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The BIS adds to the financial turbulence and should be disbanded

In 2014, it was apparent that the Bank of International Settlements (BIS) had made itself part of the ideological wall that was blocking any reasonable recovery from the GFC. I wrote about that in this blog – The BIS remain part of the problem. I was already concerned in 2013 (see this blog – Since when did the BIS become the Neo-liberal Ministry of Misinformation?). Things haven’t improved and the latest statements from the Bank in the BIS Quarterly Review (March 6, 2016) – Uneasy calm gives way to turbulence – demonstrates two things that are now obvious. First, that the neo-liberal Groupthink that created the crisis in the first place, and, which has prolonged the malaise continues to dominate the leading international financial institutions. Second, not only are these institutions (and I include the OECD, the IMF, to BIS, among this group) impeding return to prosperity as a result of their continued adherence to failed macroeconomics, but worse, their patterned behaviour actually introduces new instabilities that ferment further crises. Someone should be held accountable for the instability these organisations cause, which, ultimately leads to higher rates of unemployment and increased poverty rates.

The UK Guardian article (from Agence France-Presse) yesterday (March 7, 2016) – ‘Gathering storm’ for global economy as markets lose faith – demonstrated how damaging these international organisations can be when they make pronouncements that have no real basis in a robust macroeconomics but, instead, reflect the pattern responses that neo-liberal Goupthink invokes.

It claims that the BIS has shown that are new crisis “has long been brewing” and that “investors were concerned governments around the world were running out of policy options”.

The Guardian article chose to merely be the mouthpiece for the BIS rather than present a critical scrutiny of the foundation of the information it was passing on to its readers.

This is become a typical problem whereby readers are misled by the media who purport to provide information when in fact it is just spreading propaganda without scrutiny at all.

The BIS Quarterly Review article discusses the recent financial market turbulence which featured “one of the worst stock market sell-offs since the financial crisis of 2008”.

It claims that:

Underlying some of the turbulence was market participants’ growing concern over the dwindling options for policy support in the face of the weakening growth outlook. With fiscal space tight and structural policies largely dormant, central bank measures were seen to be approaching their limits.

Where is the evidence for the “growing concern”?

Some journalist interviews some official from one of the corrupt ratings agency that have a vested interest in promoting a sense of crisis because then they can grandstand in the press about downgrading warnings or even get headlines when they downgrade Japanese government debt or whatever.

It is all a fantasy world where those trapped inside the Groupthink make self-reinforcing statements (as if they are evidence), which then feed statements by others in the same club, which then reverberate back into futher self-reinforcing statements and so the ridiculous charade continues.

The problem is that the more dim operators in the financial markets who take these nonsensical statements on authority then act and these dimwits have too much cash to play with and thus create ‘turbulence’, which invokes a sense of crisis. QED, that was the intention – profit soars, CEO bonuses soar, and the rest of us live in fear of our jobs.

A totally confected crisis.

Further, upon what basis can we conclude that there are “dwindling options for policy support in the face of the weakening growth outlook”?

Again, this is a totally made up situation or issue.

It is built on several layers of myth. First, that so-called ‘structural policies’ are an appropriate vehicle for conducting counter-stabilisation policy “in the face of the weakening growth outlook”.

These policies are microeconomic-focused and work (if at all) over the long-term. For example, a desirable structural initiative would be for government to increase the quality of education or health. Or, it might introduce a policy framework that allows industry to reduce its reliance on carbon-sourced energy and shift to renewables more quickly.

These policies will make the society better in the long run and help the economy operate in a more sustainable and inclusive manner.

But they are not meant to be ways to smooth out the non-government spending cycle to ensure that aggregate spending remains consistent with full employment – that is, to act in a counter-stabilising fashion.

Further, what the BIS and its mates in Paris and Washington mean by ‘structural policies’ typically involve attacks on workers’ pay and conditions, reductions in pension entitlements, and harsher income support rules (to push people off).

While these sorts of policies directly attack the well-being of a vast number of people, they also act in a negative way on the spending cycle (and long-run growth). If economic growth is slowing it must be because spending is insufficient at the aggregate level and firms have responded by cutting production and employment.

Cutting incomes and pensions make that situation worse.

Also, over time, these attacks undermine the morale of the workforce and this typically translates into lower productivity growth, which reduces potential real GDP growth over time and makes an economy more susceptible to inflation once spending growth increases.

