I am almost finished with a full history of the bank written by Adam Lebor. In Lebor's book "Tower of Basel" he explains how the bank was raising subtle warnings of instability in the markets prior to the crash of 2008. Based on what I've learned from various sources about the condition of the global economy, the BIS report offers an unbiased and extraordinarily credible view of the current macro situation. The BIS uses its position at the center of international banking circles to power one of the best economic research departments in the world. I feel that the content of this report lends a great deal of credibility to the book Code Red and seems to support some of the opinions of Peter Schiff, Gerald Celente, and even Alex Jones.
Understanding the report necessarily demands knowledge of recent economic history and recent developments in global political economy. The BIS writes in very broad terms, careful not to offend any one nation. The report's ambiguous language makes it sometimes difficult to pin down meaning specifically, but bear through my interpretation and let me know your thoughts.
The BIS starts their report by summing up the current macroeconomic picture:
"The global economy continues to face serious challenges. Despite a pickup in growth, it has not shaken off its dependence on monetary stimulus. Monetary policy is still struggling to normalise after so many years of extraordinary accommodation. Despite the euphoria in financial markets, investment remains weak. Instead of adding to productive capacity, large firms prefer to buy back shares or engage in mergers and acquisitions. And despite lacklustre long-term growth prospects, debt continues to rise"--section one page one
Essentially the BIS seems to agree with the thesis of Code Red, that financial markets are being distorted by central bank policies. They take their view further by stating that long-term growth prospects are low, yet central banks are encouraging the world to take on more debt. I find this fascinating in light of what we are being told by the government and mainstream media. The CBO and other major economic data agencies in the US have continuously overestimated projections for growth in the US, arguing that the radical monetary and fiscal policies of the FRB can be paid off by GDP growth that seems, at this stage, increasingly implausible. Here the BIS seems to be implying that the US will never be able to grow out from under the mountain of debt it has built up.
The BIS then comments on the Great Recession and makes a comment that confirms my long standing opinion that the crash of '08 was a defining moment in world history:
The crisis that erupted in August 2007 and peaked roughly one year later marked a defining moment in economic history. It was a watershed, both economically and intellectually: we now naturally divide developments into pre- and post-crisis. It cast a long shadow into the past: the crisis was no bolt from the blue, but stemmed almost inevitably from deep forces that had been at work for years, if not decades. And it cast a long shadow into the future: its legacy is still with us and shapes the course ahead.
This passage seems to explicitly support my personal theory that the crash of '08 merely revealed underlying weakness in the global economy. I would suggest that the "deep forces" that have been at work for years are rooted in structural flaws in our system that seem to have crystallized the economic arrangement in the US and prevented positive change and correct utilization of technology to occur. Disastrous patterns of credit allocation and systemic issues of inequality and political stagnation may have sapped the US economy of its dynamism in the run up to the crash of '08.
The BIS goes on to support this view:
The busts reveal the resource misallocations and structural deficiencies that were temporarily masked by the booms.
It is interesting to note one more thing about this statement of the BIS and this theory of resource misallocation. I would suggest that the economic outlook of the BIS researches is moving in the direction of Austrian economic thinking, as opposed to the Keynesian view which has dominated political economic thinking worldwide since the start of the new millennium. The Austrians famously blame economic crises on bad investments and emphasize supply side economic recoveries. I will develop this point a little later.
6 years after the crash of '08 little actual structural change has occurred. Awareness that stimulus induced growth may not be able to set the US back on the path of prosperity forged between 1945 and 2000 is just now taking hold. Meanwhile financial markets boom:
Overall, it is hard to avoid the sense of a puzzling disconnect between the markets' buoyancy and underlying economic developments globally.
Here I will make the assertion made elsewhere in the Markets Musings letter and in Code Red that the "puzzling disconnect" is caused mainly by the QE and ZIRP policies adopted by the FRB, BoJ, and ECB. As money flows out of the banks into the broken economic engine it has chased money into the stock market, causing a boom that attracts further investment from retail and small investors. The fact that the BIS points out this disconnect is probably an indication that markets around the world may be nearing bubble conditions.
Next they suggest some structural reforms they deem necessary to return the world to a higher growth patern:
"But it will frequently include deregulating protected sectors, such as services, improving labour market flexibility, raising participation rates and trimming public sector bloat."
