The next Crisis will be THE CRISIS.... the bond bubble is THE bubble

The next Crisis will be THE CRISIS.

You might have noticed that each successive crisis over the last 15 years has been both larger and involved more senior asset classes.

1.     The 2000 Tech Bubble involved stocks.

2.     The 2007 Housing Bubble involved housing.

3.     This crisis involves Bond… as in ALL bonds.

To give some perspective regarding size here consider that the credit default swap market based on housing that nearly took down the system in 2008 was $45 trillion at its peak in 2007.

In contrast, the global bond market is well over $100 trillion today.

And it’s growing rapidly.

Indeed, US corporates are on track to issue over $1.5 TRILLION in debt this year alone. Not only will this be an all time record… it will be the third consecutive all-time record for corporate debt issuance.

Part of the reason that the bond market has become so enormous is because few entities, particularly sovereign nations, have the cash handy to pay back debt holders when their debts come due.

As a result, many of them are choosing to roll over old debts OR pay them back via the issuance of new debt. The US did precisely this in the last few months issuing over $1 trillion to cover for the payment of old debt that was coming due.

So the bond bubble is not only over $100 trillion in size…it’s actually GROWING on a month-to-month basis.

Reading all of this is no doubt concerning. However, the situation becomes much worse when you consider that over 81% of ALL derivatives trades are based on interest rates (BONDS).

Globally, the interest rates derivative market is an unbelievable $555 TRILLION in size.
These are trades based on interest rates that in turn are based on the bond bubble. Thus, the significance of the bond bubble simply CANNOT be overstated. Banks and other financial entities have literally bet an amount equal to over SIX TIMES GLOBAL GDP on interest rates.

This is why Central Banks are absolutely terrified the moment a sovereign nation comes close to defaulting. Consider that Spain’s bond market is just $1 trillion. But the derivatives trade market based on Spain’s bonds is likely well north of 10X this amount.

With this kind of leverage, even if 4% of the trades are at risk and 10% of those trades go bust, you’ve wiped out the equity at more than a handful of the large EU banks.

In simple terms, the bond bubble is THE bubble. And when it bursts, we will experience THE crisis. In comparison, 2008 will look like a joke.

Global Mantra Market Outlook 2015 With Russell Napier Of ERIC

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Icahn Mon Nov 17, 2014 Expects major stocks correction in 3 to 5 years

Icahn

Mon Nov 17, 2014

Expects major stocks correction in 3 to 5 years

Carl Icahn isn't forecasting a dramatic stock market drop quite yet but the billionaire investor is still bracing for a market sell-off in the next three to five years, he told Reuters on Monday.

But Icahn is more concerned and is predicting a downturn. "It's really a question of when that is going to happen, in my opinion. It could be three years, it could be three months, it could be three days. But I really do believe there will be a major correction in the next three to five years, at least."

CHRIS WOOD  

Nov 18 2014

SEES 40000 SENSEX,

India best EM with 5-year view.

Printed money for nothing

http://www.anirudhsethireport.com/printed-money-for-nothing/

RBI’s Rajan Sees Risk of Financial Markets Crash

• August 6, 2014, 7:12 AM ET

RBI’s Rajan Sees Risk of Financial Markets Crash

ByGabriele Parussini

Reserve Bank of India Governor Raghuram Rajan warned Wednesday that the global economy bears an increasing resemblance to its condition in the 1930s, with advanced economies trying to pull out of the Great Recession at each other’s expense.

The difference: competitive monetary policy easing has now taken the place of competitive currency devaluations as the favored tool for playing a zero-sum game that is bound to end in disaster. Now, as then, “demand shifting” has taken the place of “demand creation,” the Indian policymaker said.

As was the case in the 1930s, the lack of coordination between policymakers is producing spillovers that may be difficult to control, and the world’s financial system may soon face fresh turbulence at a time when central banks have yet to repair the damage that the 2008 financial crisis caused to developed economies.

“We are taking a greater chance of having another crash at a time when the world is less capable of bearing the cost,” said Mr. Rajan in an interview with the Central Banking Journal.

