Monday, March 23, 2015

New Warning from BIS: Low Rates May Trigger Public Backlash

One of the interesting things you see when doing research for the topics that we cover here on the blog is that some of the strongest warnings about problems in the present monetary system come from within they system. In this case, we have yet another warning from the Bank for International Settlements (BIS). This time its about interest rates staying too low for too long. They warn this could lead to a "backlash from ordinary people". Of course, that would be us. The UK Telegraph even talks about "civil unrest" in its headline for this story and includes a map titled "How central banks lost control of the world."

It's funny because people expect things like this to come from "doom and gloom" preppers waiting for the world to collapse and civil unrest to explode. But this warning is coming from the BIS and covered by the mainstream UK Telegraph. Below are some quotes from this UK Telegraph article covering the new BIS warning.


"Low inflation, bond yields and interest rates around the world will push the boundaries of economic and political stability to breaking point if they continue on their downward trajectory, the Bank for International Settlements has warned.
The Swiss-based "bank of central banks" said the "sinking trend" of global rates would push countries further into uncharted territory.
It highlighted that $2.4 trillion (£1.6 trillion) of long-term global sovereign debt was now trading at negative yields, with an increasing number of investors willing to pay governments for the privilege of lending to them.
"As bond markets show us day after day, the boundaries of the unthinkable are exceptionally elastic," said Claudio Borio, head of the Monetary and Economic department at the BIS.
"The consequences should be watched closely, as the repercussions are bound to be significant.
The BIS warned that the low rate environment, which has already led to gaping pension deficits and lower bank profits, could risk a backlash from ordinary people whose savings were being eroded away."
. . . . . 
"In such a world, easing begets easing," he said. "If this unprecedented journey continues, technical, economic, legal and even political boundaries may well be tested."

. . . .

"Minouche Shafik, the Bank's (Bank of England) deputy governor for banking and markets, outlined the risks of moving rates into negative territory in its most recent Inflation Report, and said that policymakers were watching developments in other countries closely.

She said there was a risk that people and businesses could "revert to cash. [There is] also the worry about what happens to money markets when rates are negative," she said.
Martin Weale, an external member of the Bank's Monetary Policy Committee that sets interest rates, said the bank contemplated using negative rates at the height of the eurozone debt crisis but decided against such a move because it would have signalled "a change in the nature of money as we know it". He said companies may have decided to hold money in secure warehouses instead of at the bank if rates had been cut to below zero."
My added comments:
We can add this new warning to the long list of IMF and BIS warnings we have documented here on the blog. If you explore the archive links to the right you can find them. I actually try to maintain a balance on this blog. I try not to overdue negative articles and give the benefit of the doubt to the idea that the present system might be in some kind of recovery where possible. But what I consistently find are warnings from the BIS and IMF about all the problems out there. This bullet point list is just some of the things I can recall they have warned about in the past year:
- Central Bank QE policies leading to asset bubbles in stocks and bonds
- "Shadow Banking" where there are unknown derivatives risks (even to the IMF and BIS)
- lack of policy coordination between central banks (every man for himself mentality)
- and now this new BIS warning on low interest rates
In the old days you had to scour the internet for fringe alternative media sources to find all these kinds of warnings. The kind of sources the mainstream media rolls their eyes at and talks about being "doom and gloomers". 

These days it's much easier to find these warnings. Now we have the UK Telegraph producing a map explaining "how central banks lost control of the world." Just do a Google search on IMF and BIS warnings and you can find all you want. Despite all that, former IMF Peter Doyle says don't expect the IMF to give us any early warning for a new global financial crisis if we do get one. He says they issue warnings about risks, but never suggest these risks will spiral out of control into a full blown crisis. Hopefully they won't. All we can do here is report what we find, try to recap and analyze it, and let you make up your own mind.

In early April I will try to do an updated listing of all the IMF and BIS warnings we have documented here on the blog in the past year. It's a pretty long list.

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