THE Bank of International Settlements (BIS) has broken ranks with the IMF and the World Bank and issued a grim warning to the ruling classes of the planet
This is that Quantitative Easing (QE) and its consequence, soaring bond yields, will lead to trillions of dollars in losses for the big banks, and that a deeper financial catastrophe is ahead for the capitalist system.
This warning follows the global sell-off that took place after the Federal Reserve boss, Bernanke, warned that the Fed would be drawing down its QE programme of printing hundreds of billions of dollars to buy bonds.
BIS says that the losses on Treasury Securities will reach $1 trillion if yields rise by 300 basis points.
The BIS further warned that such a crash could happen very quickly and wipe out 15%-35% of UK, French, Italian and Japanese GDP.
The recent warning of the Federal Reserve Bank concerning QE saw the yield on 10 year Treasury bonds jump 80 basis points.
The BIS is now warning that QE and zero interest rates are already doing more harm than good.
‘Central banks cannot do more without compounding the risks they have already created,’ it said.
The BIS is demanding a combined monetary and fiscal tightening, arguing that a new economic depression and a sorting out of the ‘labour market’ will be better for capitalism than massive hikes in inflation and monetary collapses.
The BIS puts the policy of ‘monetary stimulus’ in the dock for creating ‘aggressive risk-taking’, ‘the build-up of financial imbalances’, and further ‘misallocation of capital’, and maintains that the central bank mantra of doing ‘whatever it takes’ to boost growth has left the Fed, the Bank of England, and others, stuck with over $10 trillion in bonds.
It adds: ‘Extending monetary stimulus is taking the pressure off those who need to act. In the end, only a forceful programme of repair and reform will return economies to strong and sustainable real growth.’
It continues: ‘Public debt in most advanced economies has reached unprecedented levels in peacetime. Even worse, official debt statistics understate the true scale of fiscal problems. The belief that governments do not face a solvency constraint is a dangerous illusion. Bond investors can and do punish governments hard and fast.’
It further warned: ‘Postponing the pain carries the risk of forcing consolidation under stress – which is the current situation in a number of countries in southern Europe.’
It suggests that labour markets must be reformed by undertaking a ‘forceful programme’ of ‘repair and reform’.
Stephen Cecchetti, the head of the BIS monetary and economic department, said that QE had made it easy for the private sector to put off reforms and for governments to finance deficits more cheaply thanks to the low interest rates their actions had introduced.
Central banks must return their focus to maintaining financial stability and encouraging reforms, rather than ‘retarding them with near-zero interest rates and purchases of ever larger quantities of government securities’.
Chinese stock markets are meanwhile continuing to fall sharply. The Shanghai Composite SSE index fell 5.3% to 1,963.24 points yesterday, over 1,540 points below its 52-week high.
Financial stocks fell more than 7% as traders reacted negatively to the People’s Bank of China (PBOC) saying the era of cheap cash is over.
The news from China saw markets in the UK, Germany and France resume their slide downwards, although there were as yet no signs of widespread panic selling – this is to come.
The capitalist crisis is continuing to deepen.
The workers of the world will be forced to pay for it with their jobs, wages and lives.
There is only one way out of this crisis for the working class – this is to put an end to capitalism and replace it with world socialism, through the victory of the world socialist revolution, replacing the law of the jungle under capitalism with a worldwide planned economy, based on production to satisfy people’s needs.