"The Global Economy Can No Longer Rely On Debt" - BIS Warns Central Bank Actions "Have Started To Backfire"

Tyler Durden's picture

It's late June which means it is time for the annual warning by the Bank of International Settlements about the growing futility of monetary policy and central bank impotence. Exactly one years ago, the BIS asked "Of What Use Is A Gun With No Bullets?", in which the BIS said central banks are defenseless against the coming crisis. Well, it underestimated just how far the central banking "magic people" are willing to reach inside their "magic bag of tricks" to preserve the status quo: to be sure nobody at the time expected the ECB to begin buying not just corporate bonds but junk bonds too.

Fast forward one year and the song and dance has been repeated, with the issuance of the BIS' 86th Annual report in which we read that "Easy-money policies and unprecedented monetary stimulus have started to backfire in global financial markets" as Bloomberg summarizes the 130 page report, which is largely full of data and analyses quite familiar to regular readers.

In its report, the BIS "says that historically low interest rates and bond-buying programs - which have sent yields below zero on more than $8 trillion of government bonds, a record amount - are causing anomalies in asset values. One example is that small price differences in related securities or assets, which banks traditionally eliminated through arbitrage, are persisting more often."

"Monetary policy is running out of room for maneuver," said Hyun Song Shin, head of research at the BIS, in an interview. “It is not clear how much further stimulus of the real economy can be achieved using monetary-policy tools alone without inviting unwanted distortions.”

Like on virtually every occasion since 2013, the BIS on Sunday once again 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."

One lament raised by the BIS is one we have heard loud and clear in recent weeks from both Deutcshe Bank as well as Citi:

With the cost of money so close to zero, the profitability and resilience of banks has been sapped, impairing their ability to lend to the wider economy and make markets for securities... When banks choose not to hold as many securities, that reduces depth and liquidity in bond and currency markets, threatening to disrupt their smooth functioning.


Lenders across Europe from Deutsche Bank AG to Societe Generale SA are struggling to increase revenue as the European Central Bank pushes interest rates below zero, regulators demand bigger capital buffers and market volatility spooks investors, according to their financial reports last month. Intesa Sanpaolo SpA, Italy’s second-largest bank, said in May its first-quarter profit dropped 24 percent due to such reasons.

“It’s far better for banks and broker-dealers to have a strong capital base because it allows them to lend more in support of the real economy and on better terms,” the BIS’s Shin said. “It allows them to make markets in a robust way.”

Another point the BIS makes is something we have discussed over the past year, namely the blow out in cross-currency basis swaps, which as we futher pointed out on Friday, blew out to the most negative print since 2012:

Following up on a report the BIS' Hyun Song Shin wrote just a few days ago, the BIS makes the case that "under the theory of so-called covered-interest parity, interest rates implied by currency trading should be consistent with market interest rates. Yet, current implied dollar rates from currency swaps are above Libor. This means that borrowers in dollars through the currency swap market are paying more than the rate available in the open market."

What is new and notable in the current report is the BIS' indirect allegation that the ongoing period of economic malaise, record low rates, and collapsing productivity is itself the result of previous (and current) central bank policy.

We suggest that the current predicament in no small measure reflects the failure to get to grips with hugely costly financial booms and busts (“financial cycles”). These have left long-lasting economic scars and have made robust, balanced and sustainable global expansion hard to achieve – the hallmark of uneven recovery from a balance sheet recession. Debt has been acting as a political and social substitute for income growth for far too long.

More on debt:

Debt can help better explain what would otherwise appear as independent bolts from the blue. First, it sheds light on the EMEs’ slowdown and on global growth patterns. Debt is at the heart of domestic financial cycles and of the tightening of financing conditions linked to foreign currency borrowing. This is most evident for commodity producers, especially oil exporters, who have seen their revenues and collateral strength collapse – hence the large holes in fiscal accounts and big investment cuts. And debt may be one reason why the boost to consumption in oil-importing countries has been disappointing: households have been shoring up their balance sheets.


* * *


... debt may even shed light on the puzzling slowdown in productivity growth. When used wisely, credit is a powerful driver of healthy economic growth. But as the previous evidence indicates, unchecked credit booms can be part of the problem and leave a long shadow after the bust, sapping productivity growth. In addition, debt overhangs depress investment, which weakens productivity further. In turn, weaker productivity makes it harder to sustain debt burdens, closing the loop.

