BIS Alert - Speech on Boom and Bust Cycles & Interest Rates

I get regular email alerts from the Bank for International Settlements when they issue a new report or speech. Just recently, they sent me this alert about the speech which you can watch below.

The global financial system, the real rate of interest and a long history of boom-bust cycles

Watch the lecture by Professor Hélène Rey, Lord Raj Bagri Professor of Economics, London Business School. It was followed by a panel discussion, chaired by Jens Weidmann (Chairman of the BIS Board of Directors and President, Deutsche Bundesbank), with William Dudley (President, Federal Reserve Bank of New York), Stefan Ingves (Governor, Sveriges Riksbank), and Veerathai Santiprabhob (Governor, Bank of Thailand.)

Published on Jun 26, 2017:

Financial cycles strongly determine real short-term interest rates. Wealth increases rapidly during financial booms, faster than consumption itself. As a consequence, the consumption to wealth ratio declines, as happened in the "Roaring 20s" and the "Exuberant 2000s". In the subsequent busts, savings increase and keep real interest rates low. The related global financial cycle constrains monetary poilcy independence, even for countries with flexible exchange rates, transforming the Mundellian trilemma into a dilemmma. Tackling these issues calls for combinations of monetary and fiscal policy coordination, macroprudential policies, and possibly capital controls. It also means considering the role of the US as a provider of safe assets, and asking whether a multipolar system would be advantageous.

Here is the video of the panel discussion after the speech

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Summary:  

Here are my bullet points for this speech:

- there is a history of close ties between cycles of boom and bust and interest rates

- after boom and during a bust - interest rates tend to fall 

- falling interest rates can lead to another new round of credit expansion 

- capital often gets misallocated during these credit expansions

- better policies are needed to deal with these cycles

- the US has historically been the country to deal with the busts 

- in the future more global cooperation is needed since the US may not be able to continue in this role

- global rules of the game are desirable but not feasible at present due to national interests over powering global concerns

This speech pretty much echoes what was said recently by BIS General Manager Caruana which we covered here. Again, we just note that while "new global rules of the game" are often discussed, the reality is that they do not appear to be feasible at this point in time. 

In the panel discussion after the speech, US Fed representative Willam Dudley made it clear the US sees the US as its first priority. He makes the argument that the US helps the global situation by taking actions to stabilize the US economy and that he thinks any spillovers impacting other countries can be managed. He agrees that things like stress testing are useful. 

Stefan Ingves (Swedish Central Bank) says directly "I am not very optimistic" that much global cooperation is possible because each of us as central bankers have mandates to serve their own national interests that they have to answer to before they can worry about "what is globally best for everybody."

At around the 50 minute mark of the panel discussion video, William Dudley is asked if the world can expect the US to step in and bail out the next crisis (if we have one) with swap lines and would the US Congress go along with trillions more dollars of support?  Mr. Dudley answered by saying that swap lines are limited and that they are ONLY used when the Fed thinks they are needed to support the stability of the US economy. He made it crystal clear that the US comes first in their decision making and that he had testified to Congress along those lines.

Here we have a room full of central bankers from around the world. They are talking about the problems and risks to the global monetary system from booms and busts. Nothing in this speech or panel discussion implies that any major changes to the global monetary system are under consideration at this time. It still appears that without some kind of new major global crisis, there is not much momentum for major change and the individual national central banks are mandated to put their own national interests first as we have pointed out here on the blog.

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Added note: Andrew Maguire Update - I am advised by a rep for Andrew Maguire that it will likely be next week before I may hear back on the list of questions I sent in related to BullionCoin and the large gold buy order. Also, a White Paper is being finalized on BullionCoin that should be available soon. When that is available, I will post it here. I plan to follow this story through until the launch for BullionCoin.

News note 7-26-17: Two BRICS nations (China & India) involved in border dispute. Hopefully, they work things out. Both nations possess nuclear weapons.