Bank For International Settlements: Deficits Are Crippling

The Bank for International Settlements made two observations in its 8oth Annual Report. One made sense. The basis for the second is a mystery.

Much like the declaration of the G-20 nations, the BIS believes that the preeminent threat to the global economy is deficits.

“The first and most immediate challenge is to make a convincing start on reducing budget deficits in the advanced economies. Placing public debt on a sustainable path must be accompanied by structural reforms to enhance sustainable growth.”The second problem mentioned in the BIS report was that central banks need to raise the cost of borrowing.

“The second challenge is to foster the strengthening of balance sheets and necessary behavioural changes in the financial industry. Official support was intended to facilitate orderly adjustment. But if such support is maintained for too long, it will create moral hazard, undermine private sector financial intermediation and generate new, hidden risks.”

The notion that low-interest rates increase “moral hazard” as access to cheap money builds bubbles is probably true. But that is more than offset by the need in the US, Japan, and Europe to continue to fund sovereign debt, to rebuild industry, to encourage job creation, and to improve consumer credit to stimulate consumer spending.

There are not many interest rates hawks in the central banks of the world’s developed nations, and that may not change until well into 2011-if the GDP of these countries begins to rebound.

Douglas A. McIntyre

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