Here’s the lat­est reminder that the Very Seri­ous Peo­ple run­ning the globe are suf­fer­ing from some very seri­ous learn­ing dis­abil­i­ties:

The Con­science of a Lib­er­al
Dead-enders in Dark Suits
June 24, 2013, 2:16 am
Paul Krug­man

The Bank for Inter­na­tion­al Set­tle­ments is the cen­tral bankers’ cen­tral bank; accord­ing­ly, it tends to exhib­it the prej­u­dices of the tribe in espe­cial­ly con­cen­trat­ed form. In par­tic­u­lar, it has been relent­less in mak­ing the case for high­er inter­est rates, on the grounds that … well, the log­ic keeps chang­ing. For a while it was warn­ing about infla­tion and com­mod­i­ty prices; when the infla­tion failed to mate­ri­al­ize and com­mod­i­ty prices slumped again, it sim­ply changed the argu­ment to one against bub­bles, plus the quite amaz­ing argu­ment that cen­tral bankers must not keep rates low because that would take the fis­cal pres­sure off gov­ern­ments. Who, exact­ly, elect­ed these peo­ple to run the world?

But in its lat­est report the BIS real­ly tran­scends itself.

Part of what makes the report so awe­some is the way that it trots out every dis­cred­it­ed argu­ment for aus­ter­i­ty, with not a hint of acknowl­edge­ment that these argu­ments have been researched and refut­ed at length. Ear­ly on, for exam­ple, it declares that

stud­ies have repeat­ed­ly shown that as gov­ern­ment debt sur­pass­es about 80% of GDP, it starts to become a drag on growth.
Some­body didn’t get the memo (or, more like­ly, the report had already been sent to the print­ers when Rein­hart-Rogoff-Wrong broke).

And that’s just one of many. For anoth­er exam­ple, the BIS goes on at length about the alleged dif­fi­cult of shift­ing work­ers out of hous­ing into oth­er sec­tors, and the role of this alleged lack of flex­i­bil­i­ty in caus­ing sus­tained high unem­ploy­ment. What about all those stud­ies show­ing that employ­ment fell broad­ly across sec­tors and regions, indeed across occu­pa­tions and skill class­es, all of which is incon­sis­tent with this sto­ry? Nev­er mind.

But the real rea­son to be hor­ri­fied by this report doesn’t lie in the details, it lies in the destruc­tive inco­her­ence of the whole vision.

The BIS large­ly accepts a bal­ance-sheet, debt-over­hang view of the cri­sis; indeed, it inveighs a lot against both pub­lic and pri­vate sec­tor debt. And it demands that every­one, pub­lic and pri­vate both, delever­age fast, start­ing imme­di­ate­ly.

Hel­lo? Does any­one see the prob­lem? If every­one is slash­ing spend­ing, who will buy what they have to sell? And won’t a glob­al depres­sion — because that, in effect, is what they’re call­ing for — both under­mine attempts to save and actu­al­ly raise debt/GDP ratios, though a falling denom­i­na­tor?

In fact, their own data are try­ing to tell them this sto­ry. They lament the fact that debt ratios have risen, not fall­en, in most coun­tries:
[see image]

But they fail to note that some of the biggest increas­es have come in coun­tries pur­su­ing sav­age aus­ter­i­ty. This is not, of course, a mys­tery: Greece has made bud­get cuts amount­ing to around 15 per­cent of GDP, the equiv­a­lent of $2.5 tril­lion in the Unit­ed States, but it has been chas­ing a rapid­ly falling GDP. To some of us, this is evi­dence of the futil­i­ty of aus­ter­i­ty; to the BIS it’s evi­dence that peo­ple need to cut much more.

Now, you could argue that we need sharp spend­ing cuts by pri­vate and pub­lic debtors, but that we can avoid a glob­al depres­sion by using expan­sion­ary mon­e­tary pol­i­cy to encour­age who­ev­er is left to spend more. But noooo [/end Belushi]: the BIS is fierce­ly opposed to easy mon­ey, which it says just encour­ages irre­spon­si­bil­i­ty.

So the BIS is call­ing both for sharp cuts in pub­lic spend­ing and for sharp cuts in pri­vate spend­ing, encour­aged by an end to easy mon­ey. I’m not sure how this is sup­posed to work; maybe the idea is for every­one to run a large trade sur­plus, at the same time.

In the end, though, this isn’t about analy­sis, it’s about atti­tude. The BIS is basi­cal­ly embody­ing the notion that we must pay for our past sins, nev­er mind the arith­metic.

