BIS Bubble-Blower Warns About Bubbles
By Staff News & Analysis - July 01, 2014

Central Bankers, Worried About Bubbles, Rebuke Markets … An organization representing the world's main central banks warned on Sunday that dangerous new asset bubbles were forming even before the global economy has finished recovering from the last round of financial excess … The organization also had harsh words for corporations, which it said were not taking advantage of booming stock markets to step up investment. That is one reason that gains in productivity — the foundation of sustained economic growth — have slowed in most advanced economies, the bank said. – New York Times

Dominant Social Theme: The BIS is concerned, thank goodness.

Free-Market Analysis: What an article! Only by treating most every statement as false can we begin to approach the truth.

The excerpt notes that corporations are not "taking advantage of the booming stock market to step up investment." In a way, this is surely untrue. Corporations have been "investing," but not in core businesses. The investment has flowed into equity markets, into stock buybacks and other kinds of financial paper shuffling.

We've pointed this out for years now. Corporations are not investing in businesses because many businesses were propped up by successive waves of money printing. It's hard for people in industry to make investments when so many companies and whole industries may still be verging on bankruptcy.

Remember, it's widely acknowledged that central banks have printed something like US$50 trillion worldwide, which means that even the most fragile institution has probably had the resources to survive, even though it shouldn't have had.

Central banks print money and distribute it to commercial banks that lend primarily to corporations. It is then the job of corporations to use funds to generate increased business.

Here's more from the article:

"Despite the euphoria in financial markets, investment remains weak," the B.I.S. said. "Instead of adding to productive capacity, large firms prefer to buy back shares or engage in mergers and acquisitions."

Investors, desperate to earn returns when official interest rates are at or near record lows, have been driving up the prices of stocks and other assets with little regard for risk, the Bank for International Settlements in Basel, Switzerland, said in its annual report published on Sunday.

Recovery from the financial crisis that began in 2007 could take several more years, Jaime Caruana, the general manager of the B.I.S., said at the organization's annual meeting in Basel on Sunday. The recovery could be especially slow in Europe, he said, because debt levels remain high. "During the boom, resources were misallocated on a huge scale," Mr. Caruana said, according to a text of his speech, "and it will take time to move them to new and more productive uses."

The B.I.S. provides financial services to national central banks and also acts as a setting where central bankers can discuss monetary policy and other issues like financial stability or bank regulation. The board of directors includes Janet L. Yellen, chairwoman of the Federal Reserve; Mario Draghi, president of the European Central Bank; and the heads of central banks from Japan, China, India and many other countries.

The organization, which reflects a widespread view among central bankers that they are bearing more than their share of the burden of fixing the global economy, often uses its annual reports to send a message to political leaders, commercial bankers and investors.

But the B.I.S.'s language in the 2014 edition was unusually direct, as was its warning that the world could be hurtling toward a new crisis. "There is a disappointing element of déjà vu in all this," Claudio Borio, head of the monetary and economic department at the B.I.S., said in an interview ahead of Sunday's release of the report. He described the report "as a call to action."

The organization said governments should do more to improve the performance of their economies, such as reducing restrictions on hiring and firing. The report also urged banks to raise more capital as a cushion against risk and to speed efforts to deal with past problems.

Countries that are growing quickly, like some emerging markets, must be alert to the danger of overheating, the group said. "The signs of financial imbalances are there," Mr. Borio said. "That's why we are emphasizing it is important to take further action while the time is still there."

The B.I.S. report said debt levels in many emerging markets, as well as Switzerland, "are well above the threshold that indicates potential trouble." Yet investors show no sign of being deterred. This month, for example, investors snapped up $1.5 billion worth of bonds sold by the government of Kenya. The debt paid an interest rate of 6.875 percent, very low for a country that has deep economic problems and has been rocked by terrorist bombings.

… The overall, somewhat gloomy message from the central bankers was that the world is drunk on easy money and has already forgotten the lessons of recent years.


We have been covering monetary distortions for so long that we are sensitive to much of the doublespeak above. While the BIS does act as a setting where central bankers can discuss monetary policy, this is not merely a talking-shop … These people control most of the money in the world.

If business people with similar power sat around together, they would likely be subject to arrest for meeting in cartel-like circumstances. For some reason, monopoly central banks can get away with meeting every month in Switzerland to coordinate "policy" even though this is monopoly behavior.

We are told, above, that during the mid-2000s boom, resources were misallocated on a grand scale, and that asset bubbles are now in the process of building once more. The BIS simply ignores the money printing that it has supervised. The waves of current central bank money printing have ensured that the misallocations of the Boom have never been unwound and thus, quite logically are growing worse.

The organization believes self-servingly that central banks are shouldering a lot of responsibility for fixing the global economy – but so they should. Monopoly central banks fix the rate and volume of available money. No other segment of society has that awesome power.

Of course, if the BIS really wanted to resuscitate the world's economy, it would do away with itself and its members and let market forces create private money that would reflect the realities of industry and inverting. (We'll keep our fingers crossed … )

Finally, we learn that the BIS is concerned the world is drunk on easy money and has already forgotten "the lessons of recent years." In fact, the BIS and its member central banks have made sure the world has STAYED drunk on easy money – money the BIS has helped coordinate and disperse.

It is a devious profession, indeed. First, one ensures that the money taps are wide open for more than half-a-decade. Then one begins to issue warnings about economic overheating as if one were truly concerned. In fact, the BIS and its member central banks intend to continue to print as much money as they can, from what we can tell. They are making head feints every now and then toward raising interest rates but the money injections continue unabated.

We call this current environment a "Wall Street Party." It is probably going to last a while longer. Vast fortunes will be made and ever-bigger bubbles will be blown. Eventually, the entire market will collapse as it has before. Leaders of the BIS and other facilities will then begin to agitate for a fully realizable world economic system. That seems to be the plan.

After Thoughts

It will likely take one more big crash to get to a more globalized economic system. And it will be the BIS and central banks that attempt to organize the larger system. After all, they will explain gravely, "We know best! We warned you …"

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