Second, what is the assertion that “fiscal space …[is] … tight” based on? You guessed it – another set of circular statements that begin with a lie.

That lie is that currency-issuing governments have to do raise taxes or borrow from the private bond markets in order to spend and cannot sustain public debt levels in excess of around 80 per cent of GDP.

The IMF define – Fiscal Space – to be the :

… room in a government´s budget that allows it to provide resources for a desired purpose without jeopardizing the sustainability of its financial position or the stability of the economy. The idea is that fiscal space must exist or be created if extra resources are to be made available for worthwhile government spending. A government can create fiscal space by raising taxes, securing outside grants, cutting lower priority expenditure, borrowing resources (from citizens or foreign lenders), or borrowing from the banking system (and thereby expanding the money supply). But it must do this without compromising macroeconomic stability and fiscal sustainability – making sure that it has the capacity in the short term and the longer term to finance its desired expenditure programs as well as to service its debt.

It is always good to work with first principles as they will rarely lead you astray. They cut out all the humbug in the media, the statements by politicians and the ideological ravings of vested interests.

Here are the relevant first principles, which many of you will know well by now.

In a fiat monetary system where the national government issues its own currency and floats it on international markets:

  • A sovereign government is not revenue-constrained which means that fiscal space cannot be defined in financial terms.
  • The capacity of the sovereign government to mobilise resources depends only on the real resources available to the nation.
  • A currency-issuing government can always meet the liabilities it issues in its own currency.
  • Nations that have ceded their sovereignty by entering currency zones (such as the Eurozone); by dollarising their currencies; by running currency boards; and similar arrangements clearly are not sovereign and face the same constraints that a country suffered during the gold standard era.

In the real world, rather than in the mainstream macroeconomics textbooks, the concept of fiscal space is real, not financial.

The great Polish economist, Michał Kalecki (in his 1943 article – Political Aspects of Full Employment – Page 348) wrote that:

It may be asked where the public will get the money to lend to the government if they do not curtail their investment and consumption. To understand this process it is best, I think, to imagine for a moment that the government pays its suppliers in government securities. The suppliers will, in general, not retain these securities but put them into circulation while buying other goods and services, and so on, until finally these securities will reach persons or firms which retain them as interest-yielding assets. In any period of time the total increase in government securities in the possession (transitory or final) of persons and firms will be equal to the goods and services sold to the government. Thus what the economy lends to the government are goods and services whose production is ‘financed’ by government securities. In reality the government pays for the services, not in securities, but in cash, but it simultaneously issues securities and so drains the cash off; and this is equivalent to the imaginary process described above.

Kalecki understood this in 1943! Yet, economists still fail to understand it some 70 years later. All the sham institutional frameworks that disguise the essentials, the government just borrows what it has spent into existence in the past.

So while the IMF might spend hours of labour time coming up with cute estimates of ‘fiscal space’, which show very little is available, and idiots at the BIS just pass this misinformation on in their official publications, and journalists and editors at Agence France-Presse or the UK Guardian then complete the chain of lies and pass the nonsense on to their readers, the fact is that there is no financial concept of fiscal space that will stand scrutiny for currency-issuing governments.

They might face political constraints. But these have generally emerged because the politicians themselves have continually bombarded their electorates with the same sort of lies that the IMF pumps out.

So the nonsense then becomes a self-reinforcing ‘authority’, which restricts the political capacity of governments. As we saw in the early days of the GFC, governments quickly became pragmatic and introduced rather large fiscal stimulus programs in many countries and the electorate didn’t blink an eyelid.

The only fiscal limits on growth at the moment are those that are voluntarily being imposed by governments trapped in this destructive neo-liberal Groupthink.

The fiscal space for any currency-issuing government, is in the first instance, defined by the pool of mass unemployment within any particular nation.

Millions of people remain without jobs as a consequence of the deliberate policy restrictions that politicians have acceded to under pressure from the likes of the morons at the BIS.

There is massive fiscal space available to bring these idle labour resources back into productive use and earning incomes through large-scale public employment initiatives and significantly higher levels of public infrastructure spending.

Even in the Eurozone, where the Member States surrendered their fiscal sovereignty, there is still massive fiscal space available if the ECB abandoned its neo-liberal approach and instead funded increased Member State deficits.

In my current book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale – I show how that could be done even within the restrictive rules of the current treaties.

