- PD Jonson
Updated: May 2, 2020
Welcome to the new financial year!
The Bank for International Settlements (BIS) is probably the world's leading authority on global economic trends.
Its degree of courageous dispassion no doubt comes from a comfortable existence in Basel and its long tradition as the central bankers' central bank.
This year its chief economist, William White, (pictured, now of OECD) is said to be retiring, and is no doubt keen to leave a memorable message. It is a doozy.
'The fundamental cause of today's problems in the global economy is excessive and imprudent credit growth over a long period ...'
The world economy is near a 'tipping point' that is likely to eventually slow inflation, and may even create a severe slowdown, even a global depression that converts inflation to deflation.
Finally, this unhappy situation is due to lax monetary policy allowing an unprecedented credit and asset bubble.
Two Dow Jones writers say: 'For central bankers from around the world gathered in Basel for the BIS's annual meeting Sunday and Monday, the report made for chastening reading. Not only does it highlight the difficulty of the dilemma facing central banks -- confronted with slowing growth at a time when inflationary pressures are rising -- it also lays much of the blame for their predicament at the feet of the central banks themselves.
'High inflation rates may not ease in 2009, as expected, and central bankers need to be extra vigilant to stop inflation expectations from creeping upward ...'
As to policy, what seems to be called for is vigilence in fighting inflation: 'With inflation a clear and present threat, and with real policy rates in most countries very low by historical standards, a global bias towards monetary tightening would seem appropriate.'
Different economies are at different points in their economic experience, however, and there is no 'one size fits all' solution.
And, far worse for the world's central bankers, is this judgment from its intellectual leader: 'Perhaps the principal conclusion to be drawn from today's policy challenges is that it would have been better to avoid the build-up of credit excesses in the first place. In future, this could be done through the establishment of a new macrofinancial stability framework, which would call for both monetary and macroprudential policies to "lean against the wind" of the credit cycle.'
The final chapter of the report discusses 'The difficult task of damage control.'
Current market turmoil is 'without precedent' in post war experience.
Excessively low interest rates led to an asset and credit boom and, inevitably (although surprising to most), the current inflationary surge.
Most experts are predicting a slowdown but there is 'an exceptional degree of uncertainty' about how severe this might be.
"Pretty bloody severe' seems to be the message, though this is intemperate language that would never be used by the gnomes of Basel.
However, why should we not use intemperate language? We have given central bankers all they asked for - high salaries, 'independence', clear targets - and they have failed us.
Now they conclude we are in unchartered waters and no-one can be sure how bad it will be before we return to more stable times.
If, like Henry, you have been warning about all this and are entering the 'road to retirement' just as the crisis hits, you are entitled to be angry.
In responding, what seems to be needed is a 'new macrofinancial stability framework to resist actively the inherent procyclicality of the financial system.'
This means tighten monetary policy sooner and more than Australia did and tighter fiscal policy, again in contrast to an Australia that kept budget surplusses roughly constant, gave back bracket creep and allowed spending to rise far too sharply.
In addition, simple inflation targeting will not do the job: '... monetary policy might be tightened even with projected inflation under control, given a sufficiently worriesome combination of rapid credit growth, rising asset prices and distorted spending or production patterns.'
This will be not easy to recognise and lots of hard work will be needed to work out the details and implement it next time a macro boom seems to be getting out of control.
By then, of course, there will be no-one around who recalls the great monetary policy snafu of the early 21 st century except a few old pensioners in twilight homes.