Former BIS Advisor And Central Banker Warns Entire World Is On Verge Of Another Bubble That "Could Burst With Disastrous Consequences"
In an interview with Dow Jones, William White, who previously was an economic adviser to the Bank of International Settlements, and prior to that spent 22 years at the Bank of Canada, warned that the "massive infusion of credit" accompanying the sudden and dramatic ramp up in the printing of new money as a policy response to all problems, both within the developed and developing worlds, is now "manifesting itself in the sharp rise of asset prices in large developing economies, which could potentially become another bubble that will burst with disastrous consequences for the global economy." He added that the global economy is in a 'particularly dangerous' position that can only be corrected if the currencies of developing countries strengthen relative to those of developed countries, according to William White, one of the few policy makers to correctly predict the onset of the financial crisis. Of course for that to happen, the much fabled decoupling needs to finally manifest itself, and for Jim O'Neill to be finally proven right. Of course, that won't happen. Which is why we ask, the next time there is a systemic wipe out, in addition to naturally eliminating the Fed, can the term BRIC, N-11, and all other such ridiculous acronyms, please be banned from usage in perpetuity?
More from Dow Jones:
In an interview with Dow Jones Newswires, White said that a new round of quantitative easing in the U.S. would carry big risks as long as there is no accompanying plan to cut the budget deficit.
Until June 2008, White was economic adviser to the Bank of International Settlements, and prior to that spent 22 years at the Bank of Canada. In the years leading up to the crisis, he repeatedly warned of the dangers of allowing rapid credit growth driven by widening global trade imbalances, and criticized central bankers who argued they were powerless to address the problem.
White is now chairman of the Economic and Development Review Committee, which advises the Organization for Economic Cooperation and Development. And he is also a member of the Issing Committee, which advises German Chancellor Angela Merkel on international financial stability.
Speaking Wednesday on the sidelines of a conference at Chatham House on the new global economic order, White said global imbalances persist, and are contributing to a continued buildup in credit that is now driving up asset prices in developing economies, and threatens to fuel high rates of inflation.
The underlying problem is that foreign-exchange rates haven't adjusted to the easing in monetary policy in most developed economies.
"All of that easing should have led to a general decline in their exchange rates relative to the exchange rates of the emerging markets," White said. "The emerging-markets response was essentially: if you can print the money to get your currencies down, we can print the money to prevent our currencies from going up."
"Equity prices are going through the roof, house prices are going through the roof, there's a lot of concern that the thing might just collapse," White said.
"In effect, if one characterizes the last 20 years as being a whole series of credit bubbles...the real fear would be that this is...another one, but it's not showing up in the countries that did the initial easing, it's showing up in the emerging markets and we have to wait and see how that whole thing will play out," White said. "We are at a particularly dangerous moment."
In other words, the developing world bubble, best manifested by China, and discussed extensively by such visionaries as Hugh Hendry (yet ridiculed by the like of Stpehen Roach) will need to find a way to sustain itself without the contribution of the US consumer. Can it do that? That's the $64x1012 question.
Is there a way to avoid a collapse, absent a reigning in of various central bank printers (a convenient question 45 minutes ahead of the FOMC decision). White thinks there may yet be hope. But it is tenuous:
But White said the realignment of foreign-exchange rates is needed to prevent a fresh crisis.
"By way of solutions, the first thing...would be that the exchange rates of emerging-markets economies ought to be allowed to move more freely upwards," he said.
There are risks for developing economies such as China in allowing their currencies to strengthen, in particular that even a modest appreciation would make those currencies more attractive to foreign investors, with the result that the appreciation would go further than intended.
"One of the worries they have is that once they start to let things move up in a relatively moderate way then you get the carry trade and momentum and the rest of it, and they end up making heir own internal situations worse," White said.
Needless to say, White does not think much of the imminent QE2 announcement:
White said that may be an unwise move, and contrasted the U.S. position unfavorably with that of the U.K. There is speculation among investors that the Bank of England will also restart its quantitative-easing program, but that is in the context of a government plan to eliminate the structural budget deficit over the next five years.
There isn't any such plan in the U.S.
"The arguments for continuing to do this are much stronger in the U.K. than they are in the U.S.," White said. "If you are going to have fiscal consolidation, which in the end everybody is going to have to have, then the argument for monetary easing of this nature is clearly much stronger than in a country where the deficit and debt structure seem out of control."
And White said that given the dispersal of fiscal powers in the U.S., it is unlikely that the government will soon develop a credible plan to cut its budget deficit.
And, in conclusion, White, fittingly, ties in monetary policy and total political chaos:
"The question when you start talking about fiscal policy in the States, is who are you negotiating with?" he said. "Are you negotiating with Barney Frank, are you negotiating with the head of what committee? The whole thing is worrisome, the apparent dysfunctionality of the U.S. government."
Our advice: buy a lot of popcorn, get an easy chair, pull your money from the market right now, and enjoy the show.
h/t London Dude Trader