BIS: Start Austerity ASAP

The Bank for International Settlements showed concern over the weekend that financial markets are becoming addicted to monetary and fiscal stimulus, stripping governments of the political will to move toward increased austerity. With stock markets rallying thanks to stimulus from the central banks of the US, Europe and Japan, volatility has fallen and corporate bond spreads are tighter. But, “the outlook of the real economy has not improved, mainly because of monetary and fiscal accomodative policies,” according to the BIS.

“The fact that market dynamics have become ever more dependent on central bank and government stimulus is a cause for concern,” Stephen Cecchetti, BIS economic adviser and head of the monetary and economic department, said in a conference call. “Importantly, expansionary policy, especially central bank accommodation, cannot solve structural problems”.

Cecchetti noted that global debt has risen by 30 trillion dollars and 40 percent of the GDP since 2007. “With monetary and fiscal policies reaching their own limits, it is important to lay the foundation for strong sustainable growth,” he said.  “The payoffs of these structural reforms will only accrue over time. So we have to get started as soon as possible.”

“Increasing public and private debt ever further until we are not able to fund it is not a substitute for these reforms.”

Also included in the report is that the global banking system is more cautious when giving foreign loans, as cross-border lending increased at its slowest rate in 14 years due to fewer loans to financial firms within the euro-zone.  BIS, the world record keeper, increased cross-border assets by $33 billion, or 0.1 percent, in the three months through September.

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