The ECB could simply announce that it will buy all public debt issued, the purchasers taking place in the secondary market to work around the so-called ‘no bailout clauses’ and the European Commission could simply agree that the rising deficits were to meet extraordinary circumstances, thus circumventing the mindless Excessive Deficits Mechanism rules and procedures.

Before long, the Eurozone nations would be increasing employment and enjoying higher real GDP growth and observing the individual fiscal deficits of the Member States declining as the increased tax revenue (by the automatic stabilisers) responded to higher employment and levels of economic activity.

The only thing preventing that fortuitous outcome is the Neo-liberal Groupthink that the European policymakers remain trapped within.

Please read (among others):

1. The ‘fiscal space’ charade – IMF becomes Moody’s advertising agency

2. Fiscal space is a real, not a financial concept

3. Fiscal policy is the best counter-stabilisation tool available to any government

4. Fiscal responsibility index – reductio ad absurdum ad infinitum

5. Bad luck if you are poor!

Third, the reference to “central bank measures were seen to be approaching their limits” is just a corollary of the lie that fiscal policy has no ‘space’ is to stimulate growth.

I have written about the obsession that the Groupthinkers have with monetary policy, which is just a reflection of their obsession with inflation and their dislike for fiscal interventions that might expand the size of government.

For example, recently, I wrote the following blogs – We are being led by imbeciles and The ECB could stand on its head and not have much impact – which bear on the topic.

Despite all the manipulations of conventional and non-conventional monetary policy instruments, the impact on real GDP growth in most countries has been muted.

So it is no surprise that people are beginning to ask what the hell is going on with central banks purchasing massive volumes of financial assets from the non-government sector in return for the instant creation of bank reserves yet real GDP growth appears to be slowing.

Of course, it’s no surprise that the monetary policy changes have been largely ineffective in terms of counter-stabilisation objectives.

Any understanding of the way the monetary system and the banking system within it operate would lead one to make that conclusion in advance of any policy change.

Please read the following blogs – Building bank reserves will not expand credit and Building bank reserves is not inflationary – for further discussion.

The fact that anyone is expressing concern or surprise about this now indicates that they have been caught up in a smokescreen of deceit peddled by the Groupthinkers, including the likes of the BIS economists.

The UK Guardian quoted the ‘BIS chief’ as summarising the message of the BIS article:

Against the backdrop of a long-term, crisis-exacerbated decline in productivity growth, the stock of global debt has continued to rise and the room for policy manoeuvre has continued to narrow.

There is no differentiation between public and private debt. The GFC was a private debt problem and that problem remains. It will be made worse if governments try to reduce their fiscal deficits and squeeze growth, which, in turn, squeezes non-government incomes and the capacity to repay debt.

There is no differentiation between the public debt of sovereign nations and the debt held by Eurozone nations. The latter are highly exposed to credit risk because the debt is in a foreign currency – the euro.

There is no recognition that the fiscal austerity has cruelled private sector capital formation (investment), which has, damaged productivity growth.

Further, so-called internal devaluation policies (aka wage attacks etc) have reduced the incentive for firms to invest in labour-saving (higher productivity) technologies.

They have also undermined morale.

There is no sense to the claim that higher public debt ratios reduce “the room for policy manoeuvre”.

As I explained in my recent blog – Japan – another week of humiliation for mainstream macroeconomics – they are now borrowing from private bond investors at negative rates for the next 10 years!

And … there are long queues of investors wanting to get hold of this debt – where they pay the government to borrow!

When is that reality going to sink in?


The problem is that the BIS is now contributing to the general climate of uncertainty by continuing to propagate these myths.

The financial markets are full of lemmings who run to the cliff at the slightest fright. In essence, falling sharemarket prices should have little impact on the real economy and, at any rate, the sovereign govenrment can always minimise any real effects spilling over anyway.

But, with governments poised to inflict further damage via fiscal cutbacks, and everyone seeing the impotence of monetary policy, the conclusion that things are out of control again is easy to make.

Then the BIS come out – lying – and tell us that things are out of control – and the lemmings race for the nearest cliff.

That is enough for today!

(c) Copyright 2016 William Mitchell. All Rights Reserved.

This Post Has 11 Comments

  1. But things are out of control. Were they ever under control? Not in the current system.

    I support MMT principles but it is well overdue for progressive economists to espouse a low or no growth system.
    MMT should merge well into such a system. Our survival as a civil society depends on progressives thinking outside the square.

