Claudio Borio (BIS) - On Money, Debt, Trust, and Central Banking

Following his recent speech which we noted here, Claudio Borio of the Bank for International Settlements releases this new working paper. The conclusion section of this new paper (shown just below) sounds very much like the conclusion of his recent speech. (I added the underlines for emphasis)

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Conclusion

"Let me conclude. The monetary system is the cornerstone of an economy. Not an outer facade, but its very foundation. The system hinges on trust. It cannot survive without it, just as we cannot survive without the oxygen we breathe. Building trust to ensure the system functions well is a daunting challenge. It requires sound and robust institutions. Lasting price and financial stability are the ultimate prize. The two concepts are inextricably linked, but because the underlying processes differ, in practice price and financial stability have often been more like uncomfortable bedfellows than perfect partners. The history of our monetary system is the history of the quest for that elusive prize. It is a journey with an uncertain destination. It takes time to gain trust, but a mere instant to lose it. The present system has central banks and a regulatory/supervisory apparatus at its core. It is by no means perfect. It can and must be improved. But cryptocurrencies, with their promise of fully decentralised trust, are not the answer. 

Paraphrasing Churchill’s famous line about democracy, “the current monetary system is the worst, except for all those others that have been tried from time to time”.

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My added comments: These remarks illustrate the very cautious nature of central bankers and why change tends to take place very gradually over time. Unless there is some external force that creates the incentive for a rapid response by central banks, they tend to stick with the status quo with occasional tweaks to the system.

So, are there any challengers to the existing system that might emerge to offer an alternative? Right now, the answer would seem to be no. So long as the overall global financial system is perceived as being orderly and reasonably stable, the overwhelming majority of the general public is not actively looking for alternatives. We see some offered in the cryptocurrency venue, but with nowhere near widespread public adoption.We see some new and creative ideas emerging (like SAGA and Kinesis that we have noted here) but those are still in their infancy.

The big question will arise if and when we get a new global financial crisis so large that the stability of the present system is truly shaken. In that event, the public will be awakened. Two major factors will be important in such a crisis scenario:

1) Who does the public blame for the crisis disrupting their daily lives?

2) If the public blames the existing power structure (the central banks and the associated regulatory apparatus mentioned in the paper above), will the public then seek out radical new alternatives?

If we live in a complex system as Jim Rickards describes, the answers to the above two questions seem unknown. But one thing that we can observe is that absent a major crisis, the status quo tends to prevail and radical changes don't seem likely.