A sudden shift in asset prices could happen in a variety of ways, Mr. Rajan said. The most obvious route would be as a result of investors chasing higher yields at a time when they believe central bank policies will protect them against a fall in prices.

“They put the trades on even though they know what will happen as everyone attempt to exit positions at the same time – there will be major market volatility,” said Mr. Rajan.

A clear symptom of the major imbalances crippling the world’s financial market is the over valuation of the euro, Mr. Rajan said.

The euro-zone economy faces problems similar to those faced by developing economies, with the European Central Bank’s “very, very accommodative stance” having a reduced impact due to the ultra-loose monetary policies being pursued by other central banks, including the Federal Reserve, the Bank of Japan and the Bank of England.

“The exchange rate is too strong given the euro area’s economic standing,” said Mr. Rajan, who took over the RBI in September.

Mr. Rajan said economists still disregard the central role of financial systems in the economy and believe they can predict upcoming disruptions.

“They still do not pay enough attention–en passant–to the financial sector,” Mr. Rajan said. “Financial sector crises are not as predictable. The risks build up until, wham, it hits you.”

...........will eventually end in disaster

For the past few years, a number of prominent hedge fund managers, Jones included, have warned that the Federal Reserve’s efforts to push down interest rates and stimulate the economy will eventually end in disaster–a calamity that will prove more damaging than the financial crisis.

That may explain why prominent hedge fund manager Paul Singer last May wrote that the Fed’s bond buying program would “ultimately destroy the value of money and savings while uprooting the basic stability of their societies.” Scared yet? Jones himself has called the Fed’s policies misguided.

 

The five most worrisome charts in the global economy

There are plenty of reasons to think that the global economy could continue to power forward.

The US economy seems to be emerging from its winter’s nap. China’s economic managers look ready to embark on a mini-stimulus push. German industrial production continues to push forward. Japan’s manufacturers are feeling better than they have in years.

But there are also reasons to worry about what economists politely call “downside risks.” Here are some that everyone should have on their radar screen.

European disinflation

European prices are climbing at their slowest pace since the worst of the financial crisis, when prices actually fell. Deflation is a dangerous place for an economy to be, as declining prices act as a persistent headwind to economic growth. What’s more, there’s no clear cure to deflation once it sets in. (Just ask Japan.)

1

After the “taper”

Lending is the lifeblood of any large, advanced economy. And a recovery in demand for loans—specifically mortgages—has been an important part of the of the US recovery over the last couple years. The Fed’s survey of senior lending officers showed a sharp downturn in demand for mortgages during the first quarter. Let’s hope it was just the weather.

+

China’s credit conundrum

There’ve been plenty of rumblings that China could be about to experience a Bear Stearns-style “Minsky moment” when investors suddenly perceive risks where they previously only saw profits. Given the fact that the financial system is already largely backed by the government, we can’t see an outright financial crisis as being in the cards. Rather, as the credit cycle turns in China, the risks seem tilted toward a Japanese-style system of unhealthy zombie banks that sap growth. Such a scenario would prompt economic forecasters to rapidly rethink the prospects for global growth.

+

Brazil’s ballooning current-account deficit 

China’s slowdown could endanger the growth model of other giant emerging markets. For instance, as commodity prices have fallen, Brazil’s current-account gap has gotten much worse. (Essentially, this is the best measure of how much a country has to borrow from abroad.) So far, investors in Brazil have been more than willing to continue to finance the South American giant. But with ongoing unrest and elections in the offing, it’s not too hard to imagine a destabilizing outflow of capital.

+

Japan’s shift from creditor to debtor

Speaking of current-account deficits, in recent months Japan notched some of the biggest on record, meaning it was becoming an importer of capital instead of a lender to the world. (Japan’s government has a lot of debt, but the economy as a whole has long run current-account surpluses.) Plainly put, if Japan ran persistent current-account deficits, it would need foreign investors to buy its government bonds. They’d likely demand higher interest rates. Those higher rates would make the debt, already nearing 230% of GDP and predicted to keep growing under Japan’s economic stimulus program, pile up even faster. That could set off the kind of negative debt dynamics that we’ve seen drive once rock-solid creditors—like Italy—to the brink in recent years. And because Japanese government bonds—like US Treasurys—are a bedrock of the global financial system, that would be a terrible thing for global growth.