And the worst of it is that these views will car­ry some weight, because the BIS still, for some rea­son, retains sub­stan­tial cred­i­bil­i­ty.

How help­ful: The BIS just released a new study on the impact of defla­tion. Its con­clu­sion? Defla­tion is noth­ing to wor­ry about. At least not now. The lessons of the Great Depres­sion were his­tor­i­cal­ly anom­alous and don’t real­ly apply to today. Instead, wor­ry about loose mon­e­tary poli­cies caus­ing infla­tion.

The BIS: ‘help­ful’ as always:

Bloomberg Busi­ness
The Cen­tral Bank of Cen­tral Banks Says Keep Calm About Defla­tion

by Simon Kennedy
6:00 AM CDT March 18, 2015

(Bloomberg) — The cen­tral bank for cen­tral banks has some advice for pol­i­cy mak­ers fret­ting about defla­tion: Don’t.

In a study bound to prove con­tro­ver­sial in the cor­ri­dors of pow­er and acad­e­mia, econ­o­mists at the Bank for Inter­na­tion­al Set­tle­ments con­clud­ed the con­nec­tion between eco­nom­ic growth and shrink­ing prices is weak.

Their num­ber-crunch­ing found that since World War II there were more than 100 years of short-term defla­tion across 38 economies stud­ied, yet the aver­age growth rate in those peri­ods was high­er than oth­er­wise at 3.2 per­cent ver­sus 2.7 per­cent. When infla­tion was more long-last­ing, aver­age growth was 2.1 per­cent.

In keep­ing with past warn­ings that the easy mon­ey now being tar­get­ed at slug­gish prices risks gen­er­at­ing finan­cial mar­ket bub­bles, the BIS found a stronger link between out­put growth and slid­ing asset prices. In the wake of equi­ty and prop­er­ty price peaks, eco­nom­ic expan­sion is about 10 per­cent­age points low­er over five years.

The research “rais­es ques­tions about the pre­vail­ing view that goods and ser­vices price defla­tions, even if per­sis­tent, are always per­ni­cious,” said econ­o­mists led by Clau­dio Borio, head of the BIS’s mon­e­tary and eco­nom­ic depart­ment. “There is a case for pol­i­cy mak­ers to pay clos­er atten­tion than hith­er­to to the finan­cial cycle — that is, to booms and busts in asset prices.”

Defla­tion Fears

The assump­tion that defla­tion spells eco­nom­ic weak­ness is based on the idea it reflects a slump in demand and can prompt con­sumers and com­pa­nies to retrench, push­ing prices down fur­ther, the BIS econ­o­mists said.

Still, “good” defla­tion can be dri­ven by sup­ply forces such as cheap­er oil or greater com­pe­ti­tion and can also spur out­put by increas­ing spend­ing pow­er and mak­ing export mar­kets more com­pet­i­tive, they said.

Mod­ern-day defla­tion fears are root­ed in the out­ly­ing expe­ri­ence of the Great Depres­sion era of 1929 to 1938 when aver­age growth was 4 per­cent­age points weak­er than usu­al, accord­ing to the BIS report.

As for the recent expe­ri­ence of Japan, which is said to have suf­fered “lost decades” because of defla­tion, the BIS said on a per capi­ta basis, eco­nom­ic growth actu­al­ly rose from 2000 to 2013 by 10 per­cent com­pared with 12 per­cent in the U.S.

The find­ings, which echo those of a Jan­u­ary report by Deutsche Bank AG, may prove con­tentious as cen­tral bankers from the euro-area to Japan step up mon­e­tary stim­u­lus to stop their economies suf­fer­ing a col­lapse in prices dri­ven by declin­ing com­mod­i­ty costs and soft eco­nom­ic growth.

Share­hold­er Rep­ri­mand

The BIS, which is owned by cen­tral banks and serves as a coun­ter­par­ty for them, has not been shy of cross­ing its share­hold­ers. After sound­ing the alarm on asset price excess­es which helped trig­ger the glob­al finan­cial cri­sis of 2008, it sub­se­quent­ly warned against ultra-loose mon­e­tary pol­i­cy.

It last year drew rebukes from cen­tral bankers includ­ing Fed­er­al Reserve Chair Janet Yellen and econ­o­mists such as Nobel lau­re­ate Paul Krug­man for declar­ing rates risked being raised “too slow­ly and too late” to counter asset-bub­bles.

Today’s attempt to quell defla­tion wor­ries sug­gests it’s stick­ing to its guns.

...

