BIS warns of US risk to global economy (fwd)

Any thoughts on this?  

dave smith
sociology, uci

>---------- Forwarded message ----------
>Date: Thu, 29 Jun 2000 17:53:20 +0200
>From: Arno Mong Daastoel <arno@daastol.com>
>Subject: BIS warns of US risk to global economy
>
>Just in case you missed the Financial Times:
>
>BIS warns of US risk to global economy
>
>By Alan Beattie in Basle
>Published: June 5 2000 17:34GMT | Last Updated: June 5 2000 17:41GMT
>
>The global economy faces the risk of a hard landing with US stock markets
>and the dollar dropping sharply in tandem, the Bank for International
>Settlements warned on Monday.
>Recent volatility in currencies and equities, and the lack of liquidity in
>some financial markets, meant the market reaction to such a downturn posed 
>a
>further risk, the BIS, the international organisation of central banks, 
>said
>in its annual report.
>Emphasising the uncertainties of the current global situation, the BIS said
>the imbalance between rapid growth in the US and slower growth elsewhere
>would have to be corrected, and that large movements in exchange rates were
>likely to follow.
>"The rate of expansion of domestic demand in the United States is
>unsustainable and potentially inflationary, and a similar if less extreme
>state of affairs prevails in some of the other English-speaking countries,"
>the BIS said.
>In a pointed warning about the risks of complacency, the BIS compared the 
>US
>to Japan in the late 1980s, with a combination of high productivity growth,
>low inflation and soaring asset markets, which ended in a collapse in asset
>markets and a prolonged recession. Present stock market valuations were
>unlikely to be sustainable in the long term, it said.
>"The Federal Reserve's rate cuts in late 1998, needed to stabilise fixed
>income markets, may have encouraged the stock market to rally at the same
>time," the BIS said.
>It warned that, if the inflationary threat in the US remained, the Federal
>Reserve should keep raising interest rates even if stock markets slumped -
>so avoiding any suspicion that it was bailing out investors who had been
>caught out.
>"Were monetary policy to back off at the first signs of declining equity
>prices, the risks of moral hazard would be great," the BIS said. "Misguided
>investors should be allowed to pay the price, and quickly, so that capacity
>can be reduced and longer-term profitability rapidly restored.".
>Andrew Crockett, the general manager of the BIS, said although banks were
>better prepared for financial market turmoil than in earlier years, the
>recent high volatility in the equity and currency markets was likely to
>continue.
>"The market-making activities of some institutions and the liquidity of 
>many
>markets are not as good as before," he said. "The ability to absorb changes
>in supply and demand in the markets is not there."
>The drying-up of government borrowing was also creating difficulties for
>bond investors, with liquidity problems fragmenting government bond 
>markets,
>the BIS said.
>The BIS also criticised emerging market countries which had failed to push
>ahead with reform in their economies and banking systems, and who were
>loosening monetary policy by intervening to stop their currencies rising.
>"There is a risk of re-establishing the fixed exchange rate mentality which
>contributed to the Asian financial crisis," said William White, the BIS's
>economic adviser.
>The annual report said the Japanese government should maintain its fiscal
>stimulus to the economy. But it suggested switching the expenditure from
>public investment to the country's "underdeveloped" social safety net.
>
>
>