Developed country debts hit WWII high at $39.8tn by the end of this year

Developed country debts hit WWII high at $39.8tn by the end of this year

28 March 2014 - 16:05 pm

The developed world’s borrowing binge peaked in 2012, but overall debts are still climbing and are expected to reach the highest since World War II for a slew of big countries.

The Organisation for Economic Co-operation and Development, a club of 34 rich countries estimates that member governments borrowed about $10.8tn last year, down from a peak of $11tn in 2012, and forecast the total would slip further to $10.6tn in 2014.

However, the OECD noted that the overall debt burden is still climbing sharply – to an estimated $39.8tn by the end of this year – which will pose a “significant challenge” to refinance in the coming years.

Government debt ratios are expected to further increase and remain at elevated levels in the near future. In fact, general government debt as a percentage of GDP is projected to surpass the World War II peak.

The OECD has included a striking chart in its latest report on government borrowing that underscores this point, seen below.

Low interest rates mean that the net interest payments as a percentage of economic outlput has remained relatively stable, but that could be reversed by the US Federal Reserve’s ongoing “tapering” of its quantitative easing programme and possibility of rate hikes in 2015.

The Fed is the world’s most powerful central bank, and shifts in its monetary policy have major knock-on effects elsewhere. The OECD duly noted a wide range of risks:

In sum, OECD debt managers continue to face continued sizeable borrowing operations amid a still fairly challenging environment with headwinds to global economic growth, heightened concerns about market and liquidity risk, higher long-term borrowing rates, the high uncertainty of the exact timing of the exit and tapering plans regarding asset purchase programmes by central banks, legacy risks related to incomplete financial sector reforms, the possible adverse impact on market liquidity of new regulations, reducing leverage and increasing capital cushions of banks in particular in the euro area, and downside risks with a build-up of imbalances in a wide range of emerging markets.

Agricultural Sector ........long term story

• Agriculture is an inelastic sector.
• 30% of the house-hold income has to go into food.
• Walmart, ITC, Tesco, RIL , Bharati to make an imminent entry into corporate farming.
• Scarce land supply competing with urbanization
• Poor productivity in farming due to an avg age greater than 50 yrs
• Food supply unable to keep pace with a global pop. to explode to 9 billn. by 2050.
• Global warming depleting current agri. output.
• Massive farm to fuel programme
• Increasing intake of food per capita due to rising discretionary income

Foreign Grip Loosens on Treasuries as U.S. Investors Buy..........Bloomberg

http://www.bloomberg.com/news/2014-03-23/foreign-grip-loosens-on-treasuries-as-u-s-buyers-bolster-demand.html

Overseas creditors such as China and Japan enabled the U.S. to spend its way out of the recession as they gobbled up 80 percent of the nation’s Treasuries. Now, their holdings are dropping toward the lowest level in a decade, while homegrown investors have picked up the slack.

Foreigners are slowing their purchases of U.S. government debt as central banks and reserve managers tried to diversify away from dollar-based assets on speculation the Fed’s policy of printing money by buying bonds would debase the greenback

With the Fed moving to end its own debt purchases this year, the willingness of U.S. investors to finance a greater share of America’s $12 trillion in marketable debt securities is now providing a crucial source of demand.

Becoming less beholden to foreign creditors also means the U.S. can limit the risk any reduction in their buying will trigger a sudden surge in borrowing costs for the government, companies and consumers.

Yields (USGG10YR) on 10-year Treasuries, a benchmark for everything from mortgages to car loans and corporate bonds, have confounded forecasters by falling this year as an economic slowdown in China and political crises from Thailand to Ukraine helped fuel demand for the safest assets among U.S. investors.

