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.
To put that number in perspective, that’s about the size of the defense appropriation for 2010 or about 20 percent of the entire federal budget.
The federal budget roughly consists of 20 percent for defense; 20 percent for Social Security; 20 percent for Medicaid; 20 percent discretionary; 6 percent for interest and 14 percent for other mandatory spending. When interest rates rise, the U.S. will face the types of austerity measures that are facing Greece now.
That’s one of the reasons the government is insisting on keeping rates so low. They can’t afford higher rates and do all the social engineering they want.
As queen of the Baby Boomers, Hillary Clinton once explained "I have a million ideas. The country can't afford them all."
We can’t afford any of them, apparently, even thankfully.
According to Bloomberg, the BIS is warning too that the U.S. must cut the federal budget too or risk the health of the global economy:
The BIS warned that a failure of the U.S. to tackle its budget deficit could become a source of instability, with potentially “far-reaching ramifications for the global economy” should a rapid depreciation of the dollar result.
“The current ability of the United States to easily finance its deficit cannot be taken for granted,” the report said.
Some financial experts already worry that the U.S. will face increasing difficulty raising money for deficit financing.
Peter Schiff, president of Euro Pacific Capital told Townhall Finance last week that the only substantial buyer of U.S securities has been the Federal Reserve.
“There’s no real private demand for Treasuries,” said Schiff. “No one buys them to hold them. They flip them, just like condos in Vegas.”
In fact Reuters noted two weeks ago that demand for U.S. Treasuries has been slackening for months.
“Foreigners bought Treasuries in April but the total net inflow fell by $3.4 billion to $23.3 billion,” wrote Reuters on June 15th, “the fifth consecutive monthly decline. The slide was driven by private foreign investors, who turned their backs on Treasuries in April and sold a net $751 million….Some analysts said reduced private demand for Treasuries may reflect concern over U.S. public finances. The U.S. government budget gap is expected to hit $1.4 trillion this year and stay in the trillion-dollar range for several years.”
The Federal Reserve is expected to finish buying government bonds in the open market this month as talks on deficit reduction start up again in D.C., this time with Obama in the lead.
This might be the most delicate time in the country’s financial history since 1937.
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