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It's All About The Debt, Stupid

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The BIS issues a 'five-alarm' fire warning over impending US rate rise.

http://www.telegraph.co.uk/finance/economics/11858952/BIS-fears-emerging-market-maelstrom-as-Fed-tightens.html

Debt ratios have reached extreme levels across all major regions of the global economy, leaving the financial system acutely vulnerable to monetary tightening by the US Federal Reserve, the world's top financial watchdog has warned.

The Bank for International Settlements said the wild market ructions of recent weeks and capital outflows from China are warning signs that the massive build-up in credit is coming back to haunt, compounded by worries that policymakers may be struggling to control events.

"We are not seeing isolated tremors, but the release of pressure that has gradually accumulated over the years along major fault lines," said Claudio Borio, the bank's chief economist.

The Swiss-based BIS said total debt ratios are now significantly higher than they were at the peak of the last credit cycle in 2007, just before the onset of global financial crisis.

Combined public and private debt has jumped by 36 percentage points since then to 265pc of GDP in the the developed economies.

This time emerging markets have been drawn into the credit spree as well. Total debt has spiked 50 points to 167pc, and even higher to 235pc in China, a pace of credit growth that has almost always preceded major financial crises in the past.

Adding to the toxic mix, off-shore borrowing in US dollars has reached a record $9.6 trillion, chiefly due to leakage effects of zero interest rates and quantitative easing (QE) in the US. This has set the stage for a worldwide dollar squeeze as the Fed reverses course and starts to drain dollar liquidity from global markets.

Dollar loans to emerging markets (EM) have doubled since the Lehman crisis to $3 trillion, and much of it has been borrowed at abnormally low real interest rates of 1pc. Roughly 80pc of the dollar debt in China is on short-term maturities.

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BIS outline pivotal role of the BIS by telling everyone what they already know absent any accountability. With added natural-disaster interpretation because fear reduces probability of change, and abstract fear in particular increases probability of continued good livelihoods centered on doing nothing.

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The telegraph link refers to the "Wicksellian rate".


http://

www.economist.com/blogs/freeexchange/2013/10/are-real-rates-too-high-or-too-low

Yet out there, somewhere, is a "correct" interest rate, sometimes called the natural interest rate, or Wicksellian rate.

So if the Fed's rate is currently correct then interest rates have been wrong for the last 5000 years (at least). That wouldn't be a complete surprise either.

image.jpg

Even the interest rate spike about 3000BC didn't result in crisis rates as low as they are now. Maybe they were just better at managing the economy in those days.

Edited by billybong

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Claudio Borio on interest rates:

Easing has induced easing

Interview with Mr Claudio Borio, Head of the Monetary and Economic Department (MED), in Börsen-Zeitung, conducted by Mr Mark Schrörs and published on 25 August 2015.

[. . .]


For years, the Bank for International Settlements (BIS) has been calling for policymakers to shift away from a short-term focus on macroeconomic variables like production and inflation and to adopt a longer-term perspective, including one that pays more attention to the financial cycle. But the central banks' decisions are still very much dominated by the former. How frustrated are you by that?

We have to distinguish a couple of aspects here. As regards thinking, there has been a shift. It had already started before the financial crisis, but it intensified after it. It is now recognised that financial stability is very important. And many central banks are now of the view that very low interest rates for a very long time can raise financial stability risks. The other issue is how best to respond.

And here there is hardly any visible change.

I think that things have also shifted a little bit. But you are right: many central banks believe that it is exclusively the task of macroprudential regulation and supervision ...

... which focuses on the financial system as a whole ...

... to deal with these risks. We do not share this view: financial booms are too powerful to be constrained through macroprudential measures alone. Their active use, for instance, has not prevented the emergence of signs of financial imbalances in Asia. In comparison with central banks, at the BIS we have the luxury of not having to press the button and of not facing the constraints of national mandates. This allows us to see the picture from a different perspective. And our institutional duty is to say what we think is right.

Some experts say financial stability should become an explicit mandate for central banks.

The first priority should be to use as much as possible the flexibility that the existing monetary policy frameworks provide - even if we are aware of the serious political constraints and communication challenges. A lot depends on how central banks judge the potential trade-offs. Changing the mandate should not be taboo, but should only be done as a last resort.

The BIS is always warning of the risk of overburdening central banks. But is there not also a risk that central banks could become overburdened if they also had to safeguard financial stability?

No, I don't think so. Safeguarding financial stability is a natural central bank task, and it cannot be performed fully successfully by others. Monetary policy has a huge influence on financial markets, and hence on financial stability; it can thus effectively complement macroprudential measures. And this would also bring central banks closer to their origins. What I worry about is something completely different.

That is to say?

It is the growing perception that central banks can be the answer to all our economic problems. The great danger is that more and more people come to believe that everything can simply be solved with money and that central banks can produce infinite amounts of it. This could cause big problems in the future. This is why we insist that people should demand less from central banks and that structural policies should play a much greater role.

