The New CS Board

[jumanji0881]

Former BIS Chief Economist: "Central Banks Keep Shooting Themselves In The Foot" : https://www.zerohedge.com/economics/former-bis-chief-economist-central-banks-keep-shooting-themselves-foot

My comment : So how might the debt unravel ? A lot of corporate debt is poor (BBB-) quality, but I think state and local government debt could be the weak link. Illinois has a $1.2Billion shortfall and the pandemic is wreaking havoc on state and local governments. I think some of these budgets should have already defaulted. Surely their cost to finance the debt increases as the debt increases. There are many state and local governments with large deficits and they are required to balance their budgets.

Excerpts:
Jerome Powell has tried to normalize monetary policy, but he had to stop after a market panic in late 2018. Is the Fed hostage to financial markets?

This is exactly my definition of the debt trap: Central banks know they can’t leave interest rates as low as they are, because they are inducing still more bad debt and bad behavior. But they can’t raise rates, because then they would trigger the very crisis they are trying to avoid. There is no way out but to keep doing what you are doing, but by doing that, you are making it worse. Pretty uncomfortable, right?

After the Financial Crisis, there was a lot of talk about deleveraging the system. Nothing happened. Why?

In 2008, the ratio of global household, corporate and government debt to GDP was 280%. Early 2020, this ratio had grown to 330%. And it’s not just the quantity of that debt, it’s the quality. Most of the new corporate debt is BBB-rated, covenant light, low quality stuff. The reason for that is the ultra easy monetary policy we have seen post-2008. Governments made the mistake of embracing fiscal austerity too early. By that, they left the job to the central banks to frantically try to create economic growth. This is a mistake we must avoid after this crisis. Fiscal policy will have to play a much larger part going forward.

The period of financial repression after World War II had another prerequisite: capital controls to prevent capital flight. Are they feasible today?

When I started working at the Bank of England in the late 1960s, the biggest department in the place was Foreign Exchange Control. In the modern world, is it really possible for a single government to control the outflow of capital in the way that would be required? I doubt it. Yet, if a number of large governments simultaneously embark on a path of financial repression, it raises the question of where capital might flee to? Gold? Bitcoin? In such an environment, I would be worried if I were Swiss. People might see the Swiss Franc as one of the currencies to flee into. Financial repression has the potential to be a messy process.