The Fed and the BIS

It is good to hear a voice of common-sense among the clamour of pro- and anti-regulation piffle that is being spouted. The Head of the Monetary Department of the Bank for International Settlements (BIS), Claudio Borio, has put his finger on the issue. Dependence on Central Banks “every word” by the financial markets is disrupting not only the whole financial system but the return to more normal interest rates as well.

We know markets are being systematically rigged by central bankers and Mr Borio points out in the BIS latest Quarterly Report that discipline since the financial crisis of 2007/8 has been simply more of the same. This has resulted in loose monetary policy and more and more debt. He says that monetary policy cannot solve the problems that come with increasing debt. If you relax the rules in times of crisis you must tighten them in times of plenty. Every child hoarding his cache of sweets knows that.

Very low interest rates encourage poor investments. That is not to say that investment in start-ups with their necessarily high risk should not continue, indeed, even accelerate. If Big Data means anything it surely means that we can forecast better than we used to. So we should be able to reduce the risk inherent in any start-up based on analysis of what has gone before. Pity we don’t hear more about Big Data’s forecasting ability – it seems always to be about tweaking current ops and not much about visionary developments.

So the Fed has chosen the Festive season to dip its sensitive toe in the water of rising rates. Let’s hope it doesn’t become known as the Financial ‘F’ Season. Forecasting the consequences of this odd rise of 0.25-0.5% is even more difficult than usual. As a precaution I’d fasten your investment safety belts, the ride may be rocky. My guess, however, is that it won’t be right away. There will be adjustments and exchange rates will become volatile but the signal that virtually free money is finished is well and truly overdue.

The implications of having to pay for your money will follow a little later. Bad debts will become a tsunami in time and as with all financial matters the fashion of ‘responsible to pay what is owed’ will change to one of ‘wait’ – in many cases forever. The message for businesses is don’t fund your clients more than you absolutely have to. I cannot bring myself to advise individuals to become irresponsible. In the end a debt-free life will be the longest.

Money, banking, investment are about to go through a period of dramatic change. We hope that common sense and a renewal of personal responsibility in the finance industry will be the hallmark of 2016 – 2020. We do not yet express this as a forecast – hope we can soon.

Buckle up; rough seas ahead.

The Bank for International Settlements is an international company limited by shares owned by central banks which “fosters international monetary and financial cooperation and serves as a bank for central banks”.