That’s right, who cares about defla­tion! It’s the infla­tion­ary low inter­est rates you real­ly need to wor­ry about. *wink*

It’s the kind of ‘help­ful’ analy­sis the BIS is known for:

The New York Times
The Con­science of a Lib­er­al
Liq­ui­da­tion­ism in the 21st Cen­tu­ry
By Paul Krug­man
July 12, 2014 3:20 pm

Brad DeLong pro­fess­es him­self con­fused:

I con­fess that I do not under­stand the recent BIS Annu­al Report. I have tried–I have tried very hard–to wrap my mind around just what the BIS posi­tion is. But I have failed.

Actu­al­ly, I don’t think it’s that hard. But you need to see this in terms of an atti­tude, not a coher­ent mod­el.

At least since 2010 the BIS posi­tion has basi­cal­ly been the same as that of 1930s liq­ui­da­tion­ists like Schum­peter, who warned against any “arti­fi­cial stim­u­lus” that might leave the “work of depres­sions undone.” And in 2010–2011 it had an intel­lec­tu­al­ly coher­ent — fac­tu­al­ly wrong, but coher­ent — sto­ry under­ly­ing that posi­tion. The BIS basi­cal­ly claimed that mass unem­ploy­ment was the result of struc­tur­al mis­match — work­ers had the wrong skills, and/or were in the wrong sec­tors. And it there­fore claimed that easy mon­ey would lead to a rapid rise in infla­tion, despite the high lev­el of unem­ploy­ment.

But it didn’t hap­pen. So you might have expect­ed the BIS to revise its pol­i­cy pre­scrip­tions. What it did, instead, how­ev­er, was to look for new jus­ti­fi­ca­tions for the same pre­scrip­tions. Part­ly this involved play­ing up the sup­posed dam­age low rates do to finan­cial sta­bil­i­ty. But the BIS has also gone in heav­i­ly for the notion that we’re suf­fer­ing from a bal­ance-sheet reces­sion, that is, that over-indebt­ed­ness on the part of part of the pri­vate sec­tor is exert­ing a per­sis­tent drag on the econ­o­my.

That’s a rea­son­able sto­ry — it’s a mod­el I like myself. But the BIS either doesn’t under­stand that model’s impli­ca­tions, or doesn’t care.

Through­out the annu­al report, bal­ance-sheet prob­lems are treat­ed as if they were equiv­a­lent to the kind of real struc­tur­al prob­lems the bank used to claim were at the root of our trou­bles. That is, they’re treat­ed as a good rea­son to accept a pro­tract­ed peri­od of high unem­ploy­ment as some­how nat­ur­al, and to reject arti­fi­cial stim­u­lus that might alle­vi­ate the pain.

That, how­ev­er –as Irv­ing Fish­er could have told them! — is not at all the cor­rect impli­ca­tion to draw from a bal­ance-sheet view. On the con­trary, what bal­ance-sheet mod­els tell us is that left to itself, the process of delever­ag­ing pro­duces huge, unnec­es­sary costs: debtors are forced to cut back, but cred­i­tors have no com­pa­ra­ble incen­tive to spend more, so there is a per­sis­tent short­fall of demand that leads to great pain and waste. More­over, the depressed state of the econ­o­my can crip­ple the process of delever­ag­ing itself, both because debtors don’t have the income to pay down their debts and because falling infla­tion or defla­tion increas­es the real val­ue of debt rel­a­tive to expec­ta­tions.

So the bal­ance-sheet view actu­al­ly makes a com­pelling case for activism — for fis­cal deficits to sup­port demand while the pri­vate sec­tor gets its bal­ance sheets in order, for mon­e­tary pol­i­cy to sup­port the fis­cal pol­i­cy, for a rise in infla­tion tar­gets both to encour­age who­ev­er isn’t debt-con­strained to spend more and to erode the real val­ue of the debt.

The BIS, how­ev­er, wants gov­ern­ments as well as house­holds to retrench — I’m kind of sur­prised that it doesn’t also call for every­one to run a trade sur­plus; it wants inter­est rates raised right away; and — in a clear sign that it isn’t being coher­ent — it includes a box declar­ing that defla­tion isn’t so bad, after all. Irv­ing Fish­er wept.

...

Are the BIS’s meth­ods unsound? I don’t see any method at all. Instead, I see an atti­tude, look­ing for jus­ti­fi­ca­tion.

And that was the enthu­si­as­tic response to one of last year’s BIS reports, which sounds about as ‘help­ful’ as this year’s report.

‘Help­ing’ is just what the BIS does! Over and over and over. And over. It’s like The Giv­ing Tree of bad advice!