{"id":63257,"date":"2026-07-09T15:26:05","date_gmt":"2026-07-09T05:26:05","guid":{"rendered":"https:\/\/billmitchell.org\/blog\/?p=63257"},"modified":"2026-07-09T15:26:05","modified_gmt":"2026-07-09T05:26:05","slug":"bank-of-international-settlements-pushing-the-growth-friendly-austerity-myth","status":"publish","type":"post","link":"https:\/\/billmitchell.org\/blog\/?p=63257","title":{"rendered":"Bank of International Settlements pushing the ‘growth friendly austerity’ myth"},"content":{"rendered":"

I have been ‘at it’ for decades now but it never ceases to amaze me how mainstream macroeconomic analysis is carried out and the way the public just accepts the conclusions without understanding the basis on which the analysis generates those conclusions. Chapter II in the BIS Annual Economic Report (released June 28, 2026) – High public debt and shifting financial markets: challenges for central banks<\/a> – exemplifies this point. The conclusions are rather stark but they all flow on some key assumptions that could be varied at any time by the government, which would nullify the conclusions. In other words, the projections of crises and monetary emergencies are all predicated on the assumption that the government would not step in with its unique capacities to prevent the catastrophe. In what world would we think that would happen? Not the real world, and the GFC and pandemic are recent examples where the alleged constraints are jettisoned by government in the blink of an eye.
\n<\/p>\n

The proposition that the Bank of International Settlements (BIS) want to push is that:<\/p>\n

1. “Government bond market liquidity can be ample for prolonged periods, yet dry up quickly in response to shocks, raising borrowing costs. As a result, fiscal space may shrink well before any limit implied by long-run fundamentals is reached.”<\/p>\n

2. “central banks might find fulfilling their mandates more difficult.”<\/p>\n

3. “as investors reassess fiscal sustainability and market liquidity, sovereign yields may swing more sharply and frequently.”<\/p>\n

4. “higher interest payments can also worsen the fiscal outlook, lift risk premia and tighten financial conditions.”<\/p>\n

5. “central banks may need to step in more often to address market dysfunction in repurchase agreement (repo) and government bond markets … could encourage investors to take on more risk and borrow more, increasing the fragility of the financial system. They could also weaken the market discipline that constrains fiscal excess. And, in an inflationary environment, such interventions could make it harder to stabilise inflation.”<\/p>\n

6. “governments must move towards a more symmetric fiscal policy, supporting the economy in downturns but rebuilding fiscal buffers in expansions.”<\/p>\n

7. “For countries with high debt levels, credible medium-term fiscal frameworks are needed to ensure that fiscal consolidation takes place.”<\/p>\n

Taken together it is really the same old story dressed up as if it is a new discovery.<\/p>\n

Essentially, governments must<\/strong> issue debt when they run fiscal deficits, if bond market investors think the debt is too high, bond yields will rise and the government will enter crisis and not be able to fund its net spending.<\/p>\n

If central banks step in and buy the government debt thus driving bond yields down towards zero or below then governments will lose fiscal discipline and go wild and cause inflation.<\/p>\n

Same old story.<\/p>\n

Near record-high public debt<\/h2>\n

The BIS note the obvious:<\/p>\n

\nPublic debt in many economies has risen to near post-World War II highs …\n<\/p><\/blockquote>\n

They cite the GFC, the Pandemic, the Russian invasion of Ukraine, as the causes.<\/p>\n

The inference is that this is a problem of government – “fiscal consolidation has been insufficient or delayed, while in others \u2013 notably in the United States \u2013 fiscal policy turned strongly expansionary in the years preceding the pandemic.”<\/p>\n

But if one reflects on it more deeply, what the BIS calls “fiscal expansion to protect jobs and preserve the purchasing power of households and firms”, I call the failure of Capitalism to provide stability.<\/p>\n

In other words, the fiscal deficits and rising debt have been the direct result of a production system that is subject to periodic crises as a result of the singular goals of capital – to advance their own short-term interests at the expense of all else.<\/p>\n

The BIS should be applauding the fact that governments have used their fiscal capacity to maintain jobs and incomes.<\/p>\n

Without that support, where would the world be now?<\/p>\n

Asymmetric fiscal policy<\/h2>\n

The BIS also rehearses the standard mainstream line (and a view held by most ‘Post Keynesians’) that fiscal policy should be symmetric over a full economic cycle:<\/p>\n

