BIS Warns Of ‘Major Faultlines’ In Global Debt Bubble
– BIS warns “unrealistic and dangerous to expect that monetary policy can cure all the global economy’s ills”
– Bank of International Settlements warns that recent turmoil is not caused by isolated incidents
– Debt levels are now so extreme they threaten the financial system
– Ultra low rates have led to mal-investment and bigger boom/bust cycles
– Emerging markets vulnerable to deeper crises
– ECB easy money may juice markets for a while but reckoning is coming
– BIS acknowledge that central banks rig markets
– Gold and silver protect against crises in financial system
BIS via Business Insider
In
a stark warning, the Bank for International Settlements (BIS), the
central bank of central banks, has said in its quarterly report that the
turmoil that has shaken global
stock markets in recent weeks showed how developed and emerging markets
were exposed to the unwinding of financial vulnerabilities built up
since the 2008 crisis.
The
sell-offs rocking equity markets reflect the “release of pressure”
accumulated along “major fault lines”, the BIS said, as it warned that
investors should not expect central banks to be able to ride to the
rescue and solve such deep-rooted problems.
The
BIS thus dispelled the misleading narrative that the growing
instability in global markets can be brought under control by the
Federal Reserve and other masters of monetary policy.
According
to the head of its Monetary and Economic department, Claudio Borio “It
is unrealistic and dangerous to expect that monetary policy can cure all
the global economy’s ills.”
In
the report the BIS – known as the central bank of central banks –
warned that recent turmoil in markets were not caused by isolated
incidents but rather “the release of pressure that has gradually
accumulated over the years along major fault lines”.
The Bank was one of the few large entities to warn in advance of the crash in 2008 [see “Gold Up as the $500 Trillion Derivatives Time Bomb Keeps Ticking“]. The report warned that debt levels are now so extreme that they threaten the entire financial system.
Public
and private debt in the developed world has risen 36% since the crisis
and is now 265% of GDP. It adds that the post-crisis problems have been
dealt with with the same ineffectual policies that caused the crisis –
prolonged ultra-low interest rates and easy monetary policy.
In
this period of ultra low rates – and rates have not risen in almost a
decade – rich countries have become bloated on debt rather than paying
down and clearing the imbalances in the system. The West may
consequently be entering a period of stagnation similar to the trap that
has afflicted Japan since the 1990’s.
Borio
warned that investor reliance on every pronouncement by the Fed were
hampering its desire to return to a normal rate environment.
“This
is . . . a world in which interest rates have been extraordinarily low
for exceptionally long and in which financial markets have worryingly
come to depend on central banks’ every word and deed, in turn
complicating the needed policy normalisation,” – Claudio Borio
The
low rate environment has led to an array of wasteful “investment” such
as ghost cities in China and pumping up share prices with stock buybacks
in the U.S. where the underlying business is not performing.
The
BIS warns that the already battered emerging markets are particularly
vulnerable to crisis. While debt to GDP ratios are mild compared to
those of the developed economies at 167% they have increased by 50%
since 2007 which usually precipitates a major crisis.
Emerging
markets are further exposed because of the large amount of dollar
denominated debt they have taken on – over $3 trillion for non-financial
corporations. If and when the Fed begin to raise rates it will affect
liquidity in emerging markets and may also cause capital flight into the
perceived stronger dollar.
“Dollar
borrowing . . . [spills] over into the rest of the economy in the form
of easier credit conditions,” said Hyun Song Shin, who advises the BIS.
“When the dollar borrowing is reversed, these easier domestic financial
conditions will be reversed.”
Incidentally,
in covering the story, the FT matter-of-factly stated that “markets
have been systematically rigged by central bankers” – a charge for which
we and others have been ridiculed for making in the past.
Unlike
the many US dollar denominated paper instruments that have been created
in an unprecedented fashion in recent years and continue to be – gold
is finite.
Gold bears
the confidence of millions of people throughout the world and
especially people – both poor and rich – in Asia. People in the the
non-western world value gold’s intrinsic value far above the promises of
politicians and bankers and far above the unbacked and increasingly
debased paper and electronic currency of today.
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Mark O'Byrne is executive and research director of www.GoldCore.com which
he founded in 2003. GoldCore have become one of the leading gold
brokers in the world and have over 4,000 clients in over 40 countries
and with over $200 million in assets under management and storage.We
offer mass affluent, HNW, UHNW and institutional investors including
family offices, gold, silver, platinum and p
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