Wednesday, July 2, 2008

Central Bankers Warn of 'Tipping Point'

Feels as if things have already tipped over.

The global economy may be close to a "tipping point" that could see it enter a slowdown so severe that it transforms the current period of rising inflation into a period of falling prices, the Bank for International Settlements said Monday.

Speak of conundrums: rising inflation transformed into deflation. Thanks, Doctor Greenspan.

In institutional speak, it sounds rather benign; this is from the abstract of Part I of the report from the BIS website:

After a number of years of strong global growth, low inflation and stable financial markets, the situation deteriorated rapidly in the period under review. Most notable was the onset of turmoil in the US market for subprime mortgages, which rapidly affected many other financial markets and eventually called into question the adequacy of capital at a number of large US and European banks. At the same time, US growth slowed markedly, reflecting setbacks in the housing market, while global inflation rose significantly under the particular influence of higher commodity prices.

Summarized in the WSJ article is a more direct assessment: The BIS said that in the early part of this decade, central banks had failed to set interest rates high enough to restrain an unsustainable credit boom.

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