Great Expectations

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The monetary technician Claudio Borio is a somewhat low profile, but senior figure in global policy making circles. He is in charge of the Monetary and Economics Department at the Bank for International Settlements (BIS), the world’s “central bank of central banks” in Basel, Switzerland.

Late last November, Dr. Borio gave an informative interview to the German financial daily, “Boersen Zeitung”, during which he offered observations on the problem of complacency – something we’re all quite prone to.

Borio had done so while commenting on the general state of the global economy. He had noted the buffeting on sentiment due to trade war escalation, the tug of war taking place in the global economy between a more robust services sector and weakened manufacturing one – something again, due to the trade war. That said, Borio noted the BIS didn’t see an economic correction looming, but he did cite specifically an ambient placid reliance on monetary policy, which I’ll quote:

“…But let me make one more point: In some circles, there is a view that central banks are all powerful. In particular, there is a view that monetary policy could be the engine of sustainable growth. For far too long, central banks have borne the burden of ensuring global economic recovery….”

And on that, Dr. Borio goes on to make a cautionary note:

“…In addition, the room for maneuver (of monetary policy) is much smaller than it was before the crisis (2008-2009)…”

During his interview with the financial daily, Dr. Borio highlighted the risk arising from what he calls an “expectations gap” – what central banks are expected to do versus what they can actually deliver. He went on to imply that policy makers, market participants, savers and investors, and consumers could fall very hard down that gap. According to Dr. Borio, that other wing of public policy – active fiscal policy – must become more instrumental in stabilizing national economies and facilitating growth.

However, the BIS central banker does caution against fiscal excess, and cites the importance of also being fiscally responsible. And, he also cites the importance of “structural reforms” to robust growth. And on that last point, he ends up grasping at the nettle. No number of monetary or fiscal corrective measures can improve on structural impediments hindering growth and prosperity. In so many words, Dr. Borio argues against (monetary) complacency and for serious deliberation on what works best structurally, what makes actual sense.

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