Notice here how they mention “public sector bloat.” In the post recession period we have seen an explosion in the public sector. It is interesting to note how the BIS is here telling us that this must be trimmed in order to allow growth to resume. Keep in mind the trend of government employment in the US and the way the US government continues to applaud itself for creating jobs.
A rejection of Keynesianism: “More emphasis on repair and reform implies relatively less on expansionary demand management.” I have said before and I say again that it appears as though the most intelligent and honest economists are beginning to reject the Keynesian attitudes held at the FRB and shifting towards an Austrian approach. “Demand management,” the greasing of financial wheels to stimulate spending, is the key tenant of Keynesian economics.
“While some monetary accommodation is no doubt necessary, excessive demands have been made on it post-crisis.” They do here however state that they do believe some monetary accommodation is necessary they are most likely referring to traditionally low interest rates in depressed periods and their assertion that excessive demands have been made on it seems to imply that they believe the “Great Keynesian Experiment” I have been examining is going to fail.
“ Particularly for countries in the late stages of financial booms, the trade-off is now between the risk of bringing forward the downward leg of the cycle and that of suffering a bigger bust later on.” I would suggest that US is one of these countries in the late stages of financial booms that are now sowing the seeds for a bigger bust down the line.
In support of Peter Schiff’s outspoken critique of the modern Keynesian denouncement of deflation: “Historically, periods of falling prices have often coincided with sustained output growth. And the experience of more recent decades is no exception. Moreover, conditions have changed substantially since the 1930s, not least with regard to downward wage flexibility. This is no reason to be complacent about the risks and costs of falling prices: they need to be monitored and assessed closely, especially where debt levels are high. But it is a reason to avoid knee-jerk reactions prompted by emotion.” I would suggest that they are here implying that given the stagnant state of wages deflation should be a natural way of maintaining supply/demand equilibrium. For whatever reason central bankers and economists continue to decry deflation and laud the benefits of inflation. I would suggest that these economists may have the sinister motive, at least subconsciously, of advocating for inflation that protects only the wealthy and those that own stocks. For the poor and middle class consumers who’s wages have been stagnant for 30 years, rising prices are NOT at all a good thing, and if we assume that they are the engine for economic growth, they can’t be good for the economy either.
Finally the BIS makes a statement reminiscent of their warning in the run up to 2008: “The risks of failing to act should not be underestimated. The global economy may be set on an unsustainable path. And at some point, the current open global trade and financial order could be seriously threatened. So far, institutional setups have proved remarkably resilient to the huge shock of the financial crisis. But we should not take this for granted, especially if serious financial stress were to resurface.” I feel that they agree with me that the global economy is drifting onto an unsustainable path. Another crash, further financial stress, could emerge in any number of markets. The resurfacing of the sub-prime market, the bloated auto loan market, student loan markets, and most ominously the sovereign debt market, all pose serious threats due to their sheer size.
The final word of the BIS report is most interesting to us as citizens given what I have just said about the danger of the global bond market: “Meanwhile, the consensus on the merits of price stability is fraying at the edges. And, as memories of the costs and persistence of inflation fade, the temptation could grow to void the huge debt burdens through a combination of inflation, financial repression and autarky.” Remember in Code Red how Maudlin and Tepper stated that central banks were creating conditions of extreme financial repression in order to manage their huge commitments. The BIS seems to be implying that the monetary authorities are succumbing to “temptation” to create conditions that benefit debtors at the expense of savers. Of course, the monetary authorities and their corporate sponsors are by far the world’s biggest debtors. If these inflationary debt mitigating policies continue we as citizens will find the most powerful citizens in the nation receiving a free lunch at the expense of our savings. Given what we know about deflation it is increasingly disturbing how the world is now convinced that inflation is suddenly positive for the economy even though we of the middle class are being hit the hardest.
In conclusion the global economy may be on an unsustainable path. The BIS seems thoroughly unconvinced of the motives and policies of central banks and this seems to suggest looming economic woes that are difficult to forecast. I feel that at this point the only thing we can be sure of is continued financial repression, goosing from monetary authorities, and overall declining purchasing power due to inflationary measures. I feel the best thing for us to do as investors is hedge against declines in currencies by buying assets, stocks, and bullion. Meanwhile we should monitor those running our financial institutions and prepare for them to lure us into more expensive policy traps that benefit the upper echelon of American society.
