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IMF Warns of Increasing Financial Leverage Outside Banking System

by Paul-Martin Foss

In another sign of an impending burst of the bubble economy, the International Monetary Fund (IMF) has warned of an increasing amount of financial leverage outside the banking system. Total leverage in the non-financial sector in the G20 economies has increased above its pre-financial crisis peak. The non-financial sector includes governments, households, and non-financial companies. Total debt for the non-financial sector now stands 235 percent of gross domestic product (GDP), surpassing the 210 percent high reached in 2006.

The increased amount of debt has been spurred by historically low-interest rates. That’s due to central bank monetary policies that sought to drive interest rates lower in order to stimulate recovery from the financial crisis. But nearly a decade after the financial crisis those central banks have yet to remove the monetary accommodation they set in place. The Federal Reserve is the first central bank to indicate its desire to begin unwinding its monetary stimulus, but there are fears that doing so might lead to another recession.

Both as a result of the financial crisis and of falling interest rates, returns on investment have been lower in recent years than in the past. Investors are increasingly searching for higher-yielding investments, including bonds. That increased demand has, in turn, helped to keep bond yields depressed.

Once monetary policy accommodation is scaled back interest rates should rise. That would put increasing pressure on households and businesses who have found themselves more indebted than ever before. Inability to pay those debts that they have taken on could lead to another financial crisis, with the increased amounts of debt making the next crisis more severe than the last one.

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