\nWhile countercyclical fiscal policy is a standard prescription for stabilising output, fiscal policy often responds aggressively and countercyclically when output is below potential but fails to adjust symmetrically in expansions.\n<\/p><\/blockquote>\n

What is the issue here?<\/p>\n

The argument is that it is okay for government to increase its net spending (increase the fiscal deficit) and take on more debt if the private spending cycle is weak.<\/p>\n

In other words, the increase in public net spending fills the spending gap left by the weaker private expenditure growth.<\/p>\n

However, the mainstream economists say that the government should move (symmetrically) into fiscal surplus one the trough of the cycle has passed and retire debt.<\/p>\n

The aim is that over the entire economic cycle, the government runs a balanced position and there is no net increase in the outstanding public debt.<\/p>\n

However, this ignores the fact that the private spending gap, while certainly exhibiting cyclical behaviour – falling when non-government spending is strong and vice versa – also typically has a structural characteristic exemplified by the desire of the non-government sector to net save overall.<\/p>\n

That means that fiscal deficits have to be the norm rather than the exception and a fiscal stance that targets fiscal surpluses will usually result in suppressed economic activity and chronic involuntary unemployment.<\/p>\n

So the meagre fact that following the GFC or the Pandemic that fiscal deficits remained does not indicate lax policy but rather the necessity to balance the net saving desire of the non-government sector.<\/p>\n

Fiscal sustainability<\/h2>\n

The BIS also assert:<\/p>\n

\nWhether fiscal pressures will prove manageable depends on how borrowing costs evolve. Two factors are key: (i) the structural demand for government bonds … and (ii) the capacity of the financial system to intermediate that demand …\n<\/p><\/blockquote>\n

First, it is clear as they note that “Structural demand for government debt is likely to remain strong” – I regularly publish bid-to-cover ratios for various nations, which reflect the strength of demand for public debt issues at the time of auction relative to supply, and they are usually close to 3.<\/p>\n

3 times the demand relative to supply.<\/p>\n

The BIS conject that various things could lead to investors avoiding government debt – ageing population reducing saving rates, shift to higher spending on health care and pensions, geopolitical tensions, etc.<\/p>\n

Their conclusion is that these factors may reverse “downward interest rate trends sooner than demographics and other structural factors alone would suggest”.<\/p>\n

This is just a typical mainstream ploy that doesn’t want to admit there is no problem and so sows some vague maybe-type doubt that is unspecified in causality and timing.<\/p>\n

There will always be a demand for the only risk-free financial asset other than cash that is on offer.<\/p>\n

Further, if for some reason investors stopped bidding for the government debt, then the central bank could be instructed to buy it all – as happened in many countries during the pandemic.<\/p>\n

And even more obvious – if there was for some unforeseen reason a major crisis – the government could simply announce it was changing the voluntary procedures it has in place to match its net spending with debt issuance.<\/p>\n

That is, just instruct its central bank to credit bank accounts as usual while also instructing their debt management agencies to terminate the debt auctions.<\/p>\n

No sensible system would allow itself to deconstruct as a result of voluntarily-imposed restrictions that they could change in a heartbeat.<\/p>\n

And recent history has examples of such interventions.<\/p>\n

Second, the BIS introduce more ‘maybes’:<\/p>\n

\nThe capacity of banks and NBFIs to intermediate and hold government debt may vary over time and can be affected by shocks to either the government or the financial sector. Fiscal space may therefore shift and borrowing costs may spike well before any limit implied by longterm structural factors is reached.\n<\/p><\/blockquote>\n

As before.<\/p>\n

The banks are typically required under regulative systems to hold government debt for prudential purposes.<\/p>\n

A government can always ensure that remains as a banking licence requirement.<\/p>\n

But even if the banks fluctuate in their desire to hold such debt, the central bank has infinite (minus a cent) capacity to hold it.<\/p>\n

There is no question about that.<\/p>\n

So even if ‘fiscal space’ was defined in terms of the capacity of the government to sell its debt, there can never be a limit to that if its central bank stands ready to buy it.<\/p>\n

Again, recent history has examples of that capacity being used.<\/p>\n

And I repeat the point about voluntary constraints (say on central bank bond purchases or debt being issued to match deficits) being wrongly cast as some sort of ‘natural’ or immutable restrictions.<\/p>\n

They are not immutable and we have many examples when they have been varied when the need arises.<\/p>\n

The BIS analysis is full of ‘may happens’ and statements like this:<\/p>\n

\nThis makes it difficult to identify a single threshold beyond which debt becomes unsafe.\n<\/p><\/blockquote>\n