After reaching a 29-month high of 3.05 percent at the start of the year, yields on the benchmark 10-year note ended at 2.74 percent last week. That compares with an average of 4.7 percent in the past two decades and 5.84 percent for past 30 years. 

The yield was 2.77 percent as of 7:21 a.m. in New York.

Foreign Holdings

Of the $8.1 trillion in U.S. government notes and bonds not held by the Fed, overseas investors owned $5.4 trillion as of January, data from the Treasury department and the central bank compiled by Bloomberg show. The figures exclude Treasury bills, which have maturities of one year or less.

The total is equal to about 67 percent, approaching the lowest level since the government began releasing the data in 2000. Overseas investors scaled back their pace of U.S. debt purchases last year, increasing their holdings by $228.2 billion, or 4.1 percent, the least in seven years.

China, the largest foreign creditor with $1.27 trillion of Treasuries as of January, has slowed its accumulation to about 3.1 percent annually since 2010. That compares with an average yearly increase of 34 percent in the 10 years before.

me - Japan like situation; lost decade; lower yields for many years ???

benchmark Philadelphia Gold & Silver Index in December traded at the cheapest ever relative to the price of bullion

The ratio of the Philadelphia Gold & Silver Index to gold futures reached 0.066 on Dec. 5, the lowest since the data begins in 1983. The measure was at 0.075 yesterday, and averaged 0.16 in the past 10 years

me : when shares of gold mining companies are trading at about historic lows; bubble in gold prices are far away.

Signs-of-A-Gold-Supercycle

Gold might be entering a 2 yr long super cycle 

by Gary Wagner

www.TheGoldForecast.com

http://www.kitco.com/news/video/show/Chart-This/613/2014-03-17/Signs-of-A-Gold-Supercycle-Chart-This

 

Nifty can touch 12,000 in 5 years: Raamdeo Agrawal

http://economictimes.indiatimes.com/et-now/experts/nifty-can-touch-12000-in-5-years-raamdeo-agrawal/videoshow/32373213.cms

Silver Vault for 600 Tons Starting in Singapore on Demand

Silver Bullion Pte, a Singapore supplier of coins and bars to retail investors, opens a 600 metric ton vault tomorrow as investor demand increases.

The storage could hold silver worth $390 million at prices on March 21. The company doubled sales to 1.04 million ounces in 2013 from 517,000 ounces a year earlier, said Gregor Gregersen, who founded the company in 2009.

China premier warns on economic slowdown as data fans stimulus talk

(Reuters) - Chinese Premier Li Keqiang warned on Thursday that the economy faces "severe challenges" in 2014 - comments that came as weak data fanned speculation the central bank would relax monetary policy to support stuttering growth.

Li hinted Beijing would tolerate slower economic expansion this year while it pushes through reforms aimed at providing longer-term and more sustainable growth.

"We believe we have the ability, and all the means, to ensure that economic growth will stay within a reasonable range this year," he said.

He also signaled the government will allow further debt defaults after Shanghai Chaori Solar Energy Science and Technology Co Ltd failed last Friday to pay an interest payment on its five-year bonds.

The first default on a domestic bond was hailed by experts as a landmark that will impose more market discipline, a break from the past when bonds enjoyed an implicit guarantee because the government would bailout troubled firms to ensure stability.

Soros Says Europe Faces 25-Year Slump Without Overhaul....Bloomberg

Billionaire investor George Soros said Europe faces 25 years of Japanese-style stagnation unless politicians pursue further integration of the currency bloc and change policies that have discouraged banks from lending.

While the immediate financial crisis that has plagued Europe since 2010 “is over,” it still faces a political crisis that has divided the region between creditor and debtor nations.

At the same time, banks have been encouraged to pass stress tests, rather than boost the economy by providing capital to businesses, he said.

Europe “may not survive 25 years of stagnation,” Soros said in the interview with Francine Lacqua. “You have to go further with the integration. You have to solve the banking problem, because Europe is lagging behind the rest of the world in sorting out its banks.”

He said more “radical” policies are required to avoid a “long period” of stagnation.

