Monday, September 21, 2015

Claudio Borio (BIS Chief Economist) Says Global Central Bank is "Out of the Question"

Claudio Borio is Head of the Monetary and Economic Department at the Bank for International Settlements (BIS). Recently he conducted an in depth interview on a wide range of topics. One of the big questions that we have raised here on the blog is whether we might some day see a global central bank using a global reserve currency. Jim Rickards has talked about the IMF perhaps some day stepping into this role.

So, did this question come up in the interview? Yes it did. The question was asked directly to Mr. Borio. His answer was "No, this is out of the question." So there you have it directly from one of the most influential and knowledgeable individuals in the world. Below are some selected Questions and Answers from this very interesting interview. You can read the full interview here

Q: Regarding China, some observers argue that the link between the Chinese financial system and the global financial system is weak and that, because of that, there is no risk of a global financial crisis as in 2007-08.
A: I don't want to speculate about the next big crisis. But I would caution against underestimating the financial linkages. And, of course, China has a major impact on trade and commodity prices. Moreover, it is shared vulnerabilities that matter most.
. . . . . . 
Q: The cooling-down of the Chinese economy and the depreciation of the renminbi have also led to concerns that global inflation, which is already very low, will be dampened further. What is your view on that?
A: Sometimes we seem to believe that we know more about the inflation process than we actually do - we do not fully understand what drives it. Having said this, at the BIS we are of the view that global factors have often been underestimated. We think that there are still significant disinflationary forces coming from technological progress and, above all, the globalisation of the world economy. These secular factors are headwinds that have held inflation down despite very easy monetary policies. But these are welcome supply side forces, which support the economy . On top of that, there are some cyclical factors at the moment.
. . . . . .
Q: After years of low inflation rates, some observers are already saying inflation is "dead".
A: This is by no means true. A number of countries have high inflation rates. To  assume inflation is "dead" is the best way to make sure that it will become a big problem again.
. . . . .
Q: At the moment, the Fed is heading for a first interest rate increase after six and a half years of a zero interest rate policy. The IMF has warned against possible turbulences in financial markets. Do you also see a risk that the US interest rate reversal could jolt financial markets?
A: The Fed will increase the interest rate only when it thinks that the US economy is strong. That strength would help the world economy. In addition, to minimise the shock, the Fed has almost preannounced this step and been very cautious in its communication - not only regarding the "lift-off" but also regarding what it will do thereafter. But in assessing the impact, we should bear in mind that, as noted earlier, there are financial vulnerabilities in the global economy. And in the past, a monetary policy tightening in the US and an appreciation of the dollar have triggered turbulence in EMEs. This has to do, in particular, with the special role of the dollar.
Questioner: The dollar is the world's dominant currency.
Borio: Yes, as such, the US sets the tone for global financial markets. And, more directly, financial conditions there have an impact because many borrowers around the world - in more recent years, especially companies - have heavily borrowed in dollars. For instance, since early 2009, the amount of dollar credit to non-banks in EMEs  has almost doubled.
. . . . .
Q: In its recent Annual Report, the BIS calls for more central bank cooperation, even including joint decisions on interest rates and exchange rate interventions. Do we need a new Bretton Woods?
A: No, that's not the point. But a key drawback of the existing international monetary and financial system is that it tends to heighten the risk of financial imbalances. First of all, we call for an enlightened self-interest. Central banks should take better account of the consequences of their decisions on others, especially because these will have repercussions on their own economy ("spillbacks"). This enlightened self-interest is particularly important for countries with an international currency. They have a special responsibility.
Q: But this is not always sufficient from your point of view?
A: We should also not exclude the possibility of joint decisions. We have seen this in times of crisis. But it could also make sense for crisis prevention. And then, ideally, once could even go one step further. Policymakers around the world could agree internationally on common rules constraining national policies. This would increase discipline on a national level.  (my added note: this is the idea of "new rules of the game")
Q: Do you think this is realistic?
A: At the moment, this is not on the cards. But national frameworks do not sufficiently take into account financial booms and busts. If they did, this would remove a major source of negative international spillovers. This would significantly reduce the need for further cooperation, but not eliminate it. To move in this direction, we need greater agreement on diagnosis.
Q: And in the end, would one also need a global central bank? Some experts have pushed this idea from time to time.
A:  No, this is out of the question. We know how difficult it is to have a central bank covering a number of very different economies. The euro area is an example of this. It is neither feasible nor desirable to have a world central bank.
My added comments: 
This is obviously a significant interview that directly relates to what we cover here on the blog. Mr. Borio is a key figure at the BIS. Here he once again raises the idea that there may be a need for new "rules of the game" for the international monetary system. However, in this interview he explains that more clearly. He says this could mean a need for various national central banks to work together more often in the future. But he completely rules out the idea of global central bank. Just to make sure we get the point he says, "It is neither feasible nor desirable to have a world central bank." Mr. Borio mentions the problems in the Eurozone as an exmple of how hard it is to bring multiple economies under one umbrella.
This is an important statement. It tells us that there are no current plans for anything like a global central bank on the drawing board. In addition, it makes it clear that the existing global institutions (the IMF and the World Bank) will continue to function much the same as they have with the possible tweak that they might help national central banks coordinate policy at times (under new "rules of the game").
This also suggests to me that the new institutions that China and the BRICS have started up (the AIIB and the BRICS Development Bank) are likely to become more competitive with the IMF and the World Bank over time. With the 2010 IMF reforms stalled and the decision to move back any change to the SDR currency basket to at least September 2016, there is nothing that suggests any kind of global cooperative effort to establish one global central bank or reserve currency is at hand
We have noted here that a new major global crisis (worse than 2008) could change things. But at this time, all the available evidence suggests that no major monetary system change involving a new global central bank or global reserve currency is coming soon (certainly not this fall). The evidence we can find right now suggests we are more likely to see change evolve gradually over time on a regional level.
We will continue to follow this over time. If new information surfaces, we will cover it here.
Added note:

Mr. Borio followed up this interview with a slide presentation later in which he once again mentions a possible need for "new global rules of the game." (see page 23 of the presentation here)

Additional added note: Willem Middelkoop adds this comment on his twitter feed.

Mr. Middelkoop has very good contacts in China so his added comment on this is very interesting. It suggests the ongoing difference of opinion between the US and China on how to go forward is very real. How this gets resolved will be an important story to follow if you have any interest in the potential for monetary system change.

A real Global Central Bank. China wants it. US hates it.

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