They cite examples though:<\/p>\n

1. “high debt ratios can indicate solvency vulnerabilities” – not for any currency-issuing government that issues debt in its own currency.<\/p>\n

2. “a high proportion of debt denominated in foreign currency” – obviously but this is abnormal.<\/p>\n

Further, when say Argentina’s government defaulted on all foreign currency debt in 2001, its immediately improved its domestic situation using its own currency.<\/p>\n

The foreign creditors lost out while domestic growth and employment returned quickly.<\/p>\n

3. “Large current account deficits can also signal dependence on external financing that can reverse abruptly” – the financing in this case is not for the government deficits but the imports in excess of exports, which is an entirely different problem.<\/p>\n

“financial conditions determine fiscal space”<\/h2>\n

That is a quote from the BIS, which is patently wrong for currency-issuing governments.<\/p>\n

The BIS logic is standard:<\/p>\n

1. If the balance sheets of banks are “weak” they will only take on extra debt if yields rise because the risk is higher.<\/p>\n

2. When borrowing costs rise for government, its fiscal capacity will “shrink”.<\/p>\n

First, this assumes that the government debt carries credit risk like other assets that are on the bank’s balance sheet.<\/p>\n

The evidence is clear – when market volatility is high and balance sheets of private financial corporations are compromised, there is a flight to the risk-free asset away from other risky assets.<\/p>\n

That is, exactly the opposite dynamic to the BIS logic.<\/p>\n

And, the BIS admit that “central bank backstops” can stop yields rising if desired and the only complaint they then cite are:<\/p>\n

\n.. moral hazard related to central bank interventions.\n<\/p><\/blockquote>\n

So it really distills down to that argument.<\/p>\n

Reading between all the doom projections, we understand (as the BIS understand) that a currency-issuing government can never run out of currency, regardless of what the bond markets or the private banks do, as long as the treasury and central bank functions of government coordinate their capacities.<\/p>\n

Their problem then is that we cannot trust governments not to go wild with their currency using their central bank as the backstop.<\/p>\n

And why would a government that wanted to remain in power deliberately drive their economies into catastrophic states?<\/p>\n

Some might (and do) but most don’t.<\/p>\n

But the more important here is that fiscal space cannot be meaningfully defined by a financial ratio for a currency-issuing government.<\/p>\n

The capacity to net spend in nominal terms is infinity minus a cent.<\/p>\n

But the desired net spending is defined in terms of the spending gap – which relates nominal spending growth to the growth in productive capacity.<\/p>\n

In other words, we are talking about the availability of real resources.<\/p>\n

A spending gap means there are productive resources (labour etc) that are not being fully utilised.<\/p>\n

The fiscal expression of that state is that the fiscal deficit is too small relative to the desires of the non-government sector to spend and save.<\/p>\n

So if there is a spending gap, then there is fiscal space regardless of whether the government has run large deficits or not in the past.<\/p>\n

Once the spending gap disappears (at full employment) then the government has to introduce offsets (such as higher taxes) if it wants to spend more in nominal terms because it has run out of ‘fiscal space’.<\/p>\n

The constraint on responsible government spending are the real resources that are available at any time.<\/p>\n

NBFI holdings of government debt<\/h2>\n

The BIS also note that Non-Bank-Financial-Intermediaries (mostly hedge funds but also insurance funds etc) are increasingly holding large quantities of government debt.<\/p>\n

Their argument here is that if market conditions deteriorate and these corporations engage in fire sales, the rise in supply relative to demand in the secondary bond markets will drive yields up, which they claim will cause problems for governments with high debt.<\/p>\n

Certainly, bond yields fluctuate in the secondary market according to demand and supply.<\/p>\n

But as noted previously, while the central bank is by voluntary restraint, normally a passive player in that market, it can at any time it likes, become a major player and dominate the market.<\/p>\n

That is what quantitative easing is about – and we know how central banks drove yields down to zero and even into negative values as a result of its bond buying programs at various times in recent history.<\/p>\n

So it doesn’t really matter what the hedge funds are doing in that respect.<\/p>\n

Rate hikes are inflationary<\/h2>\n

That is not a BIS quote.<\/p>\n

But it is interesting that more analysts are starting to rehearse the Modern Monetary Theory (MMT) argument that interest rate hikes by central banks may be inflationary.<\/p>\n

The BIS writes:<\/p>\n

\nHigher interest rates raise government interest payments, boosting income for private bondholders. If not offset by higher taxes or reduced transfers, this income transfer supports aggregate spending … which … weakens both the output contraction and the disinflation from rate hikes, with larger debt stocks boosting these offsetting effects.\n<\/p><\/blockquote>\n

