• If you are having problems logging in please use the Contact Us in the lower right hand corner of the forum page for assistance.

Between a Rock & a Hard Spot

A

Anonymous

Guest
BIS Puts Fed Between A Rock And A Hard Place


John Browne
Thursday, June 28, 2007

The Bank of International Settlements (BIS), the central bankers' central bank, based in Switzerland is one of the most conservative institutions in the world.
As we have already mentioned this week, the BIS, (in their 77th Annual Report of June 24) mention the unmentionable word — depression!

The reason the word "depression" is so rarely spoken of publicly in "responsible" circles is that the mere mention of the word could so shatter confidence that it could itself trigger a depression.


For the BIS of all institutions to mention the word "depression," in a forecast of dire repercussions, is, to the best of our knowledge, unprecedented, extraordinary, and of very great significance.

Of course, Wall Street and most of the mainline media have taken the BIS report to read that our Fed may be so worried that it will not just hold its rate tomorrow, but might well lower it.


We caution jumping to such conclusions.

In its thinly veiled warning of the risks of depression, the BIS makes some additional and interesting cautionary observations, some of which our readers will recognize as topics we have often raised.

The BIS points to instability in China's economy as a possible spark to a global downturn.

What is most interesting however, are the most unusual critical references to America.


Criticism was aimed at America's huge trade and deficit imbalances, with external liabilities growing to over $4 trillion in just five years, between 2001 and 2005.

The BIS found the bubble created by private equity deals and hedge fund activity to be "worrisome" adding that "The levels of leverage employed in private equity transactions have raised questions about their longer-term sustainability."

Then, rather ominously, the BIS goes on, "Sooner or later the credit cycle will turn and default rates will begin to rise."

These comments have led most observers to conclude that they represent oblique pressure on our Fed either to hold or even to lower its rate tomorrow.

We, however, think differently.

We note that the majority of central bank members of the BIS are, unlike our Fed, central bankers with only a single mandate, to control inflation, placed upon them by their politicians.

These prudent bankers, such as Jean-Claude Trichet, the powerful, guardian of the euro, have seen inflation threatening. As we have reported, they have been raising their domestic rates for some time. Meanwhile, they have watched the U.S. dollar plunge.

Not only has the fall in the U.S. dollar put downward pressure on exports from their own countries, but it has threatened the role of the U.S. dollar as the world's main reserve currency.


Most interestingly, in this respect, the BIS took a side swipe at the U.S. dollar, saying, "The dollar clearly remains vulnerable to a sudden loss of private sector confidence."

We ask, does the BIS mean the loss of confidence, of which we have constantly warned, that could spark a financial panic and trigger a worldwide depression?

Unlike almost all media and Wall Street, we think this can well be read as a most unusual and serious "warning" to the Fed. "Get your house in order before you rock the boat still further and tip us all into the icy water of a depression."

We see the BIS member bankers possibly reasoning as follows: "We understand that America now faces the serious risk of a faltering economy (with estimated corporate earnings now turning flat after double digit growth throughout 2006) and looming signs of a housing bust; all of which would point to a lowering of the Fed rate."

"But," we think the majority of important BIS member banks may say, "Looking at the Pre-Clinton calculation of your CPI, we see your inflation rate at some 6 percent rather than the 2.3 percent that your Post-Clinton CPI calculations indicates. By holding your Fed rate at a falsely low rate, you are firing highly-leveraged speculation with falsely cheap credit, to say nothing of your fast expanding money supply!

"This is not missed by international currency traders who, in turn, are putting such severe downward pressure on your dollar that you are effectively doing what you accuse the Chinese of doing, subsidizing your exports. But, even more seriously you are eroding confidence in your dollar as a reserve currency.

"You now risk plunging the entire world into a financial panic and a resulting depression, from which we all would suffer severely. The time for "dilly-dallying" by merely holding your Fed rate at a falsely low level for purely domestic reasons is over. We think it is time to face international realism and to raise your Fed rate to a level that will reflect the real world in which we all live and so preclude a financial disaster of massive proportions."

If we are right in our view of the "hidden meaning" (central bankers' coded signal), in the BIS report, then all bets are off for tomorrow's FOMC rate setting.

We believe that, all things being equal, the majority of FOMC members want to leave their rate on hold, even lessening the bias expressed in their statement.

However, with the evidence mounting of the housing bust we have long forecast, resulting in a massive unwinding of "stealth risk"; of a leveling-off in estimated corporate earnings, and of a looming domestic recession, the weaker FOMC members may urge a cut in the Fed rate.


However, we believe that Fed Chairman is increasingly worried about U.S. inflation. If he reads the BIS statement as we think it could be read and he receives forceful "informal" advice from his fellow BIS member central bankers, he may even urge his FOMC to consider a toughening of the wording in the FOMC statement or even a hike in rates.

A hike in the Fed rate would come as a great shock. But, we believe that we, in America, can not go on in the profligate manner in which our government has done, without facing some shocks, possibly becoming increasingly severe, the longer decision is postponed.

In summary therefore, we feel that the Fed is in an extremely difficult position.

For the first time in over a year, we believe the way is now open for all three options: a cut, a hold, and even a hike in the Fed rate.

We are truly in interesting times.

http://www.newsmax.com/money/archives/articles/2007/6/28/095111.cfm
 
A

Anonymous

Guest
"But," we think the majority of important BIS member banks may say, "Looking at the Pre-Clinton calculation of your CPI, we see your inflation rate at some 6 percent rather than the 2.3 percent that your Post-Clinton CPI calculations indicates. By holding your Fed rate at a falsely low rate, you are firing highly-leveraged speculation with falsely cheap credit, to say nothing of your fast expanding money supply!

Right there says it all-- for the last 5-6 years we have been lied to about actual inflation-- by the administration developing a new way of calculating it :roll: Looks good for politics for a couple years- but when it catches up with us it will bite us in the butt good...

You tell me- look at your costs and tell me that inflation is 2.3% -- Look at the change in oil and gas prices, fertilizer, land, food, clothing, meals at a restaurant, vehicles and equipment, etc. etc.-- then tell me that the boys in D.C. haven't been juggling the figures to deceive folks....
 
Top