Central bank prophet fears QE warfare pushing world financial system out of control … Former BIS chief economist warns that QE in Europe is doomed to failure and may draw the region into deeper difficulties … The warnings come just as the European Central Bank prepares a blitz of bond purchases at a crucial meeting on Thursday. – UK Telegraph
Dominant Social Theme: Let's roll with this easing. Can't come fast enough for Europe.
Free-Market Analysis: Again we see the adoption of a dialectical position. The mainstream media has been in full cry over the necessity for money printing and central bank bond purchases.
Now, comes a BIS former official – apparently someone with considerable clout – who says exactly the opposite thing. William White has come onto the record warning against what the European Central Bank plans to do as soon as possible.
The economic prophet who foresaw the Lehman crisis with uncanny accuracy is even more worried about the world's financial system going into 2015.
Beggar-thy-neighbour devaluations are spreading to every region. All the major central banks are stoking asset bubbles deliberately to put off the day of reckoning. This time emerging markets have been drawn into the quagmire as well, corrupted by the leakage from quantitative easing (QE) in the West.
"We are in a world that is dangerously unanchored," said William White, the Swiss-based chairman of the OECD's Review Committee. "We're seeing true currency wars and everybody is doing it, and I have no idea where this is going to end."
Mr White is a former chief economist to the Bank for International Settlements – the bank of central banks – and currently an advisor to German Chancellor Angela Merkel.
He said the global elastic has been stretched even further than it was in 2008 on the eve of the Great Recession. The excesses have reached almost every corner of the globe, and combined public/private debt is 20pc of GDP higher today. "We are holding a tiger by the tail," he said.
He warned that QE in Europe is doomed to failure at this late stage and may instead draw the region into deeper difficulties. "Sovereign bond yields haven't been so low since the 'Black Plague': how much more bang can you get for your buck?" he told The Telegraph before the World Economic Forum in Davos.
"QE is not going to help at all. Europe has far greater reliance than the US on small and medium-sized companies (SMEs) and they get their money from banks, not from the bond market," he said.
"Even after the stress tests the banks are still in 'hunkering down mode'. They are not lending to small firms for a variety of reasons. The interest rate differential is still going up," he said.
Does any of this sound familiar, dear reader? We've been making these points ever since the ECB began muttering about mimicking the Fed. (Actually, longer than that.) And now a highly respected former BIS official makes them almost word for word.
White also makes the point, according to the article, that the kinds of easing that are happening in Japan and are apparently going to happen in Europe are a "competitive devaluation." This is an insightful point. Printing currency is a debasement, no matter what fancy name is used to describe it.
The Bank of Japan, we learn, is "funding 40pc of all government spending." Potential result: "High inflation, perhaps even hyperinflation."
"Mr White's warnings are ominous," the article apprises us. He has a history of making accurate, if grave, predictions. While at the BIS in the '90s, he reportedly argued that rates were being held too low globally.
In fact, the tech crash at the turn of the century confirmed this view. He made the same sorts of warnings in the 2000s, at least toward the end of them.
Under his guidance, the BIS annual reports over the three years before the Lehman crisis were a rising crescendo of alarm calls at a time when other global watchdogs were asleep. His legendary report in June 2008 openly discussed whether the world was on the cusp of events that might prove as dangerous and intractable as the Great Depression, as it indeed it was.
We should note regarding the above that "raising the alarm" in 2008 was not exactly a bold prediction. The Great Recession had already started, as we recall. However, at least White was speaking out. Most of his colleagues surely did not.
He is saying many of the "right" things today as well. The article quotes him as arguing that the adoption of QE around the world is an "unthinking fashion."
He even claims that QE style interventions are not necessarily working. Just because the US and UK carried out programs of aggressive intervention doesn't mean that those programs are responsible for current claims of economic expansion. This may be confusing "correlation with causality," he points out.
The article concludes with his final point: "The painful irony is that central banks may have brought about exactly what they most feared by trying to keep growth buoyant at all costs, he argues, and not allowing productivity gains to drive down prices gently as occurred in episodes of the 19th century."
The real problem we have with Mr. White's warnings has little to do with their potential accuracy. He seems accurate to us: We've reported on these issues in much the same manner.
But White would make a larger contribution if he'd come out and question why central banks continually create asset bubbles that when punctured deliver tremendously negative effects: job losses, pension bankruptcies, general entrepreneurial mayhem.
Central banks, by overprinting currency, distort economies. Massive brainpower is attracted to this powerful discipline; these intelligent individuals must certainly understand the corrosive effects of over-printing currency. In fact, we can see them regularly taking energetic steps to avoid the inevitable fallout of their actions.
Eventually, surplus money, like acid, eats away at economic prosperity and then the next crash happens. Each time, the culprits act surprised. But surely they cannot be. It is disingenuous. The warnings people like White ought to be issuing should make clear that the system is deliberately corrupt and debasing.
The perpetual surprise shown by those in charge needs to be questioned. Over and over the same disasters occur. Are those creating such conditions really ignorant of the inevitable outcome? Doesn't a century of repeated failure show us that modern central banking is not just inefficient but deliberately poisonous?
It is difficult for most people to understand that the system they labor under is designed to fail, either accidently or on purpose. Those who DO understand – and these constitute a portion of our audience – are taking appropriate action to ready their portfolios and their families for the storm to come.
But at some point, at least some of the "insider" critics of central banking must come out plainly and state that the system is not logistically bankrupt but also morally so.
It is not enough now to claim that central banks have an impossibly challenging task. The real question is WHY – as in why do they keep on doing it? Cui bono.