary and financial stability, as well as the process of international cooperation in these areas.