The Debt Fueled Global Growth


global-growthBank for International Settlements (BIS) is an organization, which is usually referred to as the central bank of central banks. It has said that the boom-and-bust cycles that have impacted the international economy must come to an end.

The organization is urging policymakers to expeditiously modify existing policy. The international economy cannot afford to depend on the debt-fueled growth model that has resulted in the existing scenario.

At present, the debt levels are extremely high, while the productivity growth is very low. Against this background, the scope for policy changes is too narrow. The most evident sign of this issue is interest rates. They continue to be persistently and extremely low.

After the financial meltdown globally in 2008, and the sovereign debt crisis in the EU, central banks from across the globe implemented several measures.

Many institutions have launched bond-buying programs and reduced benchmark rates. This is to ensure that lending is increased. Certain central banks have also pushed interest rates below zero with a negative rate effectually charging banks who maintain cash at a central bank.

Several prominent central banks – The European Central Bank (ECB), the Danish National Bank (DNB), the Swedish Riksbank, and the Swiss National Bank (SNB) have forced critical short-term policy rates below zero.

This has curbed bond yields in broader asset markets. Markets experts estimate that nearly $8 trillion in sovereign debt was trading at negative yields at the end of May 2016.

The BIS believes that this monetary policy has been overburdened for a very long period. There is an urgent need for fiscal and structural policy changes. However, policymakers must avoid any shortcuts.

The measures must be long-term in nature. The BIS has urged for the completion of banking rules on capital buffers to assist during a crisis. The tax code can also be used to limit the bias of debt over equity or decrease the impact of financial cycles.

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