BIS celebrates the obvious while missing the big irony

5p ET Sunday, June 24, 2007

Dear Friend of GATA and Gold:

Here are a couple of reports about the annual meeting of the Bank for International Settlements in Basel, Switzerland. If the reports are fair representations, the BIS has done no more than to celebrate the obvious (the U.S. trade and budget deficits make the dollar vulnerable) while missing the most telling irony -- that if, as the BIS said today, appropriating Alan Greenspan's old phrase, the financial markets have become "irrationally exuberant," it is in part because the BIS and its member central banks long have been suppressing the price of gold, disconnecting what ordinarily would be a major alarm for the markets.

In any case the decisions facing the financial markets now will never be made by the markets themselves, since there really are no markets anymore, only ever-increasing central bank interventions. That makes the market decisions into political decisions. The markets will turn when governments and central banks turn, and governments and central banks have no one to criticize but themselves.

But you can bet that the BIS' annual meeting was well-catered and that the next one will be too, so why should they criticize?

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

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Dollar 'Vulnerable' to Drop
in Investment, BIS Says

By Lukanyo Mnyanda
Bloomberg News Service
Sunday, June 24, 2007

http://www.bloomberg.com/apps/news?pid=20601103&sid=aHlb_k7gVajg

The dollar is "vulnerable" to a drop in the investment inflows that the U.S. relies on to fund its trade and current-account deficits, according the Bank for International Settlements.

The currency has been supported by purchases of Treasuries by foreign investors attracted to U.S. yields and central banks that buy dollars to curb appreciation in their exchange rates. Such investors now own a record 80 percent of Treasuries due in three to 10 years, according to research from HSBC Holdings Plc.

"The dollar clearly remains vulnerable to a sudden loss of private-sector confidence," the Basel, Switzerland-based BIS said in its 77th annual report today. "The reliability of public-sector inflows has also become more uncertain."

Central banks may reduce purchases of dollars and allow their currencies to strengthen in a bid to curb inflation, the BIS said. They may also invest a greater proportion of new foreign-exchange reserves outside of the U.S. to earn higher returns, adding to the "threat" to the dollar, it said.

Inflation in China accelerated to a two-year high of 3.4 percent last month, and a stronger currency would help curb gains in consumer prices by lowering the cost of imported goods.

"The fear of inflation is causing central banks in Asia to change their thinking away from interventionist policies," said David Bloom, global head of currency strategy at HSBC in London. "They could slow down accumulation of reserves and let their currencies rise. Then the dollar will fall."

...Currency Reserves

The deficit in the U.S. current account, the broadest measure of trade because it includes some investment flows, reached a record $192.6 billion in the first three months of the year. The U.S. needs to attract about $2.1 billion a day to fund the gap, making the economy vulnerable to higher interest rates and a drop in the dollar should foreigners sour on its assets.

The U.S. currency fell 0.6 percent to $1.3470 per euro in the past week. The dollar dropped to a record low of $1.3681 on April 27. The euro has climbed 2.1 percent against the dollar this year.

Asian central banks from China to India boosted their currency reserves 58 percent to $2.2 trillion last year as they bought dollars, said the BIS, which was formed in 1930 to monitor markets and promote cooperation between central banks.

The Indian rupee has gained 8.6 percent against the dollar in 2007, compared with a 1.7 percent advance for the whole of last year. The Chinese yuan has climbed 2.4 percent so far this year, after rising 3.3 percent in 2006.

The People's Bank of China, which has the world's largest foreign-exchange reserves totaling $1.2 trillion, has said it will boost investments in bonds other than Treasuries. Japan, the biggest foreign holder of U.S. government debt, with $612 billion, has cut the investments this year from $623 billion.

Governments "have already publicly expressed strong concern about excessive capital investments, and possible resource misallocations," the BIS said. "In a number of countries, inflationary pressures are rising."

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Central Banks Should Keep Raising Rates, BIS Says

By Krista Hughes and Sven Egenter
Reuters
Sunday, June 24, 2007

http://www.reuters.com/article/businessNews/idUSL247789220070624

BASEL, Switzerland -- Central banks around the world should raise interest rates further to curb inflation pressures, the Bank for International Settlements said on Sunday.

The global economy is poised for a fifth straight year of growth above 4 percent, but risks remain and have as their common thread the highly accommodative financial conditions that have buoyed it in recent years, BIS General Manager Malcolm Knight said.

Tighter rates would have the added benefit of reining in financial markets, which Knight said were still loaded with risk, possibly sowing the seeds for a nasty correction in assets and currencies.

"Financial conditions are still accommodative, access to credit remains easy, and credit spreads are at record lows," Knight said after talks with about 250 central bankers at the BIS annual general meeting.

"Containing inflationary pressures seems to require further tightening in most jurisdictions, as is expected by financial markets."

Central banks are concerned about excess liquidity in the face of strengthening growth, pushing up borrowing costs around the world. The Bank of England is seen hiking again in July or August, the Bank of Japan in August, the European Central Bank is expected to raise rates in September and markets have now abandoned hopes of a cut in U.S. interest rates.

In its annual report, also released on Sunday, the BIS cited a resurgence in inflation, the chance of a sharper slowdown in the United States, and financial market vulnerabilities as key risks to future global prosperity.

Financial markets may have become "irrationally exuberant," it said, borrowing a phrase used by former U.S. Federal Reserve Chairman Alan Greenspan to describe the stock market boom of the 1990s.

Knight said although real risk premiums had gone up in recent weeks as bond prices tumbled, they had come from very low levels and investors were still accepting a fair amount of risk.

"The robust performance of the world economy can in part justify such vibrancy," he said in his speech to the AGM.

"Even so, it is hard not to detect in the current climate that sense of exuberance, even hubris, that in the past has not augured well for subsequent developments."

...Going fine

Top officials from the U.S. Federal Reserve, ECB, BOJ and People's Bank of China attended the weekend meetings in the Swiss city of Basel, as well as representatives from more than 100 other central banks.

Policymakers attending the meetings also expressed optimism about the world economic outlook.

"Everything is going fine," ECB Governing Council member Yves Mersch said when asked about the global economy.

Several, including Mexico's Guillermo Ortiz and Portugal's Vitor Constancio, said this was the main reason for the recent tumble in bond markets, which sent yields on 10-year U.S. and euro zone debt to five-year highs.

"It reflects mostly the assessment of markets of the strength of growth in developed countries and not so much fears of inflation in the future," Constancio said. "Medium-term real rates increased as a consequence, which is good for inflation in the medium term."

Knight agreed that the rise in real -- inflation-adjusted -- market rates could be beneficial for inflation, helping to stabilize asset prices.

But policymakers also underlined concerns about upside risks to prices. Ortiz and Argentine central bank chief Martin Redrado said the strong rise in soft commodity prices was a new risk factor.

"We haven't seen yet a strong pass-through, especially in developed economies, but it is a factor that needs to be monitored closely," Redrado said.

The BIS also used the meeting to repeat a plea for China to allow its yuan currency to appreciate, which it said would help ease the risk of an unwinding in global imbalances.

But People's Bank of China governor Zhou Xiaochuan said the country would continue its gradual process of making the yuan fully convertible.

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