Unless the leading industrial countries get their act together and pursue compatible economic policies, the world economy may be threatened by 1930s-style competitive devaluation and an outbreak of protectionism. This warning comes from the Bank for International Settlements (BIS), one of the world's most prestigious international financial institutions.
In its annual report the BIS says: "The global economy faces a fundamental dilemma, which is becoming more acute with time. How can imbalances in growth and external accounts across the major economic regions be resolved while maintaining robust global growth overall?"
The bank suggests that the rest of the world has been far too dependent on the economic stimulus provided by the United States and that the ongoing decline in the dollar is going to make life much more difficult for Europe and Japan.
The report warns that unless other countries supplement fashionable "structural reforms" with "more expansionary demand management policies" there must be a question mark over "whether domestic demand will expand elsewhere, notably in continental Europe and Japan, after a long period of weakness".
Known as "the central bankers' bank", the BIS, headed by Malcolm Knight, is involved with banking and other financial regulation and has a particular concern about the dangers of systemic weakness in the world economy.
It says that "the institutional underpinnings of the financial system require further strengthening" and expresses grave concern about the erosion of trust in financial markets.
From its position as a central observer of the regulatory effort, the BIS plainly believes that some financial operators have been getting away with murder.
The bank points to the large overhang of industrial excess capacity in the US from the earlier boom, with capacity utilisation at a 20-year low and debt levels still high, and argues that the current level of Wall Street "can only be justified by expectations of an economic rebound and a sharp increase in profits".
Implicit in the BIS's remarkably frank admission of its concerns is a historic acknowledgement that the once-fashionable monetarist belief in price stability as the great economic panacea has proved defective.
Referring to "excessive optimism and credit expansion, asset price and spending bubbles, and balance sheet problems that subsequently rebounded on the financial system" the BIS concludes: "Clearly, the achievement of price stability, with its unquestioned merits, has not been sufficient to ensure the avoidance of financial instability."
That, in bankers' speak, is quite an acknowledgement.
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