Understanding the report necessarily demands knowledge of recent economic history and recent developments in global political economy. The BIS writes in very broad terms, careful not to offend any one nation. The report's ambiguous language makes it sometimes difficult to pin down meaning specifically, but bear through my interpretation and let me know your thoughts.
The BIS starts their report by summing up the current macroeconomic picture:
"The global economy continues to face serious challenges. Despite a pickup in growth, it has not shaken off its dependence on monetary stimulus. Monetary policy is still struggling to normalise after so many years of extraordinary accommodation. Despite the euphoria in financial markets, investment remains weak. Instead of adding to productive capacity, large firms prefer to buy back shares or engage in mergers and acquisitions. And despite lacklustre long-term growth prospects, debt continues to rise"--section one page one
Essentially the BIS seems to agree with the thesis of Code Red, that financial markets are being distorted by central bank policies. They take their view further by stating that long-term growth prospects are low, yet central banks are encouraging the world to take on more debt. I find this fascinating in light of what we are being told by the government and mainstream media. The CBO and other major economic data agencies in the US have continuously overestimated projections for growth in the US, arguing that the radical monetary and fiscal policies of the FRB can be paid off by GDP growth that seems, at this stage, increasingly implausible. Here the BIS seems to be implying that the US will never be able to grow out from under the mountain of debt it has built up.
The BIS then comments on the Great Recession and makes a comment that confirms my long standing opinion that the crash of '08 was a defining moment in world history:
The crisis that erupted in August 2007 and peaked roughly one year later marked a defining moment in economic history. It was a watershed, both economically and intellectually: we now naturally divide developments into pre- and post-crisis. It cast a long shadow into the past: the crisis was no bolt from the blue, but stemmed almost inevitably from deep forces that had been at work for years, if not decades. And it cast a long shadow into the future: its legacy is still with us and shapes the course ahead.
This passage seems to explicitly support my personal theory that the crash of '08 merely revealed underlying weakness in the global economy. I would suggest that the "deep forces" that have been at work for years are rooted in structural flaws in our system that seem to have crystallized the economic arrangement in the US and prevented positive change and correct utilization of technology to occur. Disastrous patterns of credit allocation and systemic issues of inequality and political stagnation may have sapped the US economy of its dynamism in the run up to the crash of '08.
The BIS goes on to support this view:
The busts reveal the resource misallocations and structural deficiencies that were temporarily masked by the booms.
It is interesting to note one more thing about this statement of the BIS and this theory of resource misallocation. I would suggest that the economic outlook of the BIS researches is moving in the direction of Austrian economic thinking, as opposed to the Keynesian view which has dominated political economic thinking worldwide since the start of the new millennium. The Austrians famously blame economic crises on bad investments and emphasize supply side economic recoveries. I will develop this point a little later.
6 years after the crash of '08 little actual structural change has occurred. Awareness that stimulus induced growth may not be able to set the US back on the path of prosperity forged between 1945 and 2000 is just now taking hold. Meanwhile financial markets boom:
Overall, it is hard to avoid the sense of a puzzling disconnect between the markets' buoyancy and underlying economic developments globally.
Here I will make the assertion made elsewhere in the Markets Musings letter and in Code Red that the "puzzling disconnect" is caused mainly by the QE and ZIRP policies adopted by the FRB, BoJ, and ECB. As money flows out of the banks into the broken economic engine it has chased money into the stock market, causing a boom that attracts further investment from retail and small investors. The fact that the BIS points out this disconnect is probably an indication that markets around the world may be nearing bubble conditions.
Next they suggest some structural reforms they deem necessary to return the world to a higher growth patern:
"But it will frequently include deregulating protected sectors, such as services, improving labour market flexibility, raising participation rates and trimming public sector bloat."
Notice here how they mention “public sector bloat.” In the post recession period we have seen an explosion in the public sector. It is interesting to note how the BIS is here telling us that this must be trimmed in order to allow growth to resume. Keep in mind the trend of government employment in the US and the way the US government continues to applaud itself for creating jobs.
