John Ransom

The bank that acts as the central bank to the world’s central bankers launched a scathing attack on U.S. monetary and fiscal policy, warning that unless interest rates are raised and the U.S. deficit is addressed, the world economy risks rapid inflation and financial instability.

The report underscores the increasing danger that U.S. monetary and fiscal policy could contribute to another world-wide financial meltdown.

“Tighter global monetary policy is needed in order to contain inflation pressures and ward off financial stability risks,” the BIS said in its annual report published… in Basel, Switzerland according to Bloomberg. “Central banks may have to be prepared to raise policy rates at a faster pace than in previous tightening episodes.”

It also urged governments to cut budgets saying that “Nowhere is the link between fiscal sustainability and financial health more apparent than in parts of Europe today. There is no easy way out, no shortcut, no painless solution.”

That assessment is at odds with policies outlined last week by Fed Chief Ben Bernanke who says that inflation risks are only temporary and that interest rates for the U.S., at least, are going to remain low for "an extended period" according to Reuters.

Says the report from Reuters:

Asked exactly how long that is, Bernanke said "at least two to three meetings ... and I emphasize at least."

The Federal Reserve has quarterly meetings to discuss interest rates, so when Bernanke says “two or three meetings,” he means six to nine months, at least, inflation be damned.  

The BIS however disagrees.  

“Global inflation pressures are rising rapidly as commodity prices soar and as the global recovery runs into capacity constraints. These increased upside risks to inflation call for higher policy rates,” the BIS report continued.

Last week, we pointed out in Global Bankruptcy Months Away? that the U.S. government might have trouble financing its debt at current rates, because they were too low to compensate investors for the risks involved. If rates went back to the historic norm of 4 percent, the feds would be facing interest rates of $600 billion to finance the current debt.

John Ransom

John Ransom is the Finance Editor for Townhall Finance, host of Ransom Notes Radio and you can catch more of the best money advice and monetary commentary by him daily 10am PT, 1pm ET at or on Comcast Cable

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