The august BIS is sounding as if it’s been reading The Daily Capitalist and at least accepting one or two of the points made here from time to time. Here are quotes from Bloomberg.com’s Central Banks Face Power Limit as Debt Persists, BIS Says:
Central banks in developed nations are confronting the limits of their ability to aid economic recovery as government efforts to strengthen their finances fall short, the Bank for International Settlements said.
“Central banks are being cornered into prolonging monetary stimulus as governments drag their feet and adjustment is delayed,” the Basel, Switzerland-based BIS said in its annual report, published today. “Both conventionally and unconventionally accommodative monetary policies (Ed: e.g., Large-Scale Asset Purchases = LSAPs = quantitative easing = QE) are palliatives and have their limits.”
While central banks’ actions were key to limiting damage from the collapse of Lehman Brothers Holdings Inc., interest rates are now “as low as they can go” and debt purchases have swollen central bank balance sheets, the BIS said. European Central Bank President Mario Draghi has indicated that the ECB is close to exhausting its tools after cutting its benchmark rate to a record low and flooding the banking system with cash.
“In the middle of all this we find the overburdened central banks, pushed to use what power they have to contain the damage,” Stephen Cecchetti, BIS economic adviser, said on a conference call. “There are very clear limits to what central banks can do. It’s critical for the health of the global economy to break the vicious cycles and reduce the pressure on central banks.”
Is the intellectual backdrop changing at least a little bit? The article continues:
The BIS was formed in 1930 and acts as a central bank for the world’s monetary authorities. It said extraordinary measures have reduced incentives for politicians and other borrowers to repair balance sheets, and created the illusion that central banks can do much more to stoke growth and redress imbalances.
Central bank policy “buys time” in the short term for banks and governments to tackle debt overhangs, the BIS said.
Only time will tell whether this sort of thinking will become mainstream. If it does, the next great debate will be regarding tax increases versus government spending cuts, or what mix of both to implement. Just as the long period of rising price inflation beginning in the early 1960s finally led to Volckerism and a commitment to disinflation with associated tectonic shifts in investment trends, the above quotes strike me as relevant to future economic and investing trends for years to come.