Letter Re: The BIS Issues a Global Economic Depression Warning, Points to China as Potential Trigger


UK’s Daily Telegraph has a warning from Bank of International Settlements (BIS) about danger of global economic depression. [JWR Adds: This was also featured by NewsMax in the US.]
Here are some excerpts from the Daily Telegraph article:
[begin quote]
“The Bank for International Settlements [BIS], the world’s most prestigious financial body, has warned that years of loose monetary policy has fueled a dangerous credit bubble, leaving the global economy more vulnerable to another 1930s-style slump than generally understood… …The BIS said China may have repeated the disastrous errors made by Japan in the 1980s when Tokyo let rip with excess liquidity advertisement” The Chinese economy seems to be demonstrating very similar, disquieting symptoms,” it said, citing ballooning credit, an asset boom, and “massive investments” in heavy industry.
Some 40 percent of China’s state-owned enterprises are loss-making, exposing the banking system to likely stress in a downturn.
It said China’s growth was “unstable, unbalanced, uncoordinated and unsustainable”, borrowing a line from Chinese premier Wen Jiabao In a thinly-veiled rebuke to the US Federal Reserve, the BIS said central banks were starting to doubt the wisdom of letting asset bubbles build up on the assumption that they could safely be “cleaned up” afterwards – which was more or less the strategy pursued by former Fed chief Alan Greenspan after the dot com bust.
It said this approach had failed in the US in 1930 and in Japan in 1991 because excess debt and investment built up in the boom years had suffocating effects. While cutting interest rates in such a crisis may help, it has the effect of transferring wealth from creditors to debtors and “sowing the seeds for more serious problems further ahead.” The bank said it was far from clear whether the US would be able to shrug off the consequences of its latest imbalances, citing a current account deficit running at 6.5 percent of GDP, a rise in US external liabilities by over $4 trillion from 2001 to 2005, and an unprecedented drop in the savings rate. “The dollar clearly remains vulnerable to a sudden loss of private sector confidence,” it said. [end quote] – Don W.

JWR Replies: I was shocked at how remarkably frank the BIS Annual Report was in its assessment. When even the international bankers start talking this way, watch out! Coincidentally, Sean M. and Tom at CometGold.com both spotted this new story: Banks ‘set to call in a swathe of loans’ Some serious “food for thought and grounds for further research” (FFTAGFFR).