Bank of International Settlements uses the "D" word

[BradLohaus]

Bank of International Settlements: Credit Boom May Spark Depression

http://www.newsmax.com/money/archive...54818.cfm?s=st

"The BIS said that years of loose monetary policy have fueled a dangerous credit bubble leaving the global economy more vulnerable to an economic catastrophe than is generally understood."

[DarkReign]

Maybe I am just dense, but that made no sense to me at all.

I never claimed to be an economist. Thats what youre here for, Brad (holy , we dont have a wink icon!)

[Yonivore]

<< Yeah we do. One of the oldest emoticons in the book.

[BradLohaus]

Maybe I am just dense, but that made no sense to me at all.

I never claimed to be an economist. Thats what youre here for, Brad (holy , we dont have a wink icon!)

"Several worrying signs, including mass issuance of new types of credit instruments, soaring levels of household debt, extreme appe e for risk shown by investors and entrenched imbalances in the world currency system, have all made the Bank wary the global economy is at serious risk."

That's basically financial jargon for "banks have issued too much credit in the form of bad loans that can't ever be repaid."

"The BIS said "China may have repeated the disastrous errors made by Japan in the 1980s when Tokyo let rip with excess liquidity." "The Chinese economy seems to be demonstrating very similar, disquieting symptoms," the BIS claimed, noting China's credit and asset boom.

The Bank described China's booming economy as "unstable, unbalanced, uncoordinated and unsustainable" — a comment apparently made by Chinese premier Wen Jiabao"

The Chinese, with cheap credit, have built up so much industrial capacity that it's getting to the point that they have too much in relation to the purchasing power of their citizens and of foreigners who by their products. Many investment ventures will go under, their loans will be written off by banks, and it could trigger a banking crisis and deflation like what happened in Japan. Interest rates were just above zero for a time; they were almost giving money away at no cost (interest), but there wasn't anywhere to invest it. The same thing could easily happen in China.

"The BIS also took a swipe at the U.S. Federal Reserve, noting that the central bank was rethinking the easy credit policies of former Fed chief Alan Greenspan."

The Fed kept interest rates extremely low to drag us out of the recession known as the bursting of the dot-com bubble. That solution is basically kicking the problem down the road, except the problem gets worse. You are buying a short term solution at the price of a greater long term problem because the credit bubble that Greenspan created keeps inflating.

"The BIS was not sanguine about the dollar, citing America's huge trade and deficit imbalances with US external liabilities growing to over $4 trillion from 2001 to 2005.

"The dollar clearly remains vulnerable to a sudden loss of private sector confidence," the BIS report stated."

A different, but related, problem that has been kicked down the road. All the stuff from the trade deficit thread a few months back.

"Sooner or later the credit cycle will turn and default rates will begin to rise," the BIS said.

"The levels of leverage employed in private equity transactions have raised questions about their longer-term sustainability. The strategy depends on the availability of cheap funding."

As long as credit is relatively cheap, all is well. But rates must rise substantially at some point; it is economically impossible to have an eternal credit boom with low interest rates; no matter how much manipulation power the Fed has, it is not stronger than the market in the long run . When rates rise, this will be a signal of excess investment capacity, and default rates will rise in all loan sectors. Many economists think that there is already excess capacity pretty much everywhere. Only a flood of cheap credit keeps the stock market rising.

[PixelPusher]

^if one of those little birdies that tipped of Joe Kennedy before '29 should happen to find itself on your shoulder one of these days, be sure to pm me.

[BradLohaus]

^Oh, there's probably alot of room left for the central banks of the world to maneuver for years, maybe even a couple of decades. The info in the BIS's article has been obvious to many people for years. As indebted as the US government is, if you look at in comparison to many US households, they could take on alot more debt, as long as somebody can lend it, because it can't be the Chinese forever. It all depends on how far the Fed is willing to go, but it looks like they won't take the tough measures necessary for an easy landing; recessions are very politically unpopular, and the guys in power at the time would be begging the Fed for more cheap money, and they are always inclined to agree and keep everything afloat for as long as possible. But there has to be an end to all of this one way or another.

And if I run into a little bird, I'll let everybody know. But I don't know anybody nearly high up enough in the system to really matter.

[DarkReign]

Thanks for the breakdown.

[BradLohaus]

Thanks for the breakdown.

No problem. By the way, only central bankers talk like the people in the BIS article did. There are people whose job is figure out exactly what the Fed chairman and other central bankers around the world mean when they speak. Seriously. What a financial system we have.

Edit: In fact, there have been times when central bankers' words have been widely and incorrectly interpreted, and all kinds of changes take place in markets, and then the bank chairman has to get up and speak more clearly about what they were actually saying, and then the markets rapidly shift the other way.

There was one famous example of this regarding interest rates when Bernanke said somehting when he was still just a regional governor, and Greenspan had to step in and be more clear about the Feds true intentions. Billions were lost in bond markets by people speculating on Bernanke's words.

But of course, without the Federal Reserve issuing and controlling our money, the economy would be lost.

[Nbadan]

Look out, Inflation ahead...

Knees would be knocking audibly in the credit markets if the Fed still reported M3 growth. Annual growth (SGS Ongoing M3 series) accelerated sharply in April to 12.9%, from 11.7% in March. The last time annual M3 growth approached 13%, the Fed was liquefying the financial system in the wake of the 9-11 terrorist attacks. Before that, the year was 1981 and official annual CPI inflation was running about 10%. If 10% inflation sounds familiar, that is roughly the level of annual CPI inflation that would be reported today using the CPI methodologies of 1980. Exacerbating the financial catastrophe that slowly is unfolding for the U.S. markets, the economy is in a deepening recession and the U.S. dollar has begun suffering nascent selling pressures. In terms of monthly averages, gold already is near an all-time high, and the trade-weighted dollar is at an all-time low. Out of touch with reality - the Dow Jones Industrial Average keeps bouncing to new highs. Annual growth in the SGS Ongoing M3 has broken above 13%, rivaling levels seen before the severe 1973/1975 inflationary recession.