BIS Warns Central Banks to Stop Easy Money While U.S. GDP Disappoints Yet Again

by The Curmudgeon

At the Annual Meeting of the Bank for International Settlements (BIS) in Basel, Switzerland, General Manager Jaime Caruana called for the world's Central Banks to take their foot off the easy money accelerator. In effect, this was a loud and clear rebuke to Central Bank policies of artificially low short term interest rates and debt monetization. One has to believe that the BIS was primarily pointing its finger at the U.S. Federal Reserve!

Central banks currently find themselves "caught in the middle," Caruana said, "forced to be the policy makers of last resort." They are providing monetary stimulus on a "massive scale, supplying liquidity to banks unable to fund themselves in markets and easing government financing burdens by keeping interest rates low," he added.

The Basel-based BIS, which is in effect the Central Bank for sovereign Central Banks, said cheap and plentiful bank created money had merely bought time; warning that more bond buying would retard the global economy’s return to health.

Mr. Canuana stated, "These emergency measures could have undesirable side effects if continued for too long," he said. "A worry is that monetary policy would be pressured to do still more because not enough action has been taken in other areas."

The BIS annual report calls on member banks to re-emphasize their focus on inflation and press governments to do more to spearhead a return to meaningful growth. The BIS report stated that the global economy was “past the height of the crisis” and its goal should be “to return still-sluggish economies to strong and sustainable growth. Alas, central banks cannot do more without compounding the risks they have already created,” BIS said, and delivering more “extraordinary” stimulus was “becoming increasingly perilous."

“Ours is a call for acting responsibly now to strengthen growth and avoid even costlier adjustment down the road . . . Monetary policy has done its part. Fiscal adjustment, the repair of banks' balance sheets and other reforms cannot be put off in the hope of better times," Mr. Caruana said. "Relying only on central bankers, but failing to act on other fronts would ultimately damage confidence and increase the risks to macroeconomic and financial stability."

European Central Bank President Mario Draghi said last summer (at the height of the Eurozone monetary crisis), that the ECB would do “whatever it takes” to preserve the currency bloc. That message was now being misconstrued, the BIS warned. “Can central banks now really do ‘whatever it takes’?” BIS asked. “It seems less and less likely. Central banks cannot repair the balance sheets of households and financial institutions.”

Stephen Cecchetti, head of the BIS’s monetary and economic department, said at the end of last month that the initial rise in yields for US Treasuries and stock market reaction following Mr. Bernanke’s hints in May that the Fed would slow its asset purchases “should come as no surprise."

“One cannot reverse the Fed’s big bang moment,” said George Goncalves, strategist at Nomura Securities, adding that the scale of foreign demand for this week’s Treasury debt sales will be a crucial test of sentiment.

The Curmudgeon has repeatedly criticized the Fed's egregious and reckless monetary policy. The solid evidence speaks for itself: unemployment has not significantly decreased, the total number of employed has not increased, while economic growth continues to be significantly below its 3% trend. The U.S. economy continues to limp along, despite the Fed's extraordinary monetary stimulus.

Today it was reported that U.S. GDP increased at an annual rate of 1.8 % in the first quarter of 2013 (from the fourth quarter to the first quarter), according to the "third" estimate released by the Bureau of Economic Analysis. That's down from the previous estimate of 2.4%. In the fourth quarter, real GDP increased 0.4 percent.

Victor Sperandeo thinks real GDP is actually much less than the government reports, because inflation is understated by the Bureau of Labor Statistics, which calculates the CPI and GDP deflator (implicit price deflator for GDP). In an email to the Curmudgeon, Victor wrote, "If the CPI or GDP deflator is too high, they (the government officials) take out a given item and put something else in. This is 'virtual corruption!'  The U.S. inflation numbers have no real meaning anymore. Instead, they have become a political objective."

And on that note, we wish readers better health than the U.S. economy!

Till next time......................................

The Curmudgeon
ajwdct@sbumail.com

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.