At the moment, the Fed is heading for a first interest rate increase after six and a half years of a zero interest rate policy. The IMF has warned against possible turbulences in financial markets. Do you also see a risk that the US interest rate reversal could jolt financial markets?

The Fed will increase the interest rate only when it thinks that the US economy is strong. That strength would help the world economy. In addition, to minimise the shock, the Fed has almost preannounced this step and been very cautious in its communication - not only regarding the "lift-off" but also regarding what it will do thereafter. But in assessing the impact, we should bear in mind that, as noted earlier, there are financial vulnerabilities in the global economy. And in the past, a monetary policy tightening in the US and an appreciation of the dollar have triggered turbulence in EMEs. This has to do, in particular, with the special role of the dollar.

The dollar is the world's dominant currency.

Yes, as such, the US sets the tone for global financial markets. And, more directly, financial conditions there have an impact because many borrowers around the world - in more recent years, especially companies - have heavily borrowed in dollars. For instance, since early 2009, the amount of dollar credit to non-banks in EMEs has almost doubled.

Because interest rates have been so low for so long in the US.

Yes, interest rates have been exceptionally low for an exceptionally long time. This is unprecedented. And it has led to aggressive risk-taking in financial markets. Furthermore, many of those who are active in the financial markets now have no first-hand experience of how to respond to rising interest rates: they were not even around the last time it happened. But having said all this, one thing is also clear: the longer the interest rate reversal is delayed, the riskier the situation will become.

The Fed has announced that it will increase rates very gradually. Between 2004 and 2006, it also tightened very gradually, raising interest rates by 25 basis points per meeting. A lot of people are saying that this contributed to the financial excesses that led to the financial crisis. Do you see the risk that the Fed is repeating a mistake?

There is a tendency to emphasise the risk of acting too early and too strongly at the expense of the risk of acting too late and too gradually. This can be dangerous. Raising interest rates too late and too slowly can fuel financial booms, and the following busts can be highly damaging. It is also very important to keep a steady hand when normalising monetary policy, and not to be deterred by spikes in short-term financial market volatility. This volatility may be inevitable given the initial conditions.

[. . .]

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Caudio Borio sounds like he's seeking reasons to justify rate increases (reasons outside of the usual justifications such as inflation targets etc). When they do increase, maybe at the next Fed meeting - who knows, expect some of those reasons to be wheeled out.

Edited by billybong

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Caudio Borio sounds like he's seeking reasons to justify rate increases (reasons outside of the usual justifications such as inflation targets etc). When they do increase, maybe at the next Fed meeting - who knows, expect some of those reasons to be wheeled out.

Claudio Borio is at the BIS and I think that he's fairly genuine in his position. The Fed may well ignore him.

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Claudio Borio is at the BIS and I think that he's fairly genuine in his position. The Fed may well ignore him.

Maybe he is (I didn't say he wasn't - considering his position at the BIS) and a couple of months or so ago the BIS was reported to have said that the current interest rate policy wasn't working and that economies should consider other policies including restructuring - which ties in with what he's reported to have said in August except that he's given more reasons and more reasoning.

The Fed might not raise rates immediately but the BIS being part of the circle it's unlikely its expressed opinion won't have some weight with the Fed.

http://

www.theguardian.com/business/2015/jun/28/interest-rates-growth-warning-bank-for-international-settlements

Edited by billybong

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So the BIS are worried about too much debt. Don't make me laugh. Its the BIS and their crooked banker buddies that have given us a debt mountain in the first place.

Time sovereign states issued currency instead of letting private banks create money out of thin air and charge us interest on it.

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a BIGGER QE is all that is needed

02

the system needs inflation before interest rates can rise

02

BIG QE is the only tool they have to deliver that it would seem

QE only delivers deflation. Because it is a bond buying program and that drives rates down and sucks money out of the economy and into risk free bond speculation, guaranteed by the central bank.

if you want inflation then try helicopter money drops, but then the central banking system becomes irrelevant. So that will never happen.

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Maybe he is (I didn't say he wasn't - considering his position at the BIS) and a couple of months or so ago the BIS was reported to have said that the current interest rate policy wasn't working and that economies should consider other policies including restructuring - which ties in with what he's reported to have said in August except that he's given more reasons and more reasoning.

The Fed might not raise rates immediately but the BIS being part of the circle it's unlikely its expressed opinion won't have some weight with the Fed.

Sorry, I didn't mean to imply that you'd said he wasn't. I only meant that I thought the direction of Borio's thinking was the development and discovery of the reasons stated and then, as a direct result, the idea that perpetually low interest rates and excessive easing are probably a bad idea. This is a recurring theme that comes up periodically in his working papers and has done for quite some time - since before the financial crisis even - hence why I'm not sure that the Fed are paying any particular attention.

