Tuesday, July 01, 2008

A tipping point toward global deflation?

The Bank for International Settlements reported yesterday that the current global financial situation - viewed as a bust after a boom - could trigger a global recession on a par with that experienced in the 1930s. The full report is here. Basically it argued that central banks should act as, well, central banks, by restraining excess credit growth by raising interest rates during boom times and puttting aside capital so that cutbacks on lending could be more restrained when times turn bad.

The BIS instruction seems to be to keep current interest rates high even if inflationary expectations do not materialise. On balance however they do see inflation as a threat obviously driven by high oil prices although they see wage increases as a significant threat. According to the credit crunch now being engineered by central banks has the potential to have catastrophic implications for the global economy.

6 comments:

Sinclair Davidson said...

I just read the introduction and conclusion of that report. It seems to be all over the place. Some stock standard criticism of high levels of debt followed by some scare mongering. The 'solution', unsurprisingly from the global prudential regulator, is greater prudential regulation.

Anonymous said...

They appear to be fighting the last war.

Id we are anywhere near a financial meltdown then central banks should ensure a very steep yield curve at the short end so Banks can regain profitability

derrida derider said...

Wage increases as a threat? LOL - if the workers were so quiescent when the profit share was at historic highs during the boom, how on earth will they get these increases in the slump?

Anonymous, they're not fighting the last war - they're fighting the one of thirty years ago. Wage-push inflation is pretty well non-existent everywhere these days.

hc said...

Derrida, They are of course concerned with the possibility of a wage induced inflationary spiral as is every macroeconomist in Australia I know. The RBA are full of it.

A once and for all price shock is nothing - we just get a bit poorer. Its when expectations of such shocks get built into interest rates and wages that things get nasty.

Ali.mostaque said...

Well professor,

Its all planned, the global melt down....

Repetition of 1929, only worse....to consolidate power within the tentacles of fewer people....and a lot of people are going to suffer because of this......because there's a lot more people now than there as in 1929.

I am sure you can produce a sophisticated model to explain all this, but not the geo-politics of it.....thats the real cause....

Regards.

derrida derider said...

Oh yes, Harry, I know the RBA are full of it. But that's my point - they are full of it while there is with no evidence at all. The big risks to the labour market at the moment are all on the downside, not the upside.