BIS Warns Central Banks Won’t Be Able to Deal with Next Crisis
Bank of International Settlements issued a blunt report on Sunday, warning that over-reliance on monetary policy has left central banks with little capacity to deal with the next global crisis.
As the Telegraph reports, BIS asserts that central banks have “backed themselves into a corner” by repeatedly cutting interest rates in order to stimulate flagging economies.
These low interest rates have in turn fueled economic booms, encouraging excessive risk taking. Booms have then turned to busts, which policymakers have responded to with even lower rates.”
Claudio Borio heads the monetary and economic department at BIS. He described central bank actions as “fumbling in the dark in search of new certainties.”
Rather than just reflecting the current weakness, they may in part have contributed to it by fueling costly financial booms and busts and delaying adjustment. The result is too much debt, too little growth and too low interest rates.
“In short, low rates beget lower rates.”
In fact, central bankers in Sweden, Demark and Switzerland have pushed interest rates below zero as they attempt to keep their economies afloat, and the European Central Bank launched a €1 trillion quantitative easing program last spring.
A Wall Street Journal report emphasizes the BIS contention that low yields on bonds brought about by this monetary policy may fuel further booms and busts that could hamper growth in the long-term. Borio called the entire system unstable.
Our concern, not just this year but in previous years, is that if you look at what’s going on from a longer-term perspective these rates don’t appear to be fully consistent with lasting financial stability… It’s hard to believe that interest rates that are so extraordinarily low are consistent with a fully rational allocation of resources.”
According to the Wall Street Journal “from December 2014 until the end of May, an average of $2 trillion in global long-term government bonds—much of it in the eurozone—carried a negative yield.”
According to the Telegraph, “The BIS said that the current turmoil in Greece typified the kind of ‘toxic mix’ of private and public debt being used as a solution to economic problems, rather than making the proper commitment ‘to badly needed’ structural reforms.”
But as the Wall Street Journal points out, BIS has issued similar pronouncements before, and policymakers largely ignored them. It seems highly likely central bankers will continue on this unsustainable trajectory despite these most recent warnings. That means we can expect more crises like Greece, and those brewing in other places such as Puerto Rico.
As we reported recently, while Europe wonders if the Greek crisis will be the beginning of the end of the euro currency, news simultaneously broke that Puerto Rico cannot pay back about $72 billion in debt. As a United States territory, a Puerto Rico debt default could wreak havoc in the US municipal bond market. Peter Schiff thinks investors should be more worried about this eventuality than Greece leaving the eurozone.
You don’t have the power to make the central bankers listen. You cannot bring about the structural changes necessary avert the next crisis. But you can take steps to insulate yourself from the consequences. Buying physical gold and silver can help protect your savings as central bank monetary policy chickens come home to roost.
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