But, but... Janet Yellen was so confused just this past week:

BARR: In your prepared remarks, you indicated that business investment was surprisingly weak. Maybe the reason why the Fed is surprised and continued to miss on forecasts. And the Fed as the Washington journal pointed out, estimated 2.4 percent growth in December, that had fallen to 2.2 percent by March. This month, it was down to 2 percent. And it follows the Federal Reserve's consistent record of forecasting error from a standpoint of predicting stronger growth than is actually occurring.... I would like you to comment on that."


YELLEN: Well, growth has been disappointing. I'm not sure of the reason.

Now you know Janet.

Incidentally, this is another thing that this tinfoil, "conspiracy" site has been warning about for the past 7 years: in lieu of real reform and structural changes, the entire world has relied exclusively on more debt, and thus, permissive lower rates, to buffer the failure of politicians and to thrust all responsibility for "growth" in the hands of central bankers. Seven years later, with growth faltering and the world on the edge of a recession, is it any wonder central bank credibility has never been lower.

It may also be the BIS' code word that it is time for a global, debt jubilee or reset, since the very same central bank policies have made rising rates impractical, and thus "inflating the debt away" is impossible. It only leave bankruptcies as an option. To be sure, the BIS is more nuanced in its wording:

This interpretation argues for an urgent rebalancing of policy to focus more on structural measures, on financial developments and on the medium term. A key element of this rebalancing would be a keener appreciation of the cumulative impact of policies on the stocks of debt, on the allocation of resources and on the room for policy manoeuvre. For it is this lack of appreciation that constrains options when the future eventually becomes today. Intertemporal trade-offs are of the essence.

The problem is that going forward, central banks will have far less room to maneouvre, and if anything, may be forced to tighten policy as further easing may now be frowned upon by markets:

... we witnessed a rotation in financial booms and busts around the world after the crisis. The private sector in the advanced economies at the heart of the crisis slowly started to deleverage; elsewhere, especially but not only in EMEs, the private sector accelerated the pace of releveraging as it left behind the memory of the 1997–98 Asian crisis. Signs of unsustainable financial booms began to appear in EMEs in the form of strong increases in credit and property prices and, as in previous episodes, foreign currency borrowing. Currency appreciations failed to arrest the tide. In fact, as BIS research suggests, they may have even encouraged risk-taking, as they seemingly strengthened the balance sheet of foreign currency borrowers and induced lenders to grant more credit (the “risk-taking channel”).


What we have been witnessing over the past year may be the beginning of a major, inevitable and needed realignment in which these various elements reverse course. Domestic financial cycles have been maturing or turning in a number of EMEs, not least China, and their growth has slowed. Commodity prices have fallen. More specifically, a combination of weaker consumption and more ample production has put further pressure on the oil price. In addition, actual and expected US monetary policy tightening against the backdrop of continued easing elsewhere has supported US dollar appreciation. This in turn has tightened financing conditions for those that borrowed heavily in the currency .

The most eye-opening part in today's report was the BIS' admission that it really is all the central banks' fault in the form of boom-bust cycles "gone wrong" which in turn lead to "long-lasting damage" to wit:

The world has been haunted by an inability to restrain financial booms that, once gone wrong, cause long-lasting damage. The outsize and unsustainable financial boom that preceded the crisis masked and exacerbated the decline in productivity growth. And rather than being the price to pay for satisfactory economic performance, the boom contributed, at least in part, to its deterioration, both directly and owing to the subsequent policy response. The key symptom of the malaise is the decline in real interest rates, short and long, alongside renewed signs of growing financial imbalances.

There is much more in the report which clearly "gets it", even the unpleasant observation what monetary policy failure means for the world's politicians: namely, that they wil finally have to do their job!

The need to rebalance the policy mix puts a greater onus on structural policies. Their implementation, of course, faces serious political economy obstacles. In addition, they do not necessarily yield near-term results, although this depends on the specific measures and their impact on confidence. But they provide the surest way of removing impediments to growth, unlocking economies’ potential and strengthening their resilience.

