Just the other day the Bank for Internationa Settlements issued their annual report warning that dangerous new asset bubbles are forming again. Now we have the head of the BIS with another strong warning. The BIS is the "Bank of the Central Banks". When they issue warnings it is foolish not to listen. Here is the latest warning with a few selected quotes below and then some comments.
"The world economy is just as vulnerable to a financial crisis as it was in 2007, with the added danger that debt ratios are now far higher and emerging markets have been drawn into the fire as well, the Bank for International Settlements has warned.
Jaime Caruana, head of the Swiss-based financial watchdog, said investors were ignoring the risk of monetary tightening in their voracious hunt for yield.
“Markets seem to be considering only a very narrow spectrum of potential outcomes. They have become convinced that monetary conditions will remain easy for a very long time, and may be taking more assurance than central banks wish to give,” he told The Telegraph.
Mr Caruana said the international system is in many ways more fragile than it was in the build-up to the Lehman crisis. Debt ratios in the developed economies have risen by 20 percentage points to 275pc of GDP since then. The disturbing twist in this cycle is that China, Brazil, Turkey and other emerging economies have succumbed to private credit booms of their own, partly as a spill-over from quantitative easing in the West.
Their debt ratios have risen 20 percentage points as well, to 175pc. Average borrowing rates for five-years is 1pc in real terms. This is extemely low, and could reverse suddenly. “We are watching this closely. If we were concerned by excessive leverage in 2007, we cannot be more relaxed today,” he said.
“Overall, it is hard to avoid the sense of a puzzling disconnect between the markets’ buoyancy and underlying economic developments globally,” it said.
Mr Caruana declined to be drawn on when the bubble will burst. "As Keynes said, markets can stay irrational longer than you can stay solvent,” he said.
The BIS says prolonged monetary stimulus in the US, Europe, and Japan has led to a leakage of liquidity, contaminating the rest of the world. The rising powers of Asia are no longer able to act as a firebreak – as they did after the Lehman crash –and may themselves now be a source of risk.
The BIS is the doyen of world’s financial institutions, created in Basel in 1930 to clean up the mess left by German reparations payments under the Versailles Treaty. It has since evolved into the bank of central banks, and lately the bastion of monetary orthodoxy. It issued a crescendo of warnings in the build-up to the Lehman crisis, implicitly rebuking the US Federal Reserve and others for holding interest rates too low, which in their view robs economic growth from the future.
The International Monetary Fund has hinted that it might be best for the world to chip away its debt mountain with a few years of inflation, as the US did in late 1940s and early 1950s, armed with financial repression.
Asked whether he would support this form of loss recognition for creditors, Mr Caruana came close to choking. “It must be clearly resisted,” he said."
My added comments: There is so much important information in this article that everyone should follow the link above and read the entire article. It is too long to fully comment on, but I will list some key bullet points that jumped out to me using the underlined portions above as a guide.
-This is the 2nd warning coming out of the BIS in a couple of weeks. And notice the intensity of the warning. In a nutshell they are warning that things are in position to go into another fianancial crisis except this time it will be worse than 2008. All the numbers are bigger and the whole world is now suffering in debt that is too high compared to GDP. These are the BIS words and not mine.
-Investors have become complacent assuming Central Bank suppression of interest rates will stay in place for a long time, yet that may not be the case.
-The Central Bank QE policies have created a "downward bias" interest rates and "an upward bias in debt levels". This "makes it hard to raise interest rates without damaging the economy-a debt trap" (and yet we have the US FED constantly saying they intend to do just this - raise interest rates)
-The IMF is suggesting trying to "inflate away the debt" over a period of years, but the BIS says this must be "clearly resisted". An Austrian economist would say the same thing. The article notes the BIS statements fly in the face of current Central Bank policies.
Reading this article is somewhat surreal for those who have followed all this for years and tried to issue these same warnings to anyone who will listen. Now we have the "Central Bank of Central Banks" saying exactly the same things. And issuing two warnings in two weeks.
It raises some reasonable questions about why all this is happening. Obviously, if the BIS knows all these problems are getting worse and won't be solved by issuing even more and more debt (as they state in the article); why are the FED and other Central Banks doing it? They have to know this is not going to end well some day. So again, why are they doing it? And why do they work so hard to convince us it is all working when the BIS is clearly warning that it is not working in this article? Something does not add up here. The BIS is the top of the food chain for Central Banks.
The only plausible answer I can come up with at this point is that all these Central Bankers really know that the present monetary system cannot be sustained. So they are doing what they can to keep it going as long as they can until whatever comes next is ready to be offered as a solution. But just to make sure they are covered when the present system does come to an end, the BIS is out here issuing clear warnings about where things really stand. It sure seems that way listening to these BIS warnings.
This blog's theme is that we believe monetary system change is coming. We have defined that as meaning the end of the current US dollar based system to be replaced with something else. We don't claim to know exactly what the "something else" will be or when it will happen. We don't try to predict those things since we don't know. We do know that the BIS is talking about the same issues we do here. They know a lot more than we do about this topic.
In our research journey here on this blog we have learned some things that could be clues. We know from people like Jim Rickards that the idea of the IMF using their SDR in some way after the next crisis is being considered. Jim openly predicts this and we know he is connected at high levels to those in the current system.
We know that new technologies (like the Klickex GSD) are being tested and may play some kind of role. We have speculated that this new technology may in some way try to connect the "internal" SDR at the IMF to an "external" currency that everyone can use. Both perhaps being asset backed instead of debt backed as the US dollar system is now to restore confidence?
Readers here are raising all kinds of other interesting questions like:
Do the Central Bankers know big change is coming and are allowing the debt in the present system to just run wild because they already know how it will be dealt with in a new system?
Is there really a "split" between the Western institutions like the IMF and World Bank and BRICS? Or do they all really know at the end of they day they will end up back using a new SDR based system when the next crisis arises? If not, will the global monetary system break down into a regional world with various blocs vying for influence and control? Worse, will chaos prevail if there is a much bigger new crisis?
Is there a master plan to handle all this in test mode and development now? Will the IMF take the leading role eventually using the SDR and new "SDR bonds" to resolve the existing sovereign debt problem? Some are suggesting they will write off unsustainable sovereign debt and then convert the remaining sustainable debt into new SDR bonds. Is this a real possibility as the final solution? Could we someday live in a world where both Central Banks and private citizens own the same currency and use it in commerce anywhere in the world in a matter of minutes?
What role might gold (and other hard assets) play in a new system? Can the historical money (gold and silver with maybe other asset classes added in) somehow be combined with new technologies today to provide a whole new concept for how we use money and preserve savings?
We don't the answers here. But we do think these are good questions to keep in mind as we follow this story. We are clearly living in historic times. The world is clearly changing. We are committed to following it here as best we can and doing our best to help people find answers. Change might come soon or take awhile. We do believe it is coming. It sounds like the BIS does too. Let's hope it makes things better.