The Bank for
International Settlements (BIS) issued its Annual Report overnight.

The BIS is the
central banker’s central bank. As well as providing excellent Euro-cuisine at
its headquarters in stately Basle, it lectures
central banks to good effect.

Henry has
previously pointed out that at some time in recent months the international
brotherhood of central bankers decided to do something about inflation. Since
the markets got the message around mid-May, considerable market disruption has
ruled. Now, gentle readers, it’s official.

The good news is
that global growth has continued, with some of the “imbalances” earlier feared
receding somewhat. Then comes the bad news: “… continued strong economic
growth has, however, begun to raise concerns about global inflationary
pressures. As a result, policies which had previously contributed to extremely
easy monetary conditions worldwide have begun to be modified. Significant
adjustments to policy over the last year or so include further monetary
tightening in the United
States and Europe, the end of “quantitative easing” and
foreign exchange intervention in Japan, and the announced change in the exchange
rate regime in China.”

The concluding
chapter of the BIS report discusses the risks and the policy issues. There is
risk that the current happy conjunction of strong growth and moderate inflation
might end either with a “bang” or with a “whimper”. Either way, surprise,
surprise, “The appropriate path for global monetary policy in the current
circumstances should also be towards tightening. Whether one is more concerned
with rising inflationary pressures in the short term, or with the threat from
imbalances to sustained growth over time, both sets of indicators point in the
same direction.”

Sound familiar,
gentle readers? Overnight, US equities fell out of bed again, snuffing the
tentative late-June recovery in asset markets. Financial markets remain in a
fragile state, and continued caution is the recommended approach, as the BIS has
cautioned its member central banks. The world economy is in a tough

The BIS report is
pure gold. Anyone interested in the future of our economy should read it fully
and carefully. For Henry, it was almost as compelling as the Socceroos play in
the World Cup.

More reading at
Henry Thornton. (

Peter Fray

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