Wednesday, March 2, 2016

Claudio Borio (BIS) - "We Need to Abandon Debt Fuelled Growth Model" & Fascinating Comment by Jim Rickards

In this article we feature a new presentation by Claudio Borio of the Bank for International Settlements (BIS). Below are a few quotes from the slide presentation from his speech in London. Here is a link to an abstract of the speech and here is a link to a pdf of his slide presentation. Be sure to take a look at Jim Rickards comments below on this presentation which he provided by email.


Here is the abstract for the speech:


This presentation suggests an alternative lens through which to view the global economy's struggle to achieve sustainable and balanced growth, reflecting a failure to prevent the build-up and collapse of hugely damaging financial booms and busts. A symptom of the current malaise can be seen in interest rates that have been exceptionally low for an exceptionally long time, with a record high amount of global sovereign debt trading at negative yields. To break out of this trap, there is a need to take a longer-term view and rebalance policies towards structural measures, abandoning the debt-fuelled growth model that has brought us to the current predicament.
Because no text for the speech was posted to the BIS web site, below are some bullet points from the slide presentation which was posted.

From the introduction slide:

Theme and takeaways 

 Objective: to offer a lens to answer the question: 

 Why almost a decade since the Great Financial Crisis (GFC) does the global economy seem unable to return to sustainable and balanced growth? 

 Three takeaways :

   Failure to fully come to grips with financial booms and busts - Inability to constrain build- up of financial imbalances (FIs) - Progressive loss of policy room for maneuver 
   Prevailing analytical lens is not fully adequate - Need stronger focus on financial, medium- term and global factors 
   The road ahead is quite narrow - Economy could re-balance smoothly - But there are risks of further serious financial distress - Policy is key

 • Need to abandon debt-fuelled growth model

From slide #3:

 Symptoms of the malaise: the “ugly three” 

    Debt too high 
    Productivity growth too low 
    Policy room for maneuver too limited 

From the Conclusion slide in the Presentation:


 The global economy is struggling to achieve sustainable and balanced expansion 

    Most conspicuous sign: exceptionally low interest rates for exceptionally long 
    Most recent slowdown in EMEs is but latest scene in a long movie 

 I have offered a possible lens to understand this predicament 

    Key: inability of policy frameworks to come to grips with the global economy's… 
    …propensity to generate hugely damaging financial booms and busts 

 This raises near-term and long-term risks 

    Further episodes of serious financial distress 
    Entrenching instability and chronic weakness 
    A rupture in the open global economic order 

 Adjustments to policy frameworks are needed 

    Address the FC (Financial Crisis) through all policies  – more symmetry is key 
    Re-balance the policy mix towards structural measures
    Not presume that if one's own house is in order the global village will also be 
    Lengthen policy horizons 

 We cannot afford to rely on the current debt-fuelled growth model any longer 
    The sooner we realize this, the better

My added comments: 

I encourage readers to scroll through the full slide presentation here since the BIS web site does not have a full text of the speech posted. From what we can see, it is clear that this speech dovetails closely with the one given by BIS General Manager Jaime Caruana which we covered here. Please note the concern about "too much debt" and also the bullet point from the conclusion slide which says "we cannot afford to rely on the current debt-fuelled growth model any longer" and "the sooner we realize this, the better."

I did run this slide presentation past Jim Rickards to get his thoughts. Here are some fascinating comments he had to share in a recent email:

"It's interesting that they included the Classical Gold Standard period in their comparisons. Why include gold as a baseline case unless there was some chance of going back to gold?

The main point they are making is that inflation and deflation show up more in asset prices than consumer prices. While consumer price swings have been modest, asset price swings have been huge and dangerous. Asset price bubble bursts impose huge hidden costs and are dragging down productivity because of the misallocation of capital.

So, there are a lot of "hidden costs" in debt-fueled expansions. Once these costs are taken into account, periods without as much debt or asset bubbles (such as the gold standard period) look like a better growth model by comparison."

James Rickards
Author of The Death of Money, a New York Times Bestseller

Jim made two points in this email that I had not noticed in reviewing the slide presentation. One is that they included the Classical Gold Standard era in their analysis. The other was that in their comparison the gold standard era shows up favorably when compared to the "debt fuelled growth model" that they say we cannot afford to rely on any more. Jim has a new book coming out on gold in April, so his comments on this slide presentation are interesting for sure.

Does this indicate the BIS might consider some kind of return for gold in the monetary system in the future as Jim questions in his email? Look over the slide presentation for yourself and see what you think. (see graphs 12 & 13 on slide #19 and #20). It should be noted that the slides do not indicate that the BIS or Mr. Borio is taking a position on a return to the gold standard in the future. Jim is just raising the question in his comments.

Claudio Borio of the BIS is clearly making the case that its time for the "debt fuelled growth model" to be replaced with something else. Could this conversion involve the kind of sea change in the monetary system that we watch for here? Time will tell and we will keep an eye on it.

Added note 3-7-16: After publication of this article it came to my attention that Claudio Borio has actually done some writing in the past where he talks some about the gold standard era as part of an overall recap of monetary system history. Readers may find his writings here (see pp. 23-24) and here of interest in that regard. Neither paper suggests that he or the BIS takes a position on the gold standard I would add.I would also add that the BIS slide presentation linked above does not take a position advocating a gold standard just to be clear. I added this note because I have seen some sites on the internet reference this article and suggest that the BIS has advocated a gold standard. Those were Jim's thoughts upon looking at the slide presentation. The slides do not indicate that the BIS advocates a gold standard.


Added note: A thank you to Jim Rickards and Willem Middelkoop for a retweet mention of this article on their twitter feeds. Those really help articles get a bigger audience.

Note to Readers- Coming Friday March 4th

Friday March 4th we will have an article covering a recent discussion (captured on video) on the potential for the SDR to be used as the new global reserve currency for the world. (article is now published here) The discussion included both a current IMF official who works with SDRs right now and the former head of the SDR Division at the IMF (Dr. Warren Coats) who we have contact with by email. Dr. Coats even provided a great quote for our article that readers will want to see.

In the discussion it is clear that these officials do not see an imminent crisis coming at this time even though they do point out that the conditions for one in the future do exist. 

Please watch for it and let others know about it as you will not get this kind of direct information from official experts like this very often. It will answer many questions I see from readers and in other discussion forums all over the world about the potential for the SDR as a replacement global reserve currency for the US dollar. It directly addresses the two big questions we follow here on this blog:

1) Will we get another major financial crisis worse than 2008?

2) If we do, will the SDR used at the IMF be used in a new way to address the crisis?

Jim Rickards work on this is invaluable (they mention his book in the video) and now we have direct information on both these important questions from both a current and former IMF official on what we can reasonably expect.

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