Andy’s Notes: This situation should easily qualify as the perfect shining example of hypocrisy in the next release of Webster’s dictionary. The BOE has supervised the inflation of one of the world’s largest asset bubbles in the form of housing in the UK. Everyone knows (sic) that ‘good’ inflation is risking stock markets and home prices (unless you’re a buyer) and that ‘bad’ inflation is when bread and milk increase in price. Lost in it all is the exercise in futility going on here. Globally, central banks have decided that the only way to keep the game of musical chairs going is to continue to inflate asset bubbles. When they go wrong, the blame is distributed evenly at the feet of everyone except those with the best ability to prevent the mess in the first place. Meanwhile, the debt from the cleanups associated with these bubbles continues to accrue at an alarming rate, but the BOE (nor anyone else) is going to mention that. The proletariat might get wise to the whole sham and stop borrowing. We left the bit at the end about chocolate and meat prices and inflation to use as another example of how the mainstream mean has it completely backwards – inflation is a monetary event, not a price event. All else equal, prices rise because of inflation, NOT the other way around.

The Bank of England has issued a stark warning over the rapid growth in lending to indebted companies around the world, drawing parallels with the US sub-prime mortgage market that triggered the 2008 financial crisis.

Threadneedle Street said Britain was not immune from a global boom in risky lending that had alarmed financial regulators around the world this year, with the US market for such loans more than doubling since 2010 to surpass $1tn (£763bn).

“The global leveraged loan market was larger than – and was growing as quickly as – the US sub-prime mortgage market had been in 2006,” the central bank said of the rapid growth in leveraged loans, which are defined as loans to firms that already have debts worth more than four times their earnings.

The Bank’s financial policy committee (FPC), set up after the crisis to assess the risks to UK financial stability, noted that lending standards were falling and that it would more closely monitor the risks to Britain.

Though far from the scale of the US market, which is the largest in the world, gross issuance of leveraged loans by UK companies reached a record £38bn in 2017, while a further £30bn has been issued so far this year.

Taken together with high-yield bonds, which are debts of firms with weaker credit ratings, the Bank estimates the total stock of debt to riskier firms in Britain was worth about a fifth of all lending to UK companies.

In common with the US, it said lending terms had loosened in Britain and risk appetite among investors remained strong, with the proportion of maintenance covenants – designed to protect investors and ensure companies meet certain financial tests – dropping from nearly 100% of leveraged loans in 2010 to 20% at present.

“As with sub-prime mortgages, underwriting standards had weakened,” the FPC said, adding that it would assess the risks to British banks in the 2018 banking industry stress tests, the result of which is due in early December.

The rapid growth in high-risk lending comes as investors search for higher returns as a result of rock-bottom interest rates and billions of pounds of quantitative easing from central banks, used to stimulate their economies during the great recession that followed the 2008 financial crisis.

Cheaper chocolate and meat drive down UK inflation in September

There are growing concerns that companies will be unable to repay their debts as central banks begin to raise interest rates 10 years on from the crash, including three hikes this year by the US Federal Reserve.

The FPC said there were key differences between US sub-prime mortgages and the leveraged loan market. Banks had substantial liabilities connected to sub-prime, it said, which was the reason many required bailouts during the 2008 financial crisis, which was not the case for leveraged loans. It also said there were limited complex financial products connected to the issuance of leverage loans.

Leveraged loans are not typically held by banks because they package them up and sell them on to third-party investors, such as the loan funds of major investment management companies. Banks do, however, retain some risk, particularly if they have a pipeline of risky loans that they have not sold on.