Edited by Neverwhere

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Time sovereign states issued currency instead of letting private banks create money out of thin air and charge us interest on it.

Indeed.

The 'natural' rate of interest, the price of money, could then be discovered by private banks each having a licence to bid competitively to borrow new (state issued) money at regular reverse auctions held by the Treasury. This free market mechanism would complement the basic issuance mechanism of new state issued debt free money being spent into existence by the state.

Banks would then be able to borrow new money into existence rather than to lend it into existence as now. The money supply would be both more elastic and responsive to the real economy. Banks would conduct their money intermediation business at their own risk, like any normal business.

No bailouts, no bank credit money. Plain money, issued by the people for the people, in adequate quantity.

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Sorry, I didn't mean to imply that you'd said he wasn't. I only meant that I thought the direction of Borio's thinking was the development and discovery of the reasons stated and then, as a direct result, the idea that perpetually low interest rates and excessive easing are probably a bad idea. This is a recurring theme that comes up periodically in his working papers and has done for quite some time - since before the financial crisis even - hence why I'm not sure that the Fed are paying any particular attention.

No problem and thank you for the link. Although it seems to have been a theme in his work as far as I'm aware it's the first time he's got real headlines like in the recent guardian article (it was similarly headlined in other newspapers as well) which suggests to me that his opinion might currently be receiving more attention. The guardian article was about the BIS annual report so what he said in it was more than just a standard research conclusion. Then there was the more recent interview by Börsen-Zeitung journalist Mr Mark Schrörs that you quoted/linked to.

Also the way things seem to work is that policies are often forewarned about in the general media through such headlines/articles rather than being kept under wraps in research papers that normally have a very limited audience.

All the main central bankers are on the BIS Board of Directors (Yellen, Carney, Xiaochuan, Kuroda, Draghi and the other main ones - representing their organisations) so hold responsibility for the annual report and Borio is apparently Head of the Monetary and Economic Department for the BIS.

It's possible the Fed doesn't want to change direction but I doubt if they're entirely ignoring the contents of the BIS official annual report as they hold responsibility for what's in it - and if they want to present credible reasons to the media for a possible change in direction there they are, and backed up by years of research.

Edited by billybong

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No problem and thank you for the link. Although it seems to have been a theme in his work as far as I'm aware it's the first time he's got real headlines like in the recent guardian article (it was similarly headlined in other newspapers as well) which suggests to me that his opinion might currently be receiving more attention. The guardian article was about the BIS annual report so what he said in it was more than just a standard research conclusion. TheN ther was the more recent interview by Financial Times Deutscheland journalist Mr Mark Schrörs that you linked to.

Also the way things seem to work is that policies are often forewarned about in the general media through such headlines/articles rather than being kept under wraps in research papers that normally have a very limited audience.

All the main central bankers are on the BIS Board of Directors (Yellen, Carney, Xiaochuan, Kuroda, Draghi and other main ones - representing their organisations) so hold responsibility for the annual report and Borio is apparently Head of the Monetary and Economic Department for the BIS.

It's possible the Fed doesn't want to change direction but I doubt if they're entirely ignoring the contents of the BIS official annual report as they hold responsibility for what's in it - and if they want to present credible reasons to the media for a possible change in direction there they are, and backed up by years of research.

I hope you're right but I suspect they will shy away from the immediate and sharp pain of a rate rise in favour of the long-drawn-out protracted pain of low interest rates, because the latter appears to be less painful when only considering the present and not factoring in the long term. A significant rate rise would be like pulling a bandaid off a festering wound - probably better to get it out of the way, but damn is it going to hurt.

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I hope you're right but I suspect they will shy away from the immediate and sharp pain of a rate rise in favour of the long-drawn-out protracted pain of low interest rates, because the latter appears to be less painful when only considering the present and not factoring in the long term. A significant rate rise would be like pulling a bandaid off a festering wound - probably better to get it out of the way, but damn is it going to hurt.

Carrying on with their current policies puts them in a difficult position if things continue to get worse (especially if there's a significant "unexpected" economic event) as they will be very open to the criticism that the BIS warned them their policies were failing - and they effectively run the BIS.

Edited by billybong

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It is now recognised that financial stability is very important.

You have to laugh at a statement like this. Financial stability in a capitalist system is not important, it's impossible, for the reasons that Minsky pointed out- in any system based on a risk/reward paradigm any period of stability will engender greater risk taking leading eventually to instability- the first state implies the other and vice versa- any period of instability will engender a lower appetite for risk leading to a period of relative stability- It's a cyclical phenomena, not a static one.

Trying to maintain a 'stable' capitalist economy is like trying to have a wave free ocean- an abstract aim that can never be achieved. All the Central Banks have done in their efforts to 'stabilize' the system is to suppress the inherent cyclical swings between risk on/risk off and as a result have just created an ever greater instability as we are starting to see as markets start to swing ever more wildly between Greed and Fear as the era of Central Bank manipulation draws to a close.

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