BIS Warns Of Asset Price Deflation

Wednesday, August 24, 2005

William White, chief economist of the Bank for International Settlements (BIS), has voiced concerns that fighting inflation alone might be too little to save the global economy from a severe downturn. In an interview with the German daily "Frankfurter Allgemeine Zeitung" he pointed out that there was no significant threat of inflation in the USA in the 1920's but exuberant asset prices nevertheless led to deflation and the Great Depression.
"All central banks are focused on fighting inflation. Obviously they think containing inflation is enough to keep things orderly. But that does not have to be the case as history shows," White said.
According to White close to zero real interest rates worldwide may have led to an asset price inflation as loans have been funneled into financial investments and real estate instead of production and services. He thinks that prices of longterm bonds and corporate bonds could be due for a correction that could spill over into equity and housing markets.
White does not see a single-handed solution to these problems. Praising the Federal Reserve for its tightening he added that monetary policy is only one measure. A far better way would be if the USA would steer towards a more restrictive fiscal policy as this would also take off the pressure from monetary policy, he said.


Wikinvest Wire