European bank shares are “very depressed,” making it an “attractive time” to invest, Soros said. Still, he said it is going to be a “very tough year” for lenders as they try to shrink balance sheets and boost their capital to pass the European Central Bank’s stress tests, he said.

Soros also said Ukraine should serve as a “wake-up call” for Europe, because the political turmoil the country now faces stems in part from the same problems that triggered the region’s financial crisis.

The European Union required “too much” of Ukraine and offered “too little” as the country attempted to join the political bloc, he said. That enabled Russian President Vladimir Putin to fill the void and gain power in Ukraine, he said.

Simultaneous bull markets in deflationary and hyper-inflationary “fear assets”

Simultaneous bull markets in deflationary and hyper-inflationary “fear assets”

Misery index in Japan is set to shoot up to a 33-year high.

The big QE gamble that Ben Bernanke undertook in the US, Japanese Prime Minister Shinzo Abe has repeated in Japan. The Bank of Japan initiated a massive monetary stimulus last year. The aim was to boost economic growth and raise inflation rate to 2%. Has the monetary stimulus really worked? As per an article in Bloomberg, the misery index in Japan is set to shoot up to a 33-year high. The misery index, which reflects economic hardship, adds the jobless rate to the inflation level. The misery index is set to rise to 7 percentage points in the three months starting April when Japan increases it sales levy to 8% from 5%. This would punish consumers who are already struggling with a depreciating currency and stagnant wage levels. The cost of living in Japan has shot up to a five-year high. The monetary stimulus may have pushed up asset prices. But it has not been a bane for wage earners and savers.

Nifty/VIX

Above indicates : Short Nifty and Buy VIX (view 6 - 8 months)
Vix is currently trading near its historical low levels. Historical data suggest that VIX has strong negative correlation of around 0.8 to the Nifty. This means every time VIX falls, Nifty gains. And when VIX gains, a market fall is near imminent.

Deflation is not affordable....

1. Deflation makes money worth more and all the rest worth less.That includes labor, which is the commodity that most Americans rely on in the marketplace. Deflation is thus a wealth transfer from those that don’t have money to those that do. About 50% of Americans own zero net assets.It is fair to say that only a very small percentage of Americans will profit from this wealth transfer.

2. Deflation makes debts and the interest payed over them worth more.It is very bad for Government, which owes $15 trillion.

 

3. Prices decline because demand is crashing. Demand is crashing because the money supply is contracting and that is a very serious problem indeed. Deflation hinders economic growth. Inflation has the opposite effect: people dump cash and this supports economic growth. That’s why contractions are usually deflationary, while booms are usually inflationary.

me - @ this time of high debt levels and income/wealth inequality concern......... Deflation is not afforable.

Chinese corporate debt....120% of GDP

Standard & Poor's estimates 
Reported by Reuters
Total outstanding bank borrowing and bond debt of Chinese non-financial companies stood at about US$ 12 trillion at the end of 2013. That's 120% of China's GDP!

Chinese corporate debt has hit unsustainable levels.  
Rising debt restructuring and defaults could spell big trouble for the dragon economy.

World risks era of slow growth, high unemployment: OECD

(Reuters) - Sweeping reforms are urgently needed to boost productivity and lower barriers to trade if the world is to avoid a new era of slow growth and stubbornly high unemployment, the OECD warned on Friday.

The report echoed Australia's attempt to push an agenda for growth as it hosts finance ministers and central bank chiefs from the Group of 20 major economies in Sydney this weekend.

me : where is question of taper ???

IMF Warns Of 'Significant Downside Risks' To Global Economy Ahead of G20

The International Monetary Fund is still looking for global economic growth to pick up in 2014 but at the same time cautions that there are still “significant downside risks,” particularly the potential for more turmoil in emerging markets and deflation in the euro area.

“A new bout of financial volatility has affected emerging-market economies as markets reassess their fundamentals,” the IMF said. “While the pressures were relatively broad-based, emerging economies with relatively high inflation and high current-account deficits saw the largest asset price declines initially.