A rejection of Keynesianism: “More emphasis on repair and reform implies relatively less on expansionary demand management.” I have said before and I say again that it appears as though the most intelligent and honest economists are beginning to reject the Keynesian attitudes held at the FRB and shifting towards an Austrian approach. “Demand management,” the greasing of financial wheels to stimulate spending, is the key tenant of Keynesian economics.
“While some monetary accommodation is no doubt necessary, excessive demands have been made on it post-crisis.” They do here however state that they do believe some monetary accommodation is necessary they are most likely referring to traditionally low interest rates in depressed periods and their assertion that excessive demands have been made on it seems to imply that they believe the “Great Keynesian Experiment” I have been examining is going to fail.
“ Particularly for countries in the late stages of financial booms, the trade-off is now between the risk of bringing forward the downward leg of the cycle and that of suffering a bigger bust later on.” I would suggest that US is one of these countries in the late stages of financial booms that are now sowing the seeds for a bigger bust down the line.
In support of Peter Schiff’s outspoken critique of the modern Keynesian denouncement of deflation: “Historically, periods of falling prices have often coincided with sustained output growth. And the experience of more recent decades is no exception. Moreover, conditions have changed substantially since the 1930s, not least with regard to downward wage flexibility. This is no reason to be complacent about the risks and costs of falling prices: they need to be monitored and assessed closely, especially where debt levels are high. But it is a reason to avoid knee-jerk reactions prompted by emotion.” I would suggest that they are here implying that given the stagnant state of wages deflation should be a natural way of maintaining supply/demand equilibrium. For whatever reason central bankers and economists continue to decry deflation and laud the benefits of inflation. I would suggest that these economists may have the sinister motive, at least subconsciously, of advocating for inflation that protects only the wealthy and those that own stocks. For the poor and middle class consumers who’s wages have been stagnant for 30 years, rising prices are NOT at all a good thing, and if we assume that they are the engine for economic growth, they can’t be good for the economy either.
Finally the BIS makes a statement reminiscent of their warning in the run up to 2008: “The risks of failing to act should not be underestimated. The global economy may be set on an unsustainable path. And at some point, the current open global trade and financial order could be seriously threatened. So far, institutional setups have proved remarkably resilient to the huge shock of the financial crisis. But we should not take this for granted, especially if serious financial stress were to resurface.” I feel that they agree with me that the global economy is drifting onto an unsustainable path. Another crash, further financial stress, could emerge in any number of markets. The resurfacing of the sub-prime market, the bloated auto loan market, student loan markets, and most ominously the sovereign debt market, all pose serious threats due to their sheer size.
The final word of the BIS report is most interesting to us as citizens given what I have just said about the danger of the global bond market: “Meanwhile, the consensus on the merits of price stability is fraying at the edges. And, as memories of the costs and persistence of inflation fade, the temptation could grow to void the huge debt burdens through a combination of inflation, financial repression and autarky.” Remember in Code Red how Maudlin and Tepper stated that central banks were creating conditions of extreme financial repression in order to manage their huge commitments. The BIS seems to be implying that the monetary authorities are succumbing to “temptation” to create conditions that benefit debtors at the expense of savers. Of course, the monetary authorities and their corporate sponsors are by far the world’s biggest debtors. If these inflationary debt mitigating policies continue we as citizens will find the most powerful citizens in the nation receiving a free lunch at the expense of our savings. Given what we know about deflation it is increasingly disturbing how the world is now convinced that inflation is suddenly positive for the economy even though we of the middle class are being hit the hardest.
In conclusion the global economy may be on an unsustainable path. The BIS seems thoroughly unconvinced of the motives and policies of central banks and this seems to suggest looming economic woes that are difficult to forecast. I feel that at this point the only thing we can be sure of is continued financial repression, goosing from monetary authorities, and overall declining purchasing power due to inflationary measures. I feel the best thing for us to do as investors is hedge against declines in currencies by buying assets, stocks, and bullion. Meanwhile we should monitor those running our financial institutions and prepare for them to lure us into more expensive policy traps that benefit the upper echelon of American society.
