In its most recent evaluation of the global economy, the Bank for International Settlements, the umbrella organization for central banks, warned that trade tensions and tense geopolitics run the risk of revealing profound fault lines in the global financial system.
Agustín Carstens, the departing head of the BIS, which is sometimes referred to as the central bankers’ central bank, claimed that the long-standing economic order was being threatened by the U.S.-driven trade war and other policy changes.
He claimed that a “new era of heightened uncertainty and unpredictability” was upon the world economy, marking a “pivotal moment” that was putting the public’s faith in institutions, particularly central banks, to the test.
The bank’s analysis follows six months of significant global upheaval and is released just over a week before U.S. President Donald Trump’s trade tariff deadline of July 9.
Trump was not particularly harsh on U.S. Federal Reserve Chair Jerome Powell when questioned about his attacks on the Fed chair, including calling him “stupid.”
Former Mexican central bank governor Carstens told reporters, “It is to be expected at certain points in time that there will be friction” about the interaction between central banks and governments. “It is almost by design.”
DOLLAR’S DECLINE.
With the frequent meetings of leading policymakers at the Switzerland-based conference, the BIS’ annual report, which was released on Sunday, is considered a key indicator of central bankers’ thoughts.
Growing trade fragmentation and protectionism were “particularly concerning” since they were making the already decades-long slowdown in productivity and economic development worse, Carstens added.
Additionally, there is evidence that the global economy is growing less shock-resistant, with supply chain problems, geopolitics, climate change, and population aging all making the environment more unstable.
Research in the report revealed that the public’s perception of price movements appears to have been impacted in a lasting way by the post-COVID surge in inflation.
High and growing amounts of public debt are making the financial system more susceptible to interest rate changes and making it harder for governments to spend their way out of problems.
About the growing debt levels, Carstens stated, “This trend cannot continue,” adding that increased military spending might cause the debt to increase even more.
The BIS’s chief economic adviser, Hyun Song Shin, also noted the steep decline in the value of the dollar.
It is headed for its largest H1 decline since the free-floating exchange rate era began in the early 1970s, having dropped 10% since the year began.
He recognized that it was still too early to tell because central banks and sovereign funds act slowly, but he said there was no indication that this was the beginning of a “great rotation” away from U.S. assets, as some economists have indicated.
However, a short-term study revealed that “hedging” by foreign investors who own Treasuries and other U.S. assets seemed to have played a significant role in the dollar’s decline in recent months.
“We haven’t seen anything (yet) that would give us any cause for alarm,” Shin stated.
Last week, the BIS released a section of its report that issued a dire warning on the explosive growth of so-called stablecoins.
The BIS said that its overall comprehensive income hit a record high of SDR 3.4 billion ($5.3 billion), currency deposits at the bank also hit a new high, and it achieved a net profit of 843.7 million IMF SDR ($1.2 billion).
“It is important that the BIS has the highest creditworthiness out there,” Carstens said.
