Friday, December 16, 2016

Q&A Interview With Claudio Borio (BIS) on Monetary Policy

Claudio Borio of the BIS has conducted another Q&A interview covering his thoughts on the limits of the monetary policies being used right now by central banks. Below are a few selected excerpts and here is a link to the full interview published on the BIS web site. 

Mr Borio, the world is facing many problems. What is the root cause? 
"We do not know for sure. The big questions in economics have not quite been solved. But let me start by saying that the rhetoric about the global economy is worse than the reality. In terms of global growth, we are not that far away from historical averages, especially if we adjust for demographics. Moreover, unemployment has been declining, and in several cases is close to historical norms or measures of full employment." 
So everything is fine? 
"It is the medium term that is our concern - what we have called the "risky trilogy". The long-term decline in productivity growth has accelerated since the crisis, so that the prospects for long-term growth are not bright. Debt levels, both private and public, are historically high and have been increasing since the crisis. And, most critically, the room for policy manoeuvre, both monetary and fiscal, is limited."
But can central banks help out? 
"Monetary policy has been stretched to its limits. In inflation-adjusted terms, interest rates have never been negative for so long and they are lower now than in the midst of the financial crisis, which is odd since the situation has improved. If you came from Mars and they told you that policymakers were struggling to reach price stability, you might be surprised, as inflation is not far from measures of stable prices. But since many central banks have inflation targets set at 2%, there is a lot at stake."
Why do we have low inflation? 
"We do not fully understand this. But I think we have underestimated the long-lasting impact of the globalisation of the real economy, notably the entry of China and former communist states into the world trading system. There has been persistent downward pressure on wages and prices, as competition has greatly increased, helped also by technological change. The pricing power of producers and, in particular, the bargaining power of workers have declined, making the wage-price spirals of the past less likely."
. . . . 
The global debt is around $90 trillion, and it is rising. How should one reduce it? 
"How to manage the debt burden is the hardest question. The best way, of course, is to grow out of it, which is why structural reforms are so important. Other forms are more painful."
. . . . .
Do you fear political populism? 
I fear a return to trade and financial protectionism. We are seeing some worrying signs. The open global economy order has been remarkably resilient to the financial crisis; but it might not so easily survive another one. At that point, we could see a historic rupture. That is an endgame we should do all we can to avoid. 
There are academics and politicians advocating the abolition of cash. What do you think of that? 
Negative nominal interest rates, especially if persistent, are already problematic. Quite apart from the problems they generate for the financial system, they can be perceived as a desperate measure, paradoxically undermining confidence. Getting rid of cash would take all this one big step further, as it would signal that there is no limit to how far into negative territory nominal interest rates could be pushed. That would risk undermining the very essence of our monetary economy. It would be playing with fire. Also, it would be quite a challenge for communication, even in simply economic terms. It would be like saying: "We want to abolish cash in order to tax you with lower negative rates in order to - tax you even more in the future." 
Because the reason for doing this would be to raise inflation - which is perceived as an unjust tax on savings. This would require people to have faith in the "model" which policymakers use to steer the economy. Quite a challenge!
Please click here to read the full Interview with Claudio Borio

Added note: In other BIS news, Mexico central bank Chief Agustin Carstens will assume the role of General Manager of the BIS next year, taking over from Jaime Caruana. Again, we have no idea how new President Donald Trump will relate to either the IMF or the BIS.
My added comments: We have cited Claudio Borio many times here on the blog as he has issues a number of warnings in the past about systemic risks to the global financial system which we keep an eye on here. In this interview he repeats that current monetary policies are still a risk and he adds that the global economic order "might not so easily survive" another major financial crisis. He still says its possible we "could see a historic rupture" in the current system even though he also points out that right now things seem pretty stable and there has been some improvement recently. 
These comments just further confirm that the thing we need to watch for here is another huge global financial crisis. This is the event most likely to lead to the kinds of major systemic changes we watch for here and that would certainly impact all of us in ways we could not ignore. 
The problem we face is to remain vigilant when things appear to be normal and there is no indication of such a crisis on the immediate horizon. I could document dozens of major crisis predictions that have come and gone over the past several years with no major crisis like this unfolding. People who follow these issues will naturally tend to become more and more numb to such predictions as they see so many events pass by that we are told will trigger the crisis and yet it does not happen (I made short bullet point list of some examples below to show what I mean). Here, we avoid any kind of predictions and certainly do not try to pinpoint some specific date or event as being a trigger. We just admit that we cannot know the future. We think a better idea is to make some upfront plans to prepare for such a crisis and then stay alert to actual events to see what really happens. Staying alert may be as important as anything else that one can do since Jim Rickards predicts that the kind of crisis we are talking about could easily arise very quickly due to an event no one is anticipating.
Here are is a very partial list of crisis predictions that so far have not panned out:
- world will be engulfed in super inflation/hyperinflation due to central banks QE policies
- stock markets are a bubble that will burst due to central bank policies
- bond market is a bubble that will burst as too low interest rates (and even negative interest rates) normalize back to higher rates
- a major sovereign debt default will trigger a global crisis
- Failure of a major too big to fail entity (like Deutsche Bank for example) that triggers a chain reaction failure in trillions of derivatives contracts across the globe
- Failure of a major gold (or silver) clearinghouse (like the Comex for example) to deliver physical gold (or silver) due to lack of available gold (or silver) to meet the contract with the buyer
- too strong US dollar triggers global defaults from entities who have borrowed US dollars at low interest rates and cannot pay back when the dollar rises too much (there is an estimated 9 Trillion around the world at risk on this issue)
- various specific dates that some believe have cyclical significance or religious significance have come and gone without the associated predicted crisis. (Examples - Shemitah, Year of Jubilee, etc)
- crash in oil prices would lead to major defaults in the oil industry and trigger massive derivative defaults and/or loan defaults 
- Brexit will trigger a crisis in global markets
- election of Donald Trump will trigger a crisis in global markets
The list can go on and on if you do some searching. The interesting thing here is that many of the items in this list are very valid concerns and still exist now even though no major crisis has yet unfolded. 
The point to take from this is that we should be aware of the systemic risks that do exist and have some kind of plan in mind to deal with one if it were to ever happen. At the same time, we should very skeptical when anyone issues some kind of specific date or event crisis prediction. The above list makes it clear that no one can possibly predict the exact timing for a crisis event if we do get one. 
Again, most of us buy insurance so that we will have it if we need it even though we don't know if we will need it or exactly when we might need it. This event should be viewed in the same way. Do whatever you can in your situation to have some kind of insurance in case you need it and then hope you never use it. Try to continue to stay alert and watch events.

Added news note (9 am 12-19-16): IMF's Lagarde found guilty - IMF meets to decide her future

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