In the immediate aftermath of the 2008/9 financial crisis there was general recognition that excess credit expansion driven by commercial banking intemperance, particularly in derivatives markets such as collateralised debt obligations, had caused the problem. Central banks, aided by their academic and media allies, were swift to sidestep the blame even though they had been asleep at the wheel while private credit growth had soared.
Nevertheless, for a few years there was some contrition on the part of governments, companies and households as to the inordinate levels of debt they had accrued. At one point it was even the case that the eurozone reiterated its original commitment to Maastricht Treaty rules (which included a promise by governments not to let public debt exceed 60% of GDP and to maintain fiscal deficits under 3% of GDP). But fiscal rectitude – or austerity – is now a bad word. Years of interest rates at or close to the zero bound (some now negative) have emboldened the Keynesian and Monetarist cranks. Their new mantra is that if servicing the debt is no longer an issue, why not just pile it on?
So here comes the consequences:
But let’s assume that the worst can be averted by some insightful politicians and more (honest) policy makers. How do we as investors protect ourselves?