I am in the process of reading the Bank for International Settlements 84th annual report published late this June and covering the time period between June 2013 and June 2014. Here is a link to a short bio of the bank: http://en.wikipedia.org/wiki/Bank_for_International_Settlements
I am almost finished with a full history of the bank written by Adam Lebor. In Lebor's book "Tower of Basel" he explains how the bank was raising subtle warnings of instability in the markets prior to the crash of 2008. Based on what I've learned from various sources about the condition of the global economy, the BIS report offers an unbiased and extraordinarily credible view of the current macro situation. The BIS uses its position at the center of international banking circles to power one of the best economic research departments in the world. I feel that the content of this report lends a great deal of credibility to the book Code Red and seems to support some of the opinions of Peter Schiff, Gerald Celente, and even Alex Jones.
Understanding the report necessarily demands knowledge of recent economic history and recent developments in global political economy. The BIS writes in very broad terms, careful not to offend any one nation. The report's ambiguous language makes it sometimes difficult to pin down meaning specifically, but bear through my interpretation and let me know your thoughts.
The BIS starts their report by summing up the current macroeconomic picture:
"The global economy continues to face serious challenges. Despite a pickup in growth, it has not shaken off its dependence on monetary stimulus. Monetary policy is still struggling to normalise after so many years of extraordinary accommodation. Despite the euphoria in financial markets, investment remains weak. Instead of adding to productive capacity, large firms prefer to buy back shares or engage in mergers and acquisitions. And despite lacklustre long-term growth prospects, debt continues to rise"--section one page one
Essentially the BIS seems to agree with the thesis of Code Red, that financial markets are being distorted by central bank policies. They take their view further by stating that long-term growth prospects are low, yet central banks are encouraging the world to take on more debt. I find this fascinating in light of what we are being told by the government and mainstream media. The CBO and other major economic data agencies in the US have continuously overestimated projections for growth in the US, arguing that the radical monetary and fiscal policies of the FRB can be paid off by GDP growth that seems, at this stage, increasingly implausible. Here the BIS seems to be implying that the US will never be able to grow out from under the mountain of debt it has built up.
The BIS then comments on the Great Recession and makes a comment that confirms my long standing opinion that the crash of '08 was a defining moment in world history:
The crisis that erupted in August 2007 and peaked roughly one year later marked a defining moment in economic history. It was a watershed, both economically and intellectually: we now naturally divide developments into pre- and post-crisis. It cast a long shadow into the past: the crisis was no bolt from the blue, but stemmed almost inevitably from deep forces that had been at work for years, if not decades. And it cast a long shadow into the future: its legacy is still with us and shapes the course ahead.
This passage seems to explicitly support my personal theory that the crash of '08 merely revealed underlying weakness in the global economy. I would suggest that the "deep forces" that have been at work for years are rooted in structural flaws in our system that seem to have crystallized the economic arrangement in the US and prevented positive change and correct utilization of technology to occur. Disastrous patterns of credit allocation and systemic issues of inequality and political stagnation may have sapped the US economy of its dynamism in the run up to the crash of '08.
The BIS goes on to support this view:
The busts reveal the resource misallocations and structural deficiencies that were temporarily masked by the booms.
It is interesting to note one more thing about this statement of the BIS and this theory of resource misallocation. I would suggest that the economic outlook of the BIS researches is moving in the direction of Austrian economic thinking, as opposed to the Keynesian view which has dominated political economic thinking worldwide since the start of the new millennium. The Austrians famously blame economic crises on bad investments and emphasize supply side economic recoveries. I will develop this point a little later.
6 years after the crash of '08 little actual structural change has occurred. Awareness that stimulus induced growth may not be able to set the US back on the path of prosperity forged between 1945 and 2000 is just now taking hold. Meanwhile financial markets boom:
Overall, it is hard to avoid the sense of a puzzling disconnect between the markets' buoyancy and underlying economic developments globally.
Here I will make the assertion made elsewhere in the Markets Musings letter and in Code Red that the "puzzling disconnect" is caused mainly by the QE and ZIRP policies adopted by the FRB, BoJ, and ECB. As money flows out of the banks into the broken economic engine it has chased money into the stock market, causing a boom that attracts further investment from retail and small investors. The fact that the BIS points out this disconnect is probably an indication that markets around the world may be nearing bubble conditions.
Next they suggest some structural reforms they deem necessary to return the world to a higher growth patern:
"But it will frequently include deregulating protected sectors, such as services, improving labour market flexibility, raising participation rates and trimming public sector bloat."
