Bank of America Stumbles On A $51 Trillion Problem

Needless to say, the persistent threat of "geopolitical risk" at this moment is close to the highest on record. Ironically, when considering all potential threats, BofA concludes that "the risk for credit spreads and volatility is only on the moderate side as central banks are becoming more cognisant that “uncertainty” anda volatility shock could be damaging for the world economy. Hawkish messages are followed by dovish ones to introduce a “low vol monetary policy normalisation”. This is keeping vols and spreads in check."

Or, said otherwise, for all the bluster of normalization, central banks will immediately backtrack the moment there appears to be even a moment of "miscommunication" between the Fed and capital markets, i.e., either a rate spike, or a jump in vol, or any other form or unauthorized selling of assets.

The implication is, of course, dire: with central banks trapped, this would suggests that the current pattern of relentless debt growth will persist indefinitely - or at least until it can't go on any more - leading to an exponential growth in the "financial" economy at the expense of the "real" one, until finally the former swamps the latter.

This observation, brings us back to an analysis made by Bain several years ago:

Looking beyond today’s market conditions, however, our analysis found that capital superabundance will continue to exert a dominant influence on investment patterns for years to come. Bain projects that the volume of total financial assets will rise by some 50%, from $600 trillion in 2010 to $900 trillion by 2020 (all figures are in US dollars at the 2010 price level and market foreign exchange rates), even as the world economy increases by $27 trillion over the same period


As it has for more than the past two decades, the large volume of global financial assets will continue to sit on a small base of global GDP (totaling $90 trillion by 2020 versus $63 trillion in 2010). At that level, total capital will remain 10 times larger than the total global output of goods and services and three times bigger than the base of nonfinancial assets that help to generate that expanded world GDP.

That, much more than even the abovementioned $51 trillion in non-financial debt, is not only a major problem: it is an unprecedented disaster just waiting to happe.

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