What this means is that for anyone who thinks we have seen the full extent of populist revulsion to New Normal policies is hang on to your hats cause we ain't seen nothing yet: if the BIS' prescription of the world's ills is taken seriously by policymakers, it means that only now will politicians no longer be able to punt to central banks in lieu of making unpopular, debt-funded decisions, and the result will be an historic surge in popular anger as suddenly the debt-funded welfare state sees its funding to keep the majority content, is no longer quite so generous.

The BIS' conclusion:

A shift to more robust, balanced and sustainable expansion is threatened by a “risky trinity”: debt levels that are too high, productivity growth that is too low, and room for policy manoeuvre that is too narrow. The most conspicuous sign of this predicament is interest rates that continue to be persistently and exceptionally low and which, in fact, have fallen further in the period under review. The global economy cannot afford to rely any longer on the debt-fuelled growth model that has brought it to the current juncture.


A shift of gears requires an urgent rebalancing of the policy mix. Monetary policy has been overburdened for far too long. Prudential, fiscal and, above all, structural policies must come to the fore. In the process, however, it is essential to avoid the temptation to succumb to quick fixes or shortcuts. The measures must retain a firm long-run orientation. We need policies that we will not once again regret when the future becomes today.

As the UK has found out the hard way, it's too late for that now.

* * *

In closing we will remark what we said one year ago today:

If you know anything about the history of the BIS, you know that the bank’s latest annual report is glaringly ironic and somewhat hypocritical. The “bank for central banks” as the highly profitable institution is known, has for decades served as a secretive club for the world’s most influential central bankers. The lavish governors’ weekends hosted by the bank in Basel allow the world’s most powerful monetary policy mavens to discuss the most important issues facing the global financial system in complete privacy with no fear that anything will leak to the public or to the press.


In other words, the BIS serves to encourage and perpetuate the power and prestige of the world’s central bankers and provides a top secret forum for the monetary policy cabal to meet and commiserate safe at all times from the prying eyes of those to whom the bankers should by all rights be accountable.


In this context it’s somewhat absurd that the bank’s annual report — which, as a reminder, is required reading in treasury departments and monetary policy circles around the globe — contains a scathing critique of the very same policies which were no doubt devised, tweaked, and honed over dinner and fine wine in Basel. Nevertheless, the BIS’ latest tome is replete with criticism for the idea that the very people who make up the bank’s Board of Governors are indeed omnipotent.

Last but not least, let's not forget where the world's central bankers were located on Friday morning when they announced the barrage of monetary policy responses they would unleash in the aftermath of Brexit to soothe global capital markets: the 18th floor of the BIS tower.

So you will please excuse us if we ignore this latest annual rant by the BIS against the policies implemented by the BIS' very own board of directors. If anything, we would expect much more of the same failed policies; we certainly will expect even louder and more dire warnings from the BIS one year from today when everything else that central banks unveil between now and June 2017 is implemented, and fails to do anything but keep global equity markets propped up "whatever it takes."

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Troy Ounce's picture



A  bit late, schmucks!

STFU David Cameron: https://www.youtube.com/watch?v=5u5FtriA8tA

Stainless Steel Rat's picture
Stainless Steel Rat (not verified) Troy Ounce Jun 26, 2016 1:27 PM

BIS announcements are for force, not information.  This information is: "This is our agenda!"  And their agenda always becomes manifest.

Manthong's picture

NIRP causes anomalies?

Well, who could ever think something like that?

That can’t happen in the land of magic bankers, unicorns and balance sheets made of pixie dust.

knukles's picture

Somebody there musta started reading The Hedge.

ParkAveFlasher's picture

"...No longer.." lmao.  Debt is for war, and now the war against common sense comes to a terribly inevitable conclusion.

flaminratzazz's picture

Let us create the money from nothing and issue it to the masses with usury attached. Then we shall create more with usury to pay the existing usury. At this time we must create MUCH MOAR to pay the usury of the usury that was borrowed to pay the usury,.,, wow why the fvk do we have so much debt?


 Something must be done.. I guess the goyim have to be loaded into the cattle cars now to pay for all that money they borrowed..

Pinto Currency's picture



The BIS is central to the rigging of the LBMA gold market and thus rigging downward of global interest rates.

They've created the world's greatest debt bubble in history.

We never could rely on a bond bubble for real growth.

Bay of Pigs's picture

"We cornholed some folks..."

