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The Bank for International Settlements

The Bank for International Settlements (BIS) forecasts all manner of dismal future trends in its 77th Annual Report. The BIS telegraphs through their report that current global growth is not sustainable and there is a strong probability that the credit boom may ignite a long-lasting global crisis not unlike that…

This report is based on the Bank for International Settlements’ 77th Annual Report released June 24, 2007 in Basel, Switzerland.

The Bank for International Settlements (BIS) forecasts all manner of dismal future trends in its 77th Annual Report.  The BIS telegraphs through their report that current global growth is not sustainable and there is a strong probability that the credit boom may ignite a long-lasting global crisis not unlike that of the Great Depression of the 1930s or the East Asian Financial Crisis of the 1990s.

The Bank states that recently “real growth has been maintained around levels that are among the highest recorded” and “despite significant upward shocks to most commodity prices, underlying inflation levels have generally remained subdued.”  The Bank also affirms that “real interest rates and risk premia of all sorts have remained uncharacteristically low” and “global trade imbalances have thus far been easily financed and exchange rates have been generally quite stable.”  Although some economists believe that this exuberant growth is sustainable, the BIS addresses certain issues in the current global economy that could possibly lead to serious problems in the near future. Although inflationary pressures are suppressed right now, the threat of global inflation is real as growth in industrialized countries is slowing and growth in developing countries is rapidly increasing. The Annual Report highlights the Chinese government’s failed attempts to slow growth by tightening monetary policies perpetuating “robust broad money and credit growth” that could increase inflationary pressure and has “raised questions for some central banks about sustainable growth.”  In addition to increased sovereign, corporate and personal credit around the world, the cost of raw materials is increasing, which will only add to global inflationary pressure.  Despite the signaling of these cautionary markers in the Annual Report, the long-term effects of this credit boom are unknown.

Another important uncertainty in the global market is the effect of the all-time high ratio of house prices to rents in the United States.  According to the BIS, wages are not increasing sufficiently to support the increase in consumer spending and investment, citizens are increasing personal debt, and mortgage rates continue to rise.  If housing prices decline there may be steep deceleration in US growth and dire consequences for social infrastructure.  The United States economy still has a large impact on the world economy and any downturn in the US housing market could have significant effects on global growth.  According to the United Nations’ “World Economic Situation and Prospects 2007,” the occurrence of a plunge in US housing prices will considerably weaken global growth and cause problems in financial markets around the world.

The Bank comments that global trade imbalances are important medium-term uncertainties.  Many economists believe that the US external imbalance is unsustainable and will eventually adjust. According to the Annual Report, the uncertainty lies in the possibility of “large and perhaps abrupt movements in exchange rates” or whether “capital inflows needed to finance such deficits will be available” in the future.

The Bank asserts two reasons to explain how public sector inflows may become unreliable.  First, country currencies may rise as a result of government “hands-off” policies rooted in distorted beliefs regarding effects of government intervention. Second, current holders of large reserves of US dollars may start to favor reserves in other currencies.

The Bank acknowledges that many people believe “individual asset price increases are justified and therefore more likely to be sustainable” but it also portends that “market reaction to good news might have become irrationally exuberant.”  If the latter is the case, purchasers of risky investments could be vulnerable in the long run.  Banks, global players, and companies have been encouraged to invest in risky instruments based on low expected loss, but there is a probability of an unwelcome shock that would have massive consequences.

Based on the above excerpts from the Annual Report and the economic analysis of all the issues affecting the conclusions stated in the report, it appears that the global economy is vulnerable and growth may not be sustained.

Source: www.asiaecon.org |



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