In the growing outcry over central bank policies that are digging us even deeper into uncharted territory, we can add yet another critic.
This time, it is some of their own that are turning against those in control of policy and power.
We already have seen a groundswell of concerned citizens, investors, economists, politicians, and other individuals.
Private, institutional bankers have joined them in an unlikely coalition as well.
Deutsche Bank’s chief economist David Folkerts-Landau ripped into European central banks and the ECB last month with a report aptly titled “The ECB Must Change.”
If you were to boil down the gist of it to one quote, this would suffice:
“Already it is clear that lower and lower interest rates and ever larger purchases are confronting the law of decreasing returns…. but the ECB’s response is to push policy to further extremes. This causes mis-allocations in the real economy that become increasingly hard to reverse without even greater pain.”
Then there are individual central bank board members dissenting in greater and greater numbers.
Perhaps the latest is Bank of Japan policy board member Takehiro Sato, who went public in a speech to business leaders earlier this summer.
He broke the normally unanimous front the BOJ presents with unconditional opposition, starting with: “When there is a negative spread, shrinking the balance sheet, rather than expanding it, would be a reasonable business decision.”
He then pressed on note that the current policies are “weakening the financial system’s resiliency against shocks in times of stress,” and warned of inadequate risk valuation creating asset and equity bubbles.
Now, the little known but highly influential Bank for International Settlements is joining the call for changes, and of all the critics so far, it packs the biggest punch by far.
The What?
Odds are you’ve never heard of the Bank for International Settlements. Quite frankly, there is no reason you should have.
You could consider it the central bank of central banks, though with a much more limited role than any national one.
It’s the oldest international financial institution. Since it was established in 1930, it has grown to 60 member central banks representing countries that control 95% of world GDP.
It doesn’t work with or for any individuals, businesses, or national governments. It simply facilitates and settles transactions among international organizations and central banks, and creates economic research reports.
This ultimate clearing house, of sorts, isn’t beholden to political or national interests or policies. It has its own biases and agendas, but they mostly can be summed up as creating growth and stability on an international stage through mainstream economic models.
As a result of its independence, it can speak about economic issues more directly than its member central banks can, and with far greater candor.
And it certainly took the opportunity to do so in its recently released 86th annual report.
The “Risky Trinity”
The BIS report starts out by noting that, if you look at headline standards, the global economy is doing better than it feels.
While it continues to disappoint and fall short of expectations, unemployment and inflation have been tamed, while GDP growth has returned to historic norms:
However, national central banks continue to pursue unprecedented accommodative policies. Low and negative interest rates remain in place, removing any potential to react to any future shocks.
At the same time, these policies are creating a “risky trinity” of “productivity growth that is unusually low, global debt levels that are historically high, and room for policy manoeuvre that is remarkably narrow. A key sign of these discomforting conditions is the persistence of exceptionally low interest rates, which have actually fallen further since last year.”
Yet doubling down on destabilizing policies is the norm, in spite of the fact that central bankers are pushing economies even further from any semblance of balance.
The continuing and deepening interest rates are proof positive, with nearly $10 trillion in bonds with unsustainable negative rates. This is ravaging savers, banks, insurance companies, pensions, and investors.
And as the BIS notes:
“As history shows, banking crises wreak havoc with public finances. Growing fiscal risks, in turn, weaken the financial system… The tight two-way link between banks and public finances also creates the potential for an adverse feedback loop, in which financial and sovereign risks reinforce each other.”
In other words, central bank policy is setting up private and public finances to spiral out of control.
The BIS effectively sums up its call to action as such:
“There is an urgent need to rebalance policy in order to shift to a more robust and sustainable expansion. A key factor in the current predicament has been the inability to get to grips with hugely damaging financial booms and busts and the debt-fueled growth model that this has spawned. It is essential to relieve monetary policy, which has been overburdened for far too long. This means completing financial reforms, judiciously using the available fiscal space while ensuring long-term sustainability; and, above all, this means stepping up structural reforms. These steps should be embedded in longer-term efforts to put in place an effective macro-financial stability framework better able to address the financial cycle. A firm long-term focus is essential. We badly need policies that we will not once again regret when the future becomes today.”
What are the odds?
The question though, is if central bankers will listen to their peers, private sector bankers, economists, and investors.
The BIS may admonish central banks for fueling boom and bust cycles in everything from bonds, to stocks, to commodities.
However, the national central bankers answer to entrenched political interests, who answer to their wealthy patriarchs in the global elite, who fund and virtually guarantee their reelection.
The odds are still low that even a dire warning from the very top of the economic ivory tower will be heeded.
A major message from the BIS in this report is that the current thinking is fatally flawed. The single-minded focus on using central bank policy to artificially replace true consumption with government debt does not work.
We’re seeing vastly diminished returns from this model, and it is setting us up for, and deepening, our next economic disaster.
And while policies make things worse, debt keeps on growing everywhere except for a tiny drop in household debt.
In the current model, paying down private debt transfers it to government debt. Pay down that, and household debt rises. The buck — more specifically the IOU for it — is just being passed around.
And all this new debt is only going to replace consumption, not any meaningful capital investment. Debt is just future growth brought forward to today.
Use it for nothing productive, and it creates no future supply or demand, making today’s disappointing economies tomorrow’s shrinking economies.
The BIS is absolutely right when it states, “A firm long-term focus is essential. We badly need policies that we will not once again regret when the future becomes today.”
It should have added that we also badly need policymakers who can face the unstable, risky reality they’ve created.