The Willian Dudley

OpTwoMistic's picture

“It is not clear how much further stimulus of the real economy can be achieved using monetary-policy tools alone without inviting unwanted distortions.”

Bankster actions have accomplished nothing to grow business. You have only destroyed money.  Now the reaper comes for you. You will hang on your 200 trillion in CDS.

BullyBearish's picture



The next phase of the central banks playbook, with regard to liquidity:





DutchResistance's picture

I'm a financial layman (and increasingly prouder of it every day)

But, you're comment covered  the only thing in my mind for the entire article 

'NIRP causes  problems', whodathukit?

Well said .

JRobby's picture

Uh? Duh!?!?

Like ECON for non-Econ majors.

Please euthanize the entire lot and bulldoze them into a landfill (then build a retail center on top of it to "trap" the off gassing......)

adanata's picture


I'll give you "structrual and financial reforms"; all banks become credit unions or non profit state banks, people use/barter or whatever 'currency' they like but state currency must be backed by gold/silver and y'all just throw yourselves off the roof of that big black building in Basel...

SuperRay's picture

Can somebody please fly a 9/11 military drone into that fucking building. Let's see if it collapses

actionjacksonbrownie's picture

Well, since "money" is actually debt, I guess the BIS figures the global economy no longer requires money. Who knew!??

nibiru's picture

Wow, they needed a lot of time to figure this one out.


After they finally met recently, I wonder, what idea they will try to push now? Maybe new currency after the collapse of EUR?


FinMin's picture

Behead the post-war banking thieves and return their assets to the people of the countries they robbed.

JRobby's picture

Put them in work camps where they will be made busy as laborers rebuilding infrastructure.

knukles's picture

Best point of view, ever.
The Camps are ready .... not like they weren't planning on using them on "the opposition" now, was it?

OpenThePodBayDoorHAL's picture

Brexit was a false flag, first blame the ignorant serfs for "financial instability", then ride in with brand new policies to squeeze them some more, more austerity, bail-ins etc.

And what's the chance the UK Parliament lets anything real happen on Brexit: zero. 

So it's just like US elections, democracy theater. Nothing will change.

Clowns on Acid's picture

The British pound is down 10% in 1 day ...so that has changed. A lot is going to change ... socio-politically in England.

DutchResistance's picture

How can anyone not see the construction and implementation of such a global system is far beyond the doings of mortal man?

Stox's picture

What?  You mean people will have to manage their businesses and affairs the old fashioned way?  By carefully accumulating capital and reinvesting it productively in patiently accretive ways?


Ye gads.


Policy implications (spoiler alert ... none of this will ever happen)

Stop stock buybacks

Kill excessive / micromanagement regulations

Get real on tax policy

Rein in govt spending

Look first to home markets

Look to the long term, not this quarter

Implied Violins's picture

And now, we once again have the BIS pointing out the failures of the current central bank system - one that they created in the first place with the express purpose of causing the very crisis the world is in right now.

I expect them to continue blaming everyone but themselves, while espousing the need for ONE ring to BIND THEM ALL so that this NEVER happens again...

DEATH TO THE MONEYCHANGERS. Kaiser, your royalty check is in the mail.

earleflorida's picture

Nice... way to go Mr. CBcentral

reader2010's picture

"I was enlightened by two papers in particular. Doctoral fellow Moritz Hinsch from Berlin collected what Socrates (470-399 BC) and other Athenians wrote about debt, and the conference’s organizer, Prof. John Weisweiler, presented the new view of late imperial Rome as being still a long way from outright serfdom. The 99 Percent were squeezed, but “the economy” grew – in a way that concentrated growth in the hands of the One Percent. In due course this bred popular resentment that spread in the form of debtor revolts, not only in the Roman Empire but that of Iran as well, leading to religious reforms to limit the charging of interest and self-indulgent greed in general."


I Drink Your Milkshake's picture

Nice link smileyface!

Particularily this last statement:

"That is the protective myth that elites have wrapped around themselves and their privileges from time immemorial. To succeed, it must erase knowledge of history and live in a highly censored “present” in which the financial class takes the land, public infrastructure and government into its own hands."

Caught this in the NYT this AM:


Dovetails nicely into your counterpunch article.