We have certainly been witnessing that impact in the US where public debt is historically high at present.<\/p>\n

It tells us that proponents of monetary policy tightening to deal with supply side inflationary pressures will probably worsen the price pressures because it introduces a demand stimulus.<\/p>\n

More on the central bank backup capacity<\/h2>\n

The BIS cannot deny that central banks have all the capacity they need to ensure governments do not become insolvent or are forced to pay high yields if that is a problem.<\/p>\n

They admit that central bank backstops are “effective” and the evidence of that is plentiful.<\/p>\n

But they say using such backstops “give rise to several interrelated challenges”.<\/p>\n

So are they really challenges?<\/p>\n

1. The central bank might buy too much government debt and be “subsequently too slow to unwind once market functioning is restored”.<\/p>\n

Not a challenge.<\/p>\n

It really doesn’t matter how much debt the central bank is holding.<\/p>\n

And it could simply write it all down to zero if it wanted without altering much at all.<\/p>\n

With on-going fiscal deficits, new debt will enter the secondary markets anyway.<\/p>\n

2. “the expectation of ex post central bank support can create ex ante moral hazard, leaving the system more vulnerable to future episodes of market dysfunction.”<\/p>\n

I do not support the use of government bailouts for banks that become illiquid.<\/p>\n

Such banks if important should just be nationalised rather than bailed out within their current legal (ownership) structure.<\/p>\n

3. “Governments may then use the resulting fiscal space for further expansions, creating larger vulnerabilities in the future.”<\/p>\n

Re-read the discussion above.<\/p>\n

4. “large scale balance sheet operations can also create risks for central bank independence.”<\/p>\n

Not a problem.<\/p>\n

Everyone knew that the bond-buying programs of the central banks were the reason bond yields fell to very low (and in Japan negative) values.<\/p>\n

The bond investors understood that if the central bank decided to take a position in the market then their capacity to influence yields was reduced to around zero.<\/p>\n

5. “Large-scale purchases can also expose central banks to losses. While losses and negative equity do not directly affect the ability of central banks to operate effectively, large losses can draw heavy public criticism, as seen in several jurisdictions in recent years.”<\/p>\n

Classic.<\/p>\n

The BIS admit the ‘losses’ don’t stop effectiveness because the central bank is not a private corporation.<\/p>\n

The “public criticism” just comes from the wannabees in the financial markets who desire attention in the media.<\/p>\n

The rest of us couldn’t care less and wouldn’t know anyway.<\/p>\n

Conclusion<\/h2>\n

The BIS really just wanted to get to the conclusion that central banks should increase interest rates more and fiscal authorities should be imposing austerity to reduce their deficits.<\/p>\n

We get the ‘gradualism’ approach emphasised – “To minimise growth costs, fiscal adjustment should also proceed gradually” – but no discussion on whether the direction of fiscal shifts recommended are appropriate.<\/p>\n

The inference is that the ‘large’ fiscal deficits currently in place are dysfunctional.<\/p>\n

The question: in terms of what is ignored.<\/p>\n

The point is that the fiscal deficits in place at present are related directly to the rate of unemployment and underemployment given the spending and saving desires of the non-government sector.<\/p>\n

Unless, those desires change (more spending and less saving), a fiscal retreat will always damage growth and push up labour underutilisation.<\/p>\n

That reality is not considered at all by the BIS who seem to have become infected by the IMF myth of ‘growth friendly austerity’.<\/p>\n

There is no such thing.<\/p>\n

That is enough for today!<\/p>\n

(c) Copyright 2026 William Mitchell. All Rights Reserved. <\/p>\n","protected":false},"excerpt":{"rendered":"

I have been ‘at it’ for decades now but it never ceases to amaze me how mainstream macroeconomic analysis is carried out and the way the public just accepts the conclusions without understanding the basis on which the analysis generates those conclusions. Chapter II in the BIS Annual Economic Report (released June 28, 2026) –…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[9,14,22,28],"tags":[],"class_list":["post-63257","post","type-post","status-publish","format-standard","hentry","category-central-banking","category-debriefing-101","category-fiscal-policy","category-inflation","entry","no-media"],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/posts\/63257","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=63257"}],"version-history":[{"count":0,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=\/wp\/v2\/posts\/63257\/revisions"}],"wp:attachment":[{"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=63257"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=63257"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/billmitchell.org\/blog\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=63257"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}