By John Richardson
BACK in 2003 the Bank for International Settlements (BIS) predicted that dangerous imbalances were building up in the global financial system.
The BIS, a Brussels-based international organisation for central banks, was worried that the Fed and other central banks were compromising long term stability in favour of short-term growth.
Sadly, policymakers didn’t listen and we all know what happened.
Would you therefore bet against the BIS being right this time around? In its 2014 report, it has again warned about asset bubbles that have been blown up by monetary policy that has stayed too loose for too long.
“The risk of normalising too late and too gradually cannot be overestimated,” wrote the BIS, which added that central banks had come under political and financial pressures to delay increases in borrowing costs.
“A vicious circle can develop. In the end, it may be markets that react first, if participants start to see central banks as being behind the curve.”
Financial markets are in a surreal world. They are out of touch with the economic reality in countries such as the US where real demand for real things is in long term decline because of demographics.
Importantly, the BIS recognises this when it also writes in its report: “Sharp drops in property and other asset prices in the wake of the financial crisis have pushed down wealth in many of the countries at the heart of the crisis, although it has been recovering in some.
“Wealth effects can be long-lasting. Long-run demographic trends could aggravate this problem by putting further pressure on asset prices.
“An ageing society implies weaker demand for assets, in particular housing. Research on the relationship between house prices and demographic variables (see the above chart) suggests that demographic factors could dampen house prices by reducing property price growth considerably over the coming decades.
“If so, this would partially reverse the effect of demographic tailwinds that pushed up house prices in previous decades.”
The BIS is also with us on China, as it warns that the country’s measure of private sector debt is running at 23.6% – above China’s long-term norm and at the highest level of any of the emerging economies.
“Particularly for countries in the late stages of financial booms, the trade-off is now between the risk of bringing forward the downward leg of the cycle and that of suffering a bigger bust later on,” it said.
It, of course, took another five years after the last BIS warning – in 2003 – for the global economy to tank.
But any CEO of any chemicals company who assumes a similar time lag, and thus hopes that she or he can get away with another five years of good earnings, is running an enormous risk.