Prescient, Again?

I've often railed against a motley crew of individuals, firms and agencies who helped create the mess we are in. That includes most regulatory authorities, who were largely asleep at the switch, both as the various bubbles were being inflated and as they burst.

However, there is one organization, the Bank for International Settlements -- which might be a surprise to some given the nature of its mission -- that seems to be somewhat ahead of the curve.

I first mentioned the BIS at Financial Armageddon when I detailed the bank's warning around a year ago, in "The Week's Big Story," that "years of loose monetary policy has fuelled a dangerous credit bubble, leaving the global economy more vulnerable to another 1930s-style slump than generally understood."

Since then, of course, their words have proved prescient.

As it happens, the organization is once again commenting on the outlook, and the picture is not reassuring. In "Global Economy Faces Deep Slowdown, Warns Central Bankers' Club," the Daily Telegraph's economics editor, Edmund Conway, gives us the gory details.

The global economy may be heading for a far deeper crisis than is expected and a bout of deflation in the world's biggest economies is now a possibility, according to one of the world's most highly regarded economic institutions.

The Bank for International Settlements has warned that many in the City and elsewhere may have underestimated the scale of the coming economic downturn in one of its most sombre portraits yet of the international financial system.

The Swiss institution - known as the central bankers' bank - issued the alert in its annual report, released today.

advertisementIt warned that the sub-prime crisis in financial markets was merely a reflection of growing debt burdens in the developed world, which could soon contribute to a deep slowdown.

"The difficulties in the sub-prime market were a trigger for, rather than a cause of, all the disruptive events that have followed," it said. "Moreover... the magnitude of the problems yet to be faced could be much greater than many now perceive."

The warning will cause particular concern among participants in the financial sector, as the BIS was among the earliest major institutions to warn that the world could face a credit crisis and financial slump.

The report draws stark comparisons between the current crisis and a variety of others including the Great Depression.

It said: "Historians would recall the long recession beginning in 1873, the global downturn that began in the late 1920s, and the Japanese and Asian crises of the early and late 1990s respectively.

" In each episode, a long period of strong credit growth coincided with an increasingly euphoric upturn in both the real economy and financial markets, followed by an unexpected crisis and extended downturn.

"In virtually every instance, some form of new economic discovery or new financial development provided a further 'new era' justification for rapid credit expansion, and predictably became a focus for blame in the downturn."

Most sobering is the report's warning that developed economies including the US and Britain could face deflation.

It said: "The eventual global slowdown could prove to be much greater and longer lasting than would be required to keep inflation under control. This could potentially even lead to deflation, which would evidently be less welcome."

Comments

[roger]

Similar warning issued in the last 10 days by:Royal Bank of Scotland,Barclays,Fortis

[Frank]

It seems we are nearing a critical juncture where the pain of overleveraging and credit expansion must manifest itself in some corporeal form. Such instances generally behave as a bifurcation point signaling increased market volatility and sensitivity to geopolitical events.
In light of this it is wise to be prepared either for extreme stagflation or deflation followed by capital flight.
In short,keep some cash, keep some gold, keep some silver, keep some food.
Stay safe.

[Ed H]

Michael,

Good post. It's funny because everyone is pointing out this BLS report: Calculated Risk, Tim Iacona at the mess that greenspan created and myself. There's actually a second Telegraph article by Ambrose Pritchard-Evans that I link to in my post. The article is a very good read.

http://www.creditwritedowns.com/2008/06/bis-warns-of-worsening-credit-crisis.html

Follow Evans-Pritchard. He's a good reporter. Also, the article got me to thinking about the Depression and bear market rallies. There were 6 of them during the fall from 1929-1932. I chart them in a related post. Enjoy.

http://www.creditwritedowns.com/2008/06/chart-of-day-dow-1928-1932.html

Ed H

Thanks for your insights. This is a great site!