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.

The Bank for International Settlements Proposes Sadomonetarism To Promote Recovery, Higher Inflation What Greek Crisis?

A Benjamin Cole post

The central banker’s club known as the Bank of International Settlements (BIS), suitably HQ’ed in Basel, Switzerland, this past weekend released its annual report, and advocated the globe’s major central banks raise interest rates to combat the chronic lack of aggregate demand and low inflation-deflation dogging the world’s developed economies.

Greece may be melting down under relentless tight-money policies of the European Central Bank (ECB), but no worries.

“Rather than promoting sustainable and balanced global growth, the system risks undermining it,” Mr. Claudio Borio, head of the monetary and economic department said. “It has spread exceptionally easy monetary and financial conditions to countries that did not need them, exacerbating vulnerabilities there.”

That must explain the global double-digit inflation we see emerging. So much easy money!

Seriously, the Cleveland Federal Reserve Bank says inflation expectations are below 2% for the next 10 years—this is “easy money”? Greece is scant mentioned in the BIS annual report, except to be damned for pushing the ECB to an “easier” stance.  I wish I was making this up.

Democracy And Central Banks

The old saw is that democracy is a lousy way to run a country, until you try any other way. One can certainly rue the economic structural impediments that become permanent fixtures in democracies, what with voting blocs and accommodating office holders.

But the incredible arrogance, ineptitude and theo-monetaristic certitude of central bankers certainly tops any stupidity foisted by voters upon themselves. Voters can and have voted in tax and regulatory platforms that slow down economic growth—but the tight-money lunatics at BIS and the ECB have devised schemes that obtain actual, sustained contractions of economies.

Western central bankers, unmoored from reality or any connection to actual economies—they get their salaries no matter what is the real economic growth rate—have become economic ISIS-men, genuflecting to and implementing an ascetic ideology even as it wreaks destruction.

Remembering Milton Friedman

It is difficult to believe that less than 23 years ago, in Oct. 1992, Milton Friedman bashed the U.S. Federal Reserve in The Wall Street Journal op-ed pages for being too tight—and that, when the Fed had just cut the federal funds rate from 10% to 3%, and CPI-inflation was 3.2%! In 1992 Q4 real growth clocked in north of 4.0%.

Friedman rebuked those who erroneously connected low rates to “easy money”—just the opposite is true, he pointed out. Years of “easy money” do not result in ZLB and deflation. Except perhaps, to demented BIS gnomes.

The slavish zeal for microscopic inflation rates or even deflation at any cost is a new and dangerous affectation among the money-obsessed, especially central bankers. And tight money has not worked! Look at Japan, Europe, or the U.S. in 2008.

Indeed, when did monetary suffocation end up in the nirvana of rapid real growth and but zero inflation?

Never and nowhere.

Bad News

I see no optimistic economic outlook for Europe.

The annual report from the BIS suggests a depth of monetary-policy depravity to rival the Mariana Trench. Europe has an un-democratic central bank that will suffocate parts of Europe for decades, and pompously pettifog the whole time.

The Federal Reserve may be a bit better. One can at least hope the GOP will win in 2016, and like President Nixon, or the Reaganauts, the installed GOP go after the Fed to print more money. Remember, hounded by Reagan’s minions, Fed Chairman Paul Volcker in 1981 declared victory on rising prices—when inflation was at 4%. Today 4% inflation would be presented economic bubonic plague. Funny thing, America prospered in the 1980s with moderate rates of inflation, and then again in the 1990s.

The Bank of Japan and the People’s Bank of China may be the best of the central banking lot today.

Invest accordingly.