“Capital outflows, higher interest rates, and sharp currency depreciation in emerging economies remain a key concern and a persistent tightening of financial conditions could undercut investment and growth in some countries given corporate vulnerabilities. A new risk stems from very low inflation in the euro area, where long-term inflation expectations might drift down, raising deflation risks in the event of a serious adverse shock to activity.”

The IMF called for “cooperation” to promote financial stability, in particular urging advanced economies to avoid “premature withdrawal” of accommodative monetary policy. The IMF also urged for “credible” macroeconomic policies in emerging-market economies, including tighter monetary policy to combat inflation where necessary, as well as certain structural changes, including fiscal policy credibility.

Yesterday its China, today Japan.......loose monetary policy

 

Asian Stocks Advance After China’s New Lending Climbs to Record

Asian stocks rose, with a regional benchmark index poised to advance for the eighth time in nine days, after China’s new credit increased to a record in January, boosting optimism the world’s second-largest economy can maintain its growth momentum.

Yesterday its China, today Japan

Japanese shares surged and the yen sagged on Tuesday after the

(i) BOJ maintained unprecedented asset purchases; and

(ii) BOJ doubled loan programs aimed at stimulating bank lending and economic growth

Shankar Sharma Interview

Q : Are we going towards secular bull market.

A. Skeptical, because bull markets are based on micro economic fraud, you just print money & keep interest rates way below market rates; give free money to speculate & create an asset bubble.

All this is not sustainable in long run and have unintended consequences.

http://www.moneycontrol.com/news/market-outlook/india-to-do-better-among-emsimproved-cad-says-sharma_1045552.html

 

China Shadow Banking......Deleveraging......Deflationary threat

World asleep as China tightens deflationary vice-Ambrose Evans-Pritchard

China’s Xi Jinping has cast the die. After weighing up the unappetising choice before him for a year, he has picked the lesser of two poisons.

The balance of evidence is that most powerful Chinese leader since Mao Zedong aims to prick China’s $24 trillion credit bubble early in his 10-year term, rather than putting off the day of reckoning for yet another cycle.

This may be well-advised for China, but the rest of the world seems remarkably nonchalant over the implications. Brazil, Russia, South Africa, and the commodity bloc are already in the cross-hairs.

“China is getting serious about deleveraging,” says Patrick Legland and Wei Yao from Societe Generale. “It is difficult to gently deflate a bubble. There is a very real possibility that this slow deflation may get out of control and lead to a hard landing.”

Zhang Yichen from CITIC Capital said the denouement will be a ratchet effect since China has capital controls and banks are an arm of the state, but that does not make it benign. “They are trying to deleverage without blowing the whole thing up. The US couldn’t contain Lehman contagion, but in China all contracts can be renegotiated, so it is very hard to have a domino effect. We’ll see a slow deflating of the bubble ,” he said.

What is clear is that we are dealing with a credit expansion of unprecedented scale, equal in size to the US and Japanese banking systems combined. The outcome may matter more for the world than anything that the US Federal Reserve does over coming months under Janet Yellen, well signalled in any case.

Societe Generale has defined its hard landing as a fall in Chinese growth to a trough of 2pc, with two quarters of contraction. This would cause a 30pc slide in Chinese equities, a 50pc crash in copper prices, and a drop in Brent crude to $75. “Investors are still underestimating the risk. Chinese credit and, to a lesser extent, equity markets would be very vulnerable,” said the bank.

Such an outcome — not their base case — would send a deflationary impulse through the global system. This would come on top of the delayed fall-out from China’s $5 trillion investment in plant and fixed capital last year, matching the US and Europe together, and far too much for the world economy to absorb.

The effects of this on large parts of Latin America, Africa, the Middle East, and core Eurasia would hit before offsetting benefits accrued to consumers in the West. Such commodity shocks are “asymmetric” at first. Southern Europe would fall over the edge into deflation, pushing Italy, Portugal, and Spain deeper into a debt compound trap.

