Monday 22 July 2019

Central bankers put out a warning we all should pay attention to

With one thing and another, one story that didn't make much of a splash was the musing of the Bank of International Settlements (BIS), which said on Sunday that the party, such as it was, is over.

The club for central bankers argued convincingly in a new report that central banks have done about as much as they can to rebuild the world economy and politicians must now create the conditions for a stronger recovery. The Basel-based organisation says any more money printing will do more harm than good by distorting financial markets and jeopardising stability beyond breaking point.

"Unfortunately, central banks cannot do more without compounding the risks they have already created.

"Monetary stimulus alone cannot put economies on a path to robust, self-sustaining growth, because the roots of the problem preventing such growth are not monetary," BIS economist Stephen Cecchetti (right) said as he published the report.

Ben Bernanke is not the only one who believes that printing money is no longer a good idea, if indeed it ever was.

While we have had a lot of talk about the end of austerity, the BIS suggests that austerity has just begun and calls on central bankers to force a little austerity on their political masters to bring politicians and voters to their senses.

The BIS says governments must now take immediate action to repair public finances, finish the job of re-regulating the banking sector and make markets work better.

None of this is happening, of course.

In the past week, we have seen the Government renege on promises to cut spending in the education and health sectors while Taoiseach Enda Kenny has once again refused to hold a proper, public inquiry into the banking sector.

Over in Luxembourg, Finance Minister Michael Noonan failed to get agreement on a banking supervisor while almost nobody anywhere has begun the Herculean task of improving how the markets work.


It is quite clear (as the BIS also says) that low interest rates and quantitative easing on a huge scale have dulled the imperative for politicians to act.

"After all, cheap money makes it easier to borrow than to save, easier to spend than to tax, easier to remain the same than to change," the report says.

While old-fashioned fiscal conservatives might be delighted at the prospect of an end to the voodoo economics of the past few years, it will undoubtedly be a painful process – especially in a country as fragile as ours.

The fall in global stock markets, which began last Wednesday when the Federal Reserve began the process of managing expectations, is probably only the beginning of a long slide in asset prices in developed and emerging markets.

It will also be the beginning of the long and painful period of inflation that is now inevitable. The end of stimulus will inevitably mean bond prices start to fall and interest rates rise.

"An outsize increase in interest rates could lead to volatile capital flows and exchange rates, with corresponding adverse implications for global macroeconomic and financial stability," is how the BIS puts it.

The BIS report does not make for easy reading; it is dense and the scenarios are almost universally gloomy.

But it is worth remembering that the BIS was one of the very few organisations to warn consistently before the credit crunch that there were problems ahead. It has repeated that warning for different reasons this week.

It is time for sensible investors to run for the door.

Irish Independent

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