Notice here how they mention “public sector bloat.” In the post recession period we have seen an explosion in the public sector. It is interesting to note how the BIS is here telling us that this must be trimmed in order to allow growth to resume. Keep in mind the trend of government employment in the US and the way the US government continues to applaud itself for creating jobs.
A rejection of Keynesianism: “More emphasis on repair and reform implies relatively less on expansionary demand management.” I have said before and I say again that it appears as though the most intelligent and honest economists are beginning to reject the Keynesian attitudes held at the FRB and shifting towards an Austrian approach. “Demand management,” the greasing of financial wheels to stimulate spending, is the key tenant of Keynesian economics.
“While some monetary accommodation is no doubt necessary, excessive demands have been made on it post-crisis.” They do here however state that they do believe some monetary accommodation is necessary they are most likely referring to traditionally low interest rates in depressed periods and their assertion that excessive demands have been made on it seems to imply that they believe the “Great Keynesian Experiment” I have been examining is going to fail.
“Particularly for countries in the late stages of financial booms, the trade-off is now between the risk of bringing forward the downward leg of the cycle and that of suffering a bigger bust later on.” I would suggest that US is one of these countries in the late stages of financial booms that are now sowing the seeds for a bigger bust down the line.
In support of Peter Schiff’s outspoken critique of the modern Keynesian denouncement of deflation: “Historically, periods of falling prices have often coincided with sustained output growth. And the experience of more recent decades is no exception. Moreover, conditions have changed substantially since the 1930s, not least with regard to downward wage flexibility. This is no reason to be complacent about the risks and costs of falling prices: they need to be monitored and assessed closely, especially where debt levels are high. But it is a reason to avoid knee-jerk reactions prompted by emotion.” I would suggest that they are here implying that given the stagnant state of wages deflation should be a natural way of maintaining supply/demand equilibrium. For whatever reason central bankers and economists continue to decry deflation and laud the benefits of inflation. I would suggest that these economists may have the sinister motive, at least subconsciously, of advocating for inflation that protects only the wealthy and those that own stocks. For the poor and middle class consumers who’s wages have been stagnant for 30 years, rising prices are NOT at all a good thing, and if we assume that they are the engine for economic growth, they can’t be good for the economy either.
Finally the BIS makes a statement reminiscent of their warning in the run up to 2008: “The risks of failing to act should not be underestimated. The global economy may be set on an unsustainable path. And at some point, the current open global trade and financial order could be seriously threatened. So far, institutional setups have proved remarkably resilient to the huge shock of the financial crisis. But we should not take this for granted, especially if serious financial stress were to resurface.” I feel that they agree with me that the global economy is drifting onto an unsustainable path. Another crash, further financial stress, could emerge in any number of markets. The resurfacing of the sub-prime market, the bloated auto loan market, student loan markets, and most ominously the sovereign debt market, all pose serious threats due to their sheer size.
The final word of the BIS report is most interesting to us as citizens given what I have just said about the danger of the global bond market: “Meanwhile, the consensus on the merits of price stability is fraying at the edges. And, as memories of the costs and persistence of inflation fade, the temptation could grow to void the huge debt burdens through a combination of inflation, financial repression and autarky.” Remember in Code Red how Maudlin and Tepper stated that central banks were creating conditions of extreme financial repression in order to manage their huge commitments. The BIS seems to be implying that the monetary authorities are succumbing to “temptation” to create conditions that benefit debtors at the expense of savers. Of course, the monetary authorities and their corporate sponsors are by far the world’s biggest debtors. If these inflationary debt mitigating policies continue we as citizens will find the most powerful citizens in the nation receiving a free lunch at the expense of our savings. Given what we know about deflation it is increasingly disturbing how the world is now convinced that inflation is suddenly positive for the economy even though we of the middle class are being hit the hardest.
In conclusion the global economy may be on an unsustainable path. The BIS seems thoroughly unconvinced of the motives and policies of central banks and this seems to suggest looming economic woes that are difficult to forecast. I feel that at this point the only thing we can be sure of is continued financial repression, goosing from monetary authorities, and overall declining purchasing power due to inflationary measures. I feel the best thing for us to do as investors is hedge against declines in currencies by buying assets, stocks, and bullion. Meanwhile we should monitor those running our financial institutions and prepare for them to lure us into more expensive policy traps that benefit the upper echelon of American society.
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