Systemic crisis: the fish always rots from the head

Systemic crisis: the fish always rots from the head

March 8, 2023 0 By Michel Santi



The stars align. The potential for severe turbulence that will affect both the financial system and the budgetary stability of many States has never been so high. There are far too many indicators that warn of extreme fragility because the addition of corporate, household and government debt continues to worsen. While all of these players accumulated a debt of 250% of global GDP in 2008, this ratio has now reached 360%, according to the Institute of International Finance. Such levels have never been reached in times of peace…


But the quantity of debt is not only in question, because the qualitative side is also cause for concern at the highest point, because of the unprecedented concentration of wealth, the evolution of which greatly exceeds that of national GDP. In the past, the various wealth measurement indices tracked the progress of economic activity. Fundamental divergence: production – today – remains stagnant in a context where certain measures of wealth are panicking, thus leading to the conclusion that this is not about building real wealth, which does not benefit in any case not to the community or to the States. It is a study by McKinsey which deduces the deterioration in the quality of debtors, and therefore their ability to repay. This is probably the reason why central banks had many qualms about raising their interest rates when inflationary pressures started: because they were well alerted by these measures of wealth which were in fact only a gigantic smokescreen hiding an army of struggling debtors.


As our future will be inflationary and inflated, the nominal rates will unfortunately continue to rise, and will generate an instability all the more strong as the unregulated, unsupervised, non-transparent shadow financial system, disclosing very little information, is also deeply threatened by this burden of debt. Systemic risk is therefore fast approaching. In the near future, it will be doubled by the State risk because the markets will not fail to ask serious questions about the way in which certain countries – extraordinarily indebted – can continue their lifestyle. Worried about Britain’s deficits, former Bank of England Governor Mark Carney had this significant repartee saying his country “lives on the generosity of foreigners”. He was thinking of the time when States had the rule of trying to reduce public deficits during economic upturns. This era is well and truly over: on the one hand because we have become accustomed to spending lavishly, but also because we have only had very rare grace periods over the past 20 years.


The counter-cyclical doctrine of Keynes gave up the ghost when the States all, without exception, rushed to the option of refinancing their public debt eternally, maturity after maturity. Let’s face it: we have all known for a long time that some countries are technically bankrupt. In short, many nations of this world – powerful and respectable – live today on the generosity of others… The moment of truth is approaching for many of these sovereign debts which must also undergo an escalation of their financing costs . However, fact is that the real inflationary crises have always been caused by uncontrollable public deficits. The inflation suffered so far may only be an appetizer if the markets decree that certain public debts are simply no longer sustainable for certain countries in virtual bankruptcy.


How, indeed, can central banks continue their rate hikes without harming the ability to repay public debts? On the other hand, how do they hope to fight inflation without aggressively raising their rates? In fact, the whole chain is contaminated, because the central banks themselves are on one knee, or even both in the case of the venerable Swiss National Bank, which has just announced a loss on 2022 of more than 130 billion Swiss francs, i.e. nearly 20% of the Confederation’s GDP! No one is safe any longer, not even the central banks, whose salvation was expected during successive crises and who have actively participated in the rescue of the system – of which they are an integral part. The worm is really in the fruit, and the system begins to rot if central banks of such stature announce such massive underperformance.


The economy, the financial markets, sovereign debts, private debts, are all fundamental links that constitute a very complex system that can remain stable for a long time, then literally tip over in a very sudden and brutal way. How can we still believe in such a system if a new major crisis were to arise?