Global bankers freakout

Posted By Darren Winters on Sep 26, 2019

Global bankers freakout

Global bankers freakout on stage could yet be another red flag that the endgame is nearing and depending on how bearish you are that could range from the last buck of the longest secular stock bull market in living memory to an entire global financial reset.

Global bankers freakout publicly overspent monetary policy is somewhat unprecedented.

Claudio Borio, Head of the Monetary and Economic Department at the BIS, published the BIS Quarterly Review, September 2019 on Sunday.

The BIS is the central bank for bankers. In other words, Claudio Borio is a big fish in a big pond and he is the latest addition to join the global bankers freakout list

Some of our regular readers may remember that ECB President Mario Draghi said earlier this month that “it’s high time for the fiscal policy to take charge.” Put simply Draghi has admitted that monetary policy is spent. 

BIS’s Claudio Borio is the latest addition to the global bankers freakout list to fret over an unstoppable surge in negative yields which reached $17 trillion in August, equivalent to roughly 20% of world GDP

Global bankers freakout

The takeaway from the BIS Quarterly Review, September 2019 is that negative interest rates have reached “vaguely troubling” levels, according to BIS’s Claudio Borio.

Negative yielding bonds means that investors are guaranteed to lose money. The 10 year German and Swiss bonds already have negative yields.

When the central bank for central banks sets off a distress flare, in the form of a quarterly review, it would be reckless for investors not to take note.

The global negative-yielding debt chart is what BIS’s Claudio Borio is freaking out over.

This unstoppable surge in global negative-yielding debt is going to adversely impact everyone irrespective of where they stand in the wealth distribution curve. But it is retirees, people dependent of what used to be a low-risk reliable source of income, government bonds, who will be the worst impacted. Moreover, with the aging population in advanced economies that is likely to be a lot of people. What was perceived to be haven government bonds are now so overbought, courtesy of the central bank’s unprecedented monetary easing policy that they are negative-yielding.

So a macro trend of an aging population which typically demands fixed income instruments in conjunction with the central bank’s massive monetary easing policy has created the bubble of bubbles in the bond market. 

Outgoing ECB President Mario Draghi sums up the coming pension apocalypse. “We are very concerned about the pension industry and related services. Negative rates are necessary instruments of monetary policy. It has created a lot of positive effects. How do we speed up these effects so that interest rates can go up? The answer is fiscal policy” tweeted Draghi 

Put simply, the bond bubble is a part of the global bankers’ freakout story, bearing in mind that bond prices and their yields move in the opposite direction

So the BIS, the central bank for central banks is telling the world that monetary policy can not come to the rescue in the next crisis. 

BIS’s Claudio Borio said that the effectiveness of monetary policy is severely waning and might not be able to counter the global downturn.

“The room for monetary policy maneuver has narrowed further. Should a downturn materialize, monetary policy will need a helping hand, not least from the wise use of fiscal policy in those countries where there is still room for maneuver,” said BIS’s Claudio Borio.

Bank of France Gov. François Villeroy is also on the global bankers’ freakout list. “The ECB’s monetary policy is doing its duty, but it can’t do everything, and it certainly can’t perform miracles” said the Bank of France Gov in a recent interview with Swiss media. 

But negative-yielding bonds and negative interest-rate policy (NIRP) is a far cry from doing a miracle, it could be detrimental to the system. NIRP and negative bond yields suck liquidity out of the system. Think about it. If the bank is charging you money for keeping a deposit then why not withdraw the cash and store it in a vault? If the government charges investors to lend to them then why lend to the government?

Global bankers freak out because they can no longer hide the reality, that the system is broken

So is the solution fiscal policy, unimaginable fiscal spending

as suggested by former ECB President Draghi and his successor Christine Lagarde who called on European governments to co-operate more closely over fiscal policy. 

“Central banks are not the only game in town”, said Lagarde. “I’m not a fairy”, she added. Lagarde is urging richer eurozone governments with low deficits to spend more during downturns. In remarks aimed at rich economies like Germany and the Netherlands, she said governments who “have the capacity to use the fiscal space available to them” should spend on improving their infrastructure.

But fiscal policy doesn’t have much elasticity, particularly in the fragile eurozone with rising popularism. With signs of a recession looming more austerity in the peripherals to service the already ballooning budget deficit won’t bode well. 

Equally, the relatively rich northern neighbors won’t want to lend more to their neighbors in the south so that they can maintain their level of public spending. This political dynamics could see another wave of Euroscepticism in a recession and potentially a fractioning of the EU as countries decide that they want to go back to their national parliaments to determine fiscal policy. 

So fiscal spending is likely to be unpopular with taxpaying voters in the north. Moreover, further austerity in the south would lead to national deficit targets set in Brussels being breached. 

Europe’s sovereign debt crisis, spurred on by fiscal expansion could be the next global banker freakout story, as it was almost a decade ago

Remember Draghi’s famous words “whatever it takes” to save the euro. 

But what are the alternatives when all policies fail and global bankers freakout?

Can you hear the drumbeats of war?

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