When the independent economist Peter Warburton first published his book Debt and Delusion in 1999, the world was still in the throes of the Internet bubble, the greatest stock market mania of all time. His warnings about the global build up of debt, the proliferation of new financial instruments and the complacency of central bankers largely fell on deaf ears, only to be tragically vindicated in the global financial crisis of 2008. Eight years on from that defining moment, he has revisited the themes of his pioneering research into global credit expansion – and come up with some equally disturbing conclusions, which he summarises in a podcast interview with me today.
Not only has the buildup of debt continued inexorably since the crisis, he points out, but the patent inadequacy of the misguided policymakers’ response has failed in its objective of stimulating higher growth and eroding the real value of the outstanding debts through inflation, as it was bound to do. We are therefore sowing the seeds of a second financial crisis. “It appears that we have almost reached a juncture where the entire structure of Western-style macroeconomic policy – monetary, fiscal and regulatory – must be overturned to allow nominal GDP growth to revive and aging debt burdens to erode in real terms. Simply enabling households and businesses – as well as governments – to carry high real debt burdens through the maintenance of record-low interest rates offers no viable path to economic recovery”. A new debt default cycle has started.
This analysis, if correct, has important implications for both policymakers and investors alike. To hear more about his arguments, I have recorded a 30-minute podcast interview with Dr Warburton, which you can hear on the Money Makers website. This is the first of a new series of free podcast interviews with leading figures in the investment world I shall be recording over the coming weeks. The podcasts are also available on Soundcast, iTunes and TuneIn. Money Makers will also be running a separate group of podcast interviews dedicated to the specialist field of investment trusts.