The Bank For International Settlements has just released its 78th annual report. It contains a succinct, clear, and blunt analysis of the current financial situation, the options and their possible outcomes.
The full text is worth reading by those who wish to be informed. However it is quite long, so I recommend the conclusions chapter.
The following is virtually all the summary of that chapter (there being a limit on size that can be quoted without breaching copyright).
"In the aftermath of a long credit-driven boom, it would not be surprising to see turmoil in financial markets, slowing real growth and temporarily rising inflation. The crucial questions at the present juncture have to do with the severity of these individual trends as they now appear and how they might interact. While difficult to predict, their interaction does appear to point to a deeper and more protracted global downturn than the consensus view seems to expect. At the same time, inflationary forces, particularly in emerging market economies, could also prove unexpectedly strong and persistent. A major factor in inflation prospects everywhere is likely to be the behaviour of wages, but in some countries the effect of a depreciating exchange rate on domestic prices could also play an unwelcome role.
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. That said, the circumstances of different countries, both actual and prospective, currently rule out a "one size fits all" response. Moreover, should the global economy slow sharply and inflationary pressures recede, the bias to tightening would evidently also be reduced.
In the current and prospective environment, it should nonetheless be borne in mind that the effectiveness of a lowering of policy rates might be significantly reduced in the aftermath of a credit-induced spending boom. In view of the potential negative side effects of such a policy, not least the risk of encouraging further financial imbalances and misallocations of real resources, complementary policies might be envisaged to avoid overburdening monetary easing. Expansionary fiscal policy could have some merit, but in many countries current debt levels mean there is little room for manoeuvre. Steps to recognise and deal with losses and debt overhang problems, in a timely and orderly way, and subject to conditionality, must then be a high priority.
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. "
The document can be found at
Bank for International Settlements. The whole chapter is easy to read and both clear and concise in setting out the issues, possible policy responses, and their limitations.
For those still in denial that there is an issue the following makes the IBS view clear.
"The current market turmoil in the world’s main financial centres is without
precedent in the postwar period. With a significant risk of recession in the
United States, compounded by sharply rising inflation in many countries, fears
are building that the global economy might be at some kind of tipping point.
These fears are not groundless. A powerful interaction between financial
market innovation, lax internal and external governance and easy global
monetary conditions over many years has led us to today’s predicament.
Rather than seeking to apportion blame, however, thoughtful reactions must
be the first priority."
Some analysts have put forward the view that inflation will not take hold because there is no wage pressure (the unions having been busted in the 70s.) However, if wages don't rise then any recession will be worse as spending power is curtailed.
Of course the sceptical might wonder if despite the rhetoric to the contrary a weak dollar and inflation are not sought to monetarise debt.
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