Sunday, October 9, 2016

Claudio Borio (BIS) - Talks about the "Debt Trap"

Recently BIS Economist Claudio Borio participated in a panel discussion in which he laid out his thoughts on problems in the current monetary system. Below I a made bullet point list of some of this key comments. You can watch here. At around the 1:08 minute mark, he has some interesting comments about the classical gold standard.

Bullet Points in this presentation:

- interest rates have been low so long because of monetary policies that have unintended consequences

- our economic models rely on assumptions and variables that cannot always be observed

- central banks should passively follow true natural interest rates

- financial booms and busts may be attributable to monetary policies

- policies that just react to busts leads to more problems later and a "debt trap"

- dis-inflationary environment is making expansionary monetary policies only temporary in impact

- asset prices can be mis aligned for long periods of time, the same thing can happen with interest rates

- during the gold standard, interest rates never hit the zero bound or got as low as they are today

- persistent low interest rates raise the risks to global financial stability

- persistent low rates weaken the profitability and stability of the banking system (they are a slow death for banks)

- it will take higher inflation to get interest rates higher (as they need to be)

- a snap back to higher inflation is possible, but it may take some time to reverse deflationary headwinds

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