China did of course blink in January when the authorities stepped in to cover the $500m liabilities of the trust fund, “Credit Equals Gold No. 1”. It is the fifth trust rescue in opaque circumstances in recent weeks. Yet it would be hasty to conclude that President Xi is backing away from his Third Plenum vows to end to the bad old ways.

The central bank (PBOC) is tightening methodically, allowing the benchmark 7-day repo rate to ratchet up by 200 basis points to 5.21pc over the last year. It drained a further $50bn from the system this week.

Its latest quarterly report has turned hawkish, even though producer prices are in steep deflation, and the M2 money supply is slowing. It complains that “reliance on debt is still rising” and that “hidden risks in the financial sphere require attention”.

Zhiwei Zhang from Nomura says China has entered a “prolonged period of policy tightening” that will push up bank lending rates by as much as 90bp this quarter, leading to a chain of defaults.

The tell-tale signs are obvious in the central bank’s handling of reverse repos and maturing bills. The yield on corporate AA 1-year bonds has jumped 272 basis points to 7.15pc since June. “We think the PBOC intends to raise the whole spectrum of interest rates to push deleveraging,” he said.

This will be a rough ride. JP Morgan’s Haibin Zhu says the shadow banking system alone has jumped from $2.4 to $7.7 trillion since 2010, and is now 84pc of GDP. To put this in perspective, the total US subprime debacle was $1.2 trillion.

Haibin Zhu says there is mounting risk of “systemic spillover”. Two thirds of the $2 trillion of wealth products must be rolled over every three months. A third of trust funds mature this year. “The liquidity stress could evolve into a full-blown credit crisis,” he said.

Officials from the International Monetary Fund say privately that total credit in China has grown by almost 100pc of GDP to 230pc, once you include exotic instruments and off-shore dollar lending. The comparable jump in Japan over the five years before the Nikkei bubble burst was less than 50pc of GDP.

^{Source: People’s Bank of China, CEIC, BIS}

The transmission channel to the global banking system is through Hong Kong and Macao. Bejing’s credit squeeze is causing a scramble for off-shore dollar credit to plug the gap. It is this that keeps global regulators awake at night, for foreign currency loans to Chinese companies have jumped from $270bn to an estimated $1.1trillion since 2009.

The Bank for International Settlements says dollar loans have been growing “very rapidly and may give rise to substantial financial stability risks”, enough to send tremors across the world.

The BIS data shows that British-based banks — a broad-term, including branches of US and Mid-East outfits — are up to their necks in this. They hold a quarter of all cross-border bank exposure to China. By contrast, German, Dutch, French and other European banks have cut their share from 32pc to 14pc as they retrench to shore up capital ratios at home.

Foreign claims on China by bank nationality

This may be why the Bank of England’s Mark Carney warned before Christmas that the “parallel banking sector in the big developing countries” now poses the greatest risk to global finance. Officials at the Bank recently showed him an unsettling report by the Hong Kong Monetary Authority on China’s off-shore loan risks.

Charlene Chu, Fitch’s China veteran and now at Autonomous in Beijing, told The Telegraph last week that these dollar debts were large enough to set off a fresh global crisis if mishandled.

 They may be right, but bear in mind that the growth rate of America’s M2 money supply has halved over the last year. It might have contracted since April without $85bn of bond purchases by the Fed each month.

The European Central Bank is paralysed after the German constitutional court read the riot act last Friday, strongly suggesting that its bond rescue plan (OMT) is Ultra Vires and a violation of “monetary financing”.

The ECB cannot easily carry out quantitative easing to cushion a deflationary shock in the teeth of such a judgment, even if QE is a different tool. In German politics they are the same.

The decision came disguised as a referral to the European Court, but was in reality a warning shot, as former judge Udo di Fabio has more or less said. The German court cannot stop the ECB buying bonds but it can stop the Bundesbank from taking part, and must do so if actions are Ultra Vires. That is enough.

So we keep our fingers crossed as we glimpse the first foam of a deflationary Ch’ient’ang’kian coming our way from China. The world’s central banks have no margin for error.