  2. Great post … I particularly liked this line;
    “If economic growth is slowing it must be because spending is insufficient at the aggregate level and firms have responded by cutting production and employment.” this sums it up perfectly. The last 30 years have seen the use of private debt to cover an ever increasing proportion of spending, whilst incomes have fallen for various reasons, and it has also allowed profits to rise. But we are now in a pinch. We are hitting the point of peak private debt, which then effects spending. More private debt, the neoliberal appraoch, wont work, so we need to redistribute income, or generate more (public sector) jobs and better pay, or have private debt jubillees to reduce debt and increase spending again. Neoliberalism does not support the alternative approaches, so instead they are pushing on a string requiring more private debt. What a crazy situation. Solutions are there, but instead they are ignored.

  3. Bill,
    The lemmings can be “fleeced” as they go over the edge hence the old IBM sales pitch of Fear, Uncertainty & Doubt that the finance industry promulgates along with their political allies and institutions.

  4. “There is no recognition that the fiscal austerity has cruelled private sector capital formation (investment), which has, damaged productivity growth.”

    Is the U.K. an exception with regard to ‘investment’?

    “The depth of the crisis was reached in the spring and summer of 2009, and we now have the initial estimates for the economy for the same period in 2015. GDP as a whole increased by £100bn over the period, after allowing for inflation, a rise of nearly 13 per cent. Companies spent an additional £32bn on new investment in 2015 compared to the same period six years ago. In percentage terms, this was by far the fastest growing sector of the economy, up by 26 per cent. By contrast, consumer spending grew by only 10 per cent, less than the economy as a whole. It has been an investment-led recovery, with the role of public spending negligible. “

  5. The language framing of economics always uses analogies from weather systems or organic processes of nature (green shoots/gathering storm/turbulence) which conveys something outside human control and endeavour. When in reality we haven’t worked out what is really within our decision making and what is genuinely outside it (i.e when ‘natural’ limits are reached). This language maintains myths that perpetuate vested interests of rentier, wealth-syphoners.

  6. “The capacity of the sovereign government to mobilise resources depends only on the real resources available to the nation.”

    Apropos an interesting talk I went to last night, real resources are the problem.

    By real resources we mean the productive capacity of the nation’s manufacturers and service industries, and the workforce available to man them. Plus energy – or more particularly the raw materials to produce that energy.

    Whilst the government can issue all the currency it likes, it is to no avail if the factories have the plant, equipment, raw materials and workforce to produce widgets but their electricity has been turned off.

    Here in the UK the government is already talking about restricting the hours factories can have access to power (not quite synonymous with energy but it’ll do), and the French energy firm EDF are considering pulling out of the deal to build a nuclear power station at Hinckley Point which would supply 12% of our nation’s energy. Meanwhile we’re shutting down all our coal-fired generating plant.

    I’m not saying there isn’t enough energy in the world – there may not be but I’m optimistic. I read a book by Leonardo Maugeri who was oil exploration chief at the Italian Energy firm ENI, who says that we have so far only found a third of the world’s oil resources. I’m saying we are rapidly reaching the limit to the amount of energy we can produce. Albeit we are getting increasingly efficient at using it.

    And the weather is lovely up here on the planet Zog.

  7. I don’t understand the Kalecki notion of the government simultaneously issuing securities to drain off cash. Why the two step operation? Isn’t draining cash what tax does? I have heard the Fed in the US has to sell securities to the value of the budget deficit, but that is just an ignorant Congress request. The mention of government “borrowing” seems an unnecessary idea. The government never needs to save or borrow its own currency. Yes?

  8. Dear Larry (at 2016/03/08 at 19:38)

    Cruelled is the correct usage.

    Check the dictionary – it means “to spoil or ruin (an opportunity or a chance of success).”

    best wishes
    ps I fixed the incomplete sentence and deleted your comment. Thanks very much for the proofing! Appreciated.

  9. Great post Bill. As I have to deal with these BIS reports all day long, I share your frustation with the ongoing confusion about public-private debt, sovereign-non-Sovereign debt, and the lack of fiscal Space. Only recent light on the horizon is turn-around in positions and Call for more fiscal expansion, especially Public Investments from OECD and IMF. But only half-hearted as their basic position is the same, i.e. consolidation is required in the medium term. Really impressed by your ongoing series for New book and additional posts.

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