Mini-Me's picture

Let the hangings begin.  This list is a good start.

A82EBA's picture

Since 1984

min wage up 116%

chevy truck up 138%

gold up 229%


Anopheles's picture

A piece of property I bought in 1982 is up 1400% 

Phillpots's picture

THe BIS were always part of the problem. Sorry - They were the fucking problem!

FreeShitter's picture

This is why world war is most likely coming. Bankers take you to war when all else fails.

Anopheles's picture

The world can't rely on debt  = True

Politicians can't get elected without massive, debt financed promises = True


Guess which one wins out every time? 

knukles's picture

So I point out to my Progressive bud that this whole unraveling of The Global Establishment, New World Order is because of the futile actions and policies of the Uber-Progressives of the world, that the UK, et al, are trying to escape the sinking ship, and so he tells me that's racist and it's all Bush's Fault.
To which I replied; "See, that's what I'm talkin' about."
Was like watching fluorescent lights flicker

two hoots's picture

The world could change quickly from here?  Either common people will continue the push or governments will step in to muzzle the masses.  It is likely common people may never get another chance to make such decisions, it is to dangerous for the comfortable ones to allow it.  Look for internet controls, etc.   The work it has placed on the UK/EU governments to unwind this mess is unknowable, never tried and draining.   Interesting times.  Won't know for a couple of earning seasons how this will play out in the biz world.  Global money flow has been disrupted.


flaminratzazz's picture

But I always vote demonrat just like my daddy and his daddy and his daddy before him!

Kat Daddy's picture

Central Bankers play "Good Cop/Bad Cop".  IMF, BIS, World Bank - restraint, moderation, sensible monetary policy.  National Central Banks - reckless, excessive, competitive devaluations for economic advantage. Real story,  coordinated debasement of all currencies until worthless.  Global economic collapse, crisis. Good Cop (BIS, et al) offers solution, One World Currency run by THEM!  Bad Cop, National Central Banks terminated. Welcome to the NWO!

Kat Daddy's picture

Central Bankers play "Good Cop/Bad Cop".  IMF, BIS, World Bank - restraint, moderation, sensible monetary policy.  National Central Banks - reckless, excessive, competitive devaluations for economic advantage. Real story,  coordinated debasement of all currencies until worthless.  Global economic collapse, crisis. Good Cop (BIS, et al) offers solution, One World Currency run by THEM!  Bad Cop, National Central Banks terminated. Welcome to the NWO!

FreeShitter's picture

True.....the E.U represents the old world order, cant have that NWO until all exits cause a collapse now can we.

two hoots's picture


Struck by the obvious.  Send all Central Bankers to rehab otherwise more of the same.   Still leaves governments, not to mention companies, needing the free sugar to survive. How do you fix that without austerity?


They (CBs/gov) must take from the people with to keep their lifestyles/scams going.  The people will be blamed and shamed.  It’s an elite thing, never guilty, never say sorry, always right, always deserving more than others.   We have been screwed. 


Hohum's picture

(1)  Why does the BIS have so little faith?

(2) No one has any idea how the global economy can function without debt, Mises followers included.

(3) Except in fantasy land, no growth in debt means no growth.


Phillpots's picture

Lets all have a little think (nay lets all do a little research) on Switzerland???????

Some really interesting facts seem to pop up in this geo-political world.

cheech_wizard's picture

Let the finger pointing begin in earnest... (last refuge of the truly guilty)

Bluntly Put's picture

Central Bankers bemoan failure of central banking claiming they can better centrally plan given more power and authority.

Kat Daddy's picture

Futhermore, fiat national debt forced onto the taxpayers without their consent deserves to be reputiated and the perpetrators of this fraud pusished!

Kagemusho's picture
BIS played all sides during WW2: Anglo-American Money Owners Organized World War II  http://www.voltairenet.org/article187508.html

To mark the 70th anniversary of the Victory against Nazism, we publish a study of Valentin Katasonov on financing of the NSDAP and the rearmament of the Third Reich. The author deals with new documents that confirm the organization of the Second World War by US and UK Bankers, covered by President Franklin Roosevelt and Prime Minister Neville Chamberlain, in the hope of destroying the USSR. This study raises new questions that will be addressed in a future article.

emersonreturn's picture

kagemusho, fascinating link.  thank you.