BIS joins in warning of CB consequences

The Bank of International Settlements, the so called central bank of central banks, just released its annual report.  As with previously communications they are warning of dire consequences for the behaviour of the world’s central banks (of which RBA is ours).  Today we are dished up 2 stark examples in the Greece and Puerto Rican defaults, the results they say are a “toxic mix” of private and public debt used to try and fix economic mismanagement rather than “badly needed” structural reforms.  Simply – we are using more debt and artificial stimulus to get out of the debt induced GFC quagmire rather than, God forbid, living within our means.

Here are some key takeaways from the report:

“Persistent exceptionally low rates reflect the central banks’ and market participants’ response to the unusually weak post-crisis recovery as they fumble in the dark in search of new certainties.”

This is a graph of real interest rates in the G3

“Rather than just reflecting the current weakness, they may in part have contributed to it by fuelling 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."

“The economies worst hit by the last crisis are now suffering the costs of persistent ultra-low rates, which could inflict serious damage on the financial system, sapping banks and weakening their balance sheets and their ability to lend.”

“The continued misallocation of resources during busts prompted by central banks’ rock-bottom interest rates has also hammered productivity growth as a prolonged reliance on debt had been used in its place.”

“This problem is compounded as the world’s populations continue to age making debt burdens harder to bear. Yet politicians have relied too much on temporary growth boosts by using debt, rather than making painful choices.”

“The world will be unable to fight the next global financial crash as central banks have used up their ammunition trying to tackle the last crises.”