The US Federal Reserve is engaged in a significant battle behind the scenes in the banking world. This is a true battle of the titans. The USFed is a household word, with its Chairman Greenspan a celebrated icon, a hero among inflation supporters, nay monetary drug addicts intent on speculation in lieu of actual work, and a savior in engineering a climate for commercial purchases without money. However, the Bank for International Settlements is the "old world" central bank from Switzerland. A better description of BIS is one of insurer/ underwriter/ counselor to all major world central banks.
The war is over supremacy, leadership, lately steeped in defiance. The battle is over sound monetary policy. The true alpha dog is the BIS. The pretender to the throne is the USFed, whose role has been the more public for scrutiny since the 2000 stock bust, which was clearly the responsibility of the USFed in a grand colossal error. That concluding event might have merely stood as the climax of the Asian Meltdown of 1997, which took three years to reach the USA shores. The bust drew countless billions of European money, the resentment for which has not dissipated.
The USFed has long been chartered with a dual objective and chartered mission, 1) to limit price inflation, 2) to maintain maximum employment…The BIS has long argued that central bankers must keep to a dual mission also, 1) to limit price inflation, 2) to limit credit growth…
The BIS argues that America needs to raise interest rates further in order to restrain risk taking in financial markets and borrowing by households. With debts and house prices already so high, consumer spending will be hurt, but a more painful adjustment later could be ensured. Allow me to paraphrase their positions. Looking ahead, the BIS argues that policymakers need to modify their current policy frameworks in order to prevent the build-up of imbalances in the future. Targeting inflation is not enough, so they urge. Central banks also need to take more account of the increase in debt and exceptional rise in asset prices, whose correction reversal can cause instability…
Criticism and concern by the BIS is echoed by the International Monetary Fund, on US twin monster deficits and their threat to global economic stability. The IMF might be a tool of big US banker interests, might be a weapon used to wreck entire foreign economies (see Argentina, Brazil, Mexico) in our hemisphere. Nonetheless, the IMF carries some weight. Managing director Rodrigo Rato stated there was no sign of capital flows to the USA even beginning to decline, but conditions could change rapidly if markets took a "more negative" position.
[Rato] has commented on the deficits. He noted the capital movements needed to sustain the widening US current account deficit could not be perpetuated. He warned that foreign investors could easily lose their appetite for US assets. He has offered a stern warning. "When we speak of global imbalances, we often are referring to the large current account deficit in the United States, and the matching surpluses in other countries. Unless action is taken to facilitate an orderly resolution of these imbalances, we run the risk of investors drastically reducing the flow of capital into the United States. In that event, the dollar could depreciate rapidly, currency and capital markets could become disorderly, and interest rates could rise sharply, posing serious threat to global economic instability." One must wonder if the BIS had asked the IMF to speak publicly on its behalf as a convenient mouthpiece.
Rato noted the USGovt has promised action to cut in half its budget deficit over five years, but proposals required in his words "firm implementation." He said "Even bolder deficit reduction would be desirable and warranted, especially in view of the cyclical strength of the US Economy, and the importance of lowering government debt ahead of the retirement of the baby boom generation." In other words, words from Washington DC are meaningless, especially given the common practice of placing costs from the war in Iraq and Afghanistan off budget. Oh yes, let us not overlook the common constant confiscation of the Social Security Trust Fund on a quarterly basis, which adds further to the future obligation risk. The Medicare spending obligations fly in the face of federal budget deficit projections. Basic math drawn from the arithmetic we learn under the age of 12 suggest the recent USGovt federal deficit is more on the order of $900 billion…
Wisely, the BIS highlights the need for the United States to curb credit and to discourage the unprecedented rampup in credit. The USFed is perfectly willing to create bubbles as long as their narrow-minded consumer price index shows no strain. For years, since 1996, the USFed has lost its way and proceeds to inflate with abandon with only a half-cocked queer eye on the CPI for green light guidance. This is heretical and has wrought horrendous damage.
The BIS sees a housing correction as inevitable, with painful consequences. Without directly mentioning the bond conundrum, they urge the USFed to force long-term rates higher, but do not propose a way for that to happen. Perhaps they urge the USFed to stop their secretive monetized support of Treasurys generally. They propose that home mortgages be secured with HIGHER down payments and SHORTER repayment periods, the exact opposite of the current borrowing climate. A grand conflict is brewing behind the scenes. The USFed has created bubbles in every conceivable economic closet. They cannot expect the sympathetic help of the most powerful financial institution on earth if things go awry. Most investors are unaware of either the existence or powerful reach of the BIS.
A recent quote is brief but important. The BIS issued a statement that "Growing domestic and international debt has created the conditions for global economic and financial crises." The statement was made at a global meeting of 55 central bankers. The BIS has long been at odds with the USFed, in competition for the "alpha dog" role among bankers. The USFed mismanages the world reserve currency. The BIS acts as the underwriter insurance institution for all central bankers, more like all Western banks. Between the lines, fully understood at the meeting, was the directive for central banks to distance themselves from the USA monetarily, financially, and economically before the inevitable debt crisis arrives. The nucleus of the debt threat is the twin deficits of the USA, which have peculiarly been accepted as normal inside the USA but declared as a major cancer outside the USA…
posted by Paul at 7:49 AM
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