Yesterday I was going through a very interesting piece delivered by Jaime Caruana . General manager of the Bank for International Settlements (BIS) and he also hold the position in the past to be a former governor of Bank of Spain.
Well the message from the report of BIS is very clear that not enough being done to repair finances of Banks & Governments – cheap central-bank money props up the lame ducks. Another major remark from BIS was Cheap money in UK, US and euro zone is contaminating emerging economies.
Before going forward I would try to avoid the confusion BIS is Bank for International Settlements, central bank’s central bank, not Cable’s outfit for those who heard the name for the first time.
Mr Caruana argued that benefits for more “extraordinary monetary easing”—stepped-up central bank purchases of long-term government bonds, for instance—are shrinking and becoming less certain and that the potential for unwelcome side effects is growing.
The 3 major risk that he identified are : –
1) That “prolonged monetary stimulus makes the necessary fiscal and structural adjustments seem less urgent” by making it easier for governments and banks to put off painful but necessary changes.
2) That “the financial-stability risks of protected low-interest rates could be significant” as financial institutions and investors take ever-greater risks in search of higher yields.
3) That central banks may find it difficult to “calibrate and implement the tightening of monetary policy that will inevitably be required,” which, in turn, could produce another credit bubble or an outbreak of inflation.
The above risks clearly raise the alarm bell that relying only on central bankers but failing to act on other fronts would ultimately damage confidence and increase the risks to macroeconomic and financial stability.
May be the time has come where the Countries with the weakest fiscal positions and those most dependent on borrowing from foreigners will have to move quickly.
Stronger economies, particularly those “too dependent on exports,” could be Germany and China—should “re-orient” their economies to rely more on domestic demand.
Please find the complete report click on the link: Bank for International Settlements (BIS)