Tuesday, December 16, 2014

What to Make of the BIS and IMF Warnings

As we approach the end of 2014, some things are clearer even as some things are yet to be determined. While it is still very hard to tell if the US economy is in a real recovery or not, there are some facts we can clearly establish. Let's list some and then try to make some sense of where things stand from what we know right now. 

First a list of bullet point facts:


- There is debate as to whether the US economy is in a recovery, but there is consensus that if it is a recovery it is a weak one so far. Labor reports show job gains, but the total work force is still way below where it needs to be and average incomes are too low.  There is still too much public and private debt. We will know more in 2015.

- Virtually everyone agrees that the global economy is struggling. Japan, China, the Eurozone, and Russia are all concerned about low inflation, deflation, or actual recession. (In Russia's case , they now have to deal with high inflation and a collapsing ruble). All are trying various policies to try and stimulate their economies. China may cut interest rates twice for example. Geo-political conflicts around the world could make things worse.

- Despite the US stock market near all time highs, both the IMF and BIS have issued repeated warnings all year long that financial assets may be artificially inflated due to QE programs. They state that they are concerned about what may happen when the US Fed attempts to "normalize" interest rates. The BIS has flatly stated it may lead to sharp market drops, that there are large amounts of funds outside the US at risk that could lead to "a chain reaction" of problems, and that markets may be over confident that they can withstand rising interest rates. All these warnings are fully documented on this blog. Just check the article links to the right over the last few months that talk about IMF and BIS warnings (or see the list below).  

- the 2010 IMF reforms (and increased funding) stalled out in the US Congress and now prospects for passage look dim any time soon because Congress will be controlled by majorities that seem to be opposed to increased funding for the IMF or giving it more power.

- global debt problems and the mountain of unknown derivatives products in the banking system remain in place and nothing has been done to resolve these issues in the long term. So far, the policies implemented have just managed the problems in such a way as to prevent another financial crisis. Here again, the BIS has issued multiple warnings that these problems still exist and are a risk to systemic stability. 

Given the above facts which are easy to establish, we have to ask:                                   What do we make of all this?

This is an impossible question to answer right now because things are fairly calm and another crisis has been avoided so far. However, we have both of the leading major global financial institutions (IMF and BIS) trying to get out front of any crisis that might eventually unfold by issuing warnings now.

From this point on I can only speculate; so please understand that the rest of this article is pure speculation (but based on the facts we can observe listed above). 

It is possible that those at the top of the current system know that the global debt and derivative problems cannot be solved and will eventually lead to another crisis. It may be that this is why they are issuing repeated warnings now early on. If another crisis unfolds, the public is going to be confused, angry, and wanting someone to blame. By going on the record early, the IMF and BIS may be attempting to establish credibility so that the public will be willing to turn to them if another crisis unfolds. If the crisis becomes global and huge, the public will demand a response. The US Fed will not be able to respond to a crisis this large, especially if the crisis begins outside US jurisdiction. So that is why we watch that very closely here on the blog. (Japan, China, the EU, Russia, Middle East, etc)

All this leads me to conclude that if we do have another crisis, the odds are that it will come before the next US election in 2016.   How do arrive at that conclusion?    I use this logic:

If a crisis happens in 2015 or 2016, the general public is more likely to associate it with the Republicans because they now control both the House and the Senate. President Obama is widely viewed now as a lame duck who cannot control events in the economy. Also, if a crisis unfolds and the US Fed cannot respond, we can expect that very quickly it will be pointed out that the Obama Administration tried to get Congress to increase funding reserves at the IMF, but they refused. The public could very easily blame the situation on the US Congress and demand that action be taken in a real crisis situation.

This could open the door for the IMF to get vastly expanded funding and power to deal with a global crisis as the "lender of last resort". Both the IMF and the BIS can say they tried to warn the public that this could happen and tried to get the IMF funded to deal with the problems. This could then lead to the US Congress quickly approving more funding and expanding the power of the IMF to act like a global central bank. Especially if they sense the public will blame them for not responding to the crisis. The next two years are the time period where this kind of crisis would be more likely to be blamed on Congress than the White House.

Again, the above is pure speculation. It could be completely wrong. We may not have another crisis in the next two years or even much longer than that. I certainly hope that is the case. But I wanted to lay out this scenario now in case something like this actually does happen in the next two years. It may make it easier for readers here to understand events at that time when there would probably be a lot of confusion and finger pointing.

The point is that this scenario is certainly possible. It's based on warnings directly from both the IMF and the BIS which can be found here very easily (look just below). It also fits with the forecast that Jim Rickards has made as well (the next crisis leads to the IMF becoming a global central bank/lender of last resort).

For now, we know the warnings have been given. That is fact. No matter what actually does happen, it will be covered here. We know what to watch for. It's just a matter of the time and effort to keep up with events as they happen. If nothing happens in the next two years, I will feel like this scenario is less likely.  Let's just stay alert and see what does happen.


Just for the record, here is a partial list of warnings we have posted here on the blog:

July 2014 - BIS

July 2014 - IMF

September - International Center for Monetary and Banking Studies

October - IMF

October - BIS

October - IMF Direct Article

October - IMF Report

November - IMF

December - BIS

December - BIS

added note 01-01-2015: 

A question I get here is how can the average person prepare for change given that so many different future scenarios are possible? On January 1st 2015 I wrote an in depth article that talks about this. It gives the history for why this blog was started, what it hopes to do, and offer some common sense ideas that anyone should be able to use to prepare for whatever happens. This article is also be provided as a Google document in Word format so that it can be easily printed and given to anyone interested. Of course it is free to anyone who can use it. Please do hand it out to anyone you think can use it.

No comments:

Post a Comment