Brexit? BIS Calls For Tighter Money

A Benjamin Cole post

“Monetary policy is running out of room for maneuver,” said Hyun Song Shin, head of research at the Bank of International Settlements (BIS), in a June 26 interview, three days after the Brexit, and the subsequent global retreat of stock and asset values. “It is not clear how much further stimulus of the real economy can be achieved using monetary-policy tools alone without inviting unwanted distortions.”

You can tell that monetary policy has been hyper-accommodative from the soaring interest rates and inflation seen globally, right?

So let’s see: U.S, 10-year Treasuries are offering a 1.48% yield. In shades of the Weimar Republic, the German 10-year Bund is up to a 0.05% yield. No, that is not 0.50%. It is 0.05%. And Japan, or Switzerland? Don’t even ask.

No matter. As news service Bloomberg reported, “The BIS on Sunday (June 26) called on governments to reduce their reliance on extraordinary monetary policy for spurring economic growth. Instead, they should redouble efforts on structural and financial reforms, it said. The stimulus produced by the world’s monetary authorities will approach the limits of its effectiveness, according to the BIS, which was formed in 1930 and acts as the central bank for many of those institutions.”

These proclamations are being issued from the BIS as it has just released it annual report, parts of which have been written in deep, even abject confusion. For example, the report conducts a round-robin of global central banks, including even those of S. Korea, Japan, China, Indonesia and Thailand, and finds all are below inflation targets. This is blamed on falling commodity prices, which have undercut the “very accommodative” monetary policies of central bank after central bank.

The BIS contends that easy money extended for years on end has led to falling commodity prices and even deflation, as seen in Sweden, Switzerland and Japan.

The BIS Solution

The solution to dead prices and anemic growth is structural and financial reforms, avers the BIS. In combination with, of course, tighter money.

I am glad we have the Basel, Switzerland-based BIS’ers to tell us the politico-economic facts of life. Who ever dreamed that democracies, and probably even worse, the statists in mainland China, needed economic structural reforms?

Of course, Singapore is also struggling with deflation (headline CPI down 1.8% YOY in May) and the city-state recorded no real economic growth in 2015, and only 0.2% Q-o-Q real economic growth in Q1 2016, at SAAR. Evidently, Singapore (cited by many as a kind of structural econo-nirvana) is in need of extensive structural reforms, even worse than the United States.

Conclusion

It is confounding that the globe’s central bankers cannot fathom they will never get back to “normal” interest rates if they continue to asphyxiate the global economy with tight money.

Moreover, no nation will ever have the kind of regulations and tax laws that macroeconomists would prefer. As a consequence, monetary policy has to be made in the real word, as it is. And anyway, is the problem of slow real global growth structural and not monetary?

Brexit aside, the world’s economies are more open to trade and innovation than ever before, connected by Internet no less. Services can be dispensed globally by the click of a button, and there are more large cargo ships than ever.

Why has econo-nirvana Singapore slipped into deflation and anemic growth? Structural problems?

Sadly, the retrograde, even punitive tight central-bank monetary policies are promoting the very kinds of socialism and nationalism that will undercut real economic growth. Well, unless some nationalists seize control of a central bank. Even that might be an improvement.

PS

Yet more sad news: Blogger Dajeeps has pointed out that Don Trump appears to have a better feel for monetary policy than Hillary Clinton. Trump talks about monetizing debt while Hillary says it was easy money that collapsed the US economy.

Hillary appears headed for the White House, where no doubt she will embrace the effectively tight money policies of Janet Yellen.

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