first majestic silver

Battle Royal over CB Alpha Dog

July 13, 2005

The US Federal Reserve is engaged in a significant battle behind the scenes in the banking world. This is a true battle of the titans. The USFed is a household word, with its Chairman Greenspan a celebrated icon, a hero among inflation supporters, nay monetary drug addicts intent on speculation in lieu of actual work, and a savior in engineering a climate for commercial purchases without money. However, the Bank for International Settlements is the "old world" central bank from Switzerland. A better description of BIS is one of insurer/ underwriter/ counselor to all major world central banks. The war is over supremacy, leadership, lately steeped in defiance. The battle is over sound monetary policy. The true alpha dog is the BIS. The pretender to the throne is the USFed, whose role has been the more public for scrutiny since the 2000 stock bust, which was clearly the responsibility of the USFed in a grand colossal error. That concluding event might have merely stood as the climax of the Asian Meltdown of 1997, which took three years to reach the USA shores. The bust drew countless billions of European money, the resentment for which has not dissipated.


The USFed has long been chartered with a dual objective and chartered mission, 1) to limit price inflation, 2) to maintain maximum employment. Notice how definition of price inflation is lacking, and how obfuscation of what price inflation means has become the curious cloud of confusion generated by bankers, policy makers in the USGovt, Wall Street brokerage houses, and academia itself. As a nation, the United States has no idea what inflation is, how to measure it, where to detect it, and has gone so far as to bless its effects in higher asset prices as virtuous and favorable, and its effect on consumer staples as undesirable and damaging. All inflation is harmful, some clearly in your face now, some looming overhead for future wreckage.

The BIS has long argued that central bankers must keep to a dual mission also, 1) to limit price inflation, 2) to limit credit growth. It seems the BIS has a deeper comprehension of the dreaded debt impact. Huge debt growth leads to bubbles, which almost never avoid collapse. So the battle of titans is waged behind the scenes. It begs the questions "Do the US Federal Reserve and Greenspan answer to anyone?" and "If the USFed is on the wrong path toward crisis, how will the Bank for Intl Settlements play a role?" The clear policy in dispute is the USFed's willing not only to lead the way toward huge credit growth, but to justify it, encourage it, perpetuate it, and rationalize away its harmful risks. The BIS has an ongoing dispute with the USFed. We focus entirely on consumer price inflation, while we permit unchecked credit growth, which has wrought the attention and ire of the BIS in return.

The USFed might be coerced to hike rates more than it wishes, by the powerful Bank for International Settlements. This powerful central bank among central banks might be telling the USFed to justify continued rate hikes by whatever means. The basis could be false claims of strong US Economic growth, as measured by the Gross Domestic Product (GDP). Games were played in upward Q1 GDP growth revision two weeks ago. Apparently declining housing prices bring about a rise in inflation adjusted housing construction business activity. My analysis points to the absurdity that is the GDP Deflator. See "Three Great Big Lies" for details on the surprisingly simple argument that most of the claimed economic growth in the USA is nothing but improperly treated price inflation. The US Economy grows at about 1.5%, no more.

The BIS is extremely concerned about the frightening rise in credit. They fear how the world economy is (in their words) "vulnerable to housing corrections" and the financial strains it would cause. One can safely include asset bubbles in their general concern. Chairman Greenspan is on record as labeling housing inflation as legitimate wealth generation, which must sound like PURE HERESY to the established tradition at the BIS. The Swiss banker reputations have stood the test of time. Recall the USFed is less than a century old. Rumor is strong, that the BIS might harbor deep concerns that the United States has mismanaged to the extreme the world economy, put the world economy at great risk, and has abused on a grand scale its authority granted by owning the world reserve currency, the USDollar.

The BIS argues that America needs to raise interest rates further in order to restrain risk taking in financial markets and borrowing by households. With debts and house prices already so high, consumer spending will be hurt, but a more painful adjustment later could be ensured. Allow me to paraphrase their positions. Looking ahead, the BIS argues that policymakers need to modify their current policy frameworks in order to prevent the build-up of imbalances in the future. Targeting inflation is not enough, so they urge. Central banks also need to take more account of the increase in debt and exceptional rise in asset prices, whose correction reversal can cause instability.

The BIS argues some specific policy directives. Interest rates should be raised to curb excessive credit growth even if inflation remains tame. Regulatory policy could also be adjusted in a discretionary way over the cycle. Banks should be encouraged to build up more capital during booms, which would help to avoid excessive lending, and then be allowed to reduce their capital in bad times to cushion the economy from a credit crunch. During a rampant housing price boom, lenders should be told to reduce the amount they can lend as a percentage of the purchase price of a home or to shorten repayment periods. What the BIS urge is the exact opposite of what has happened in the USA. Quotes are extremely difficult to come by. The BIS, based in Basil Switzerland, prefers to operate quietly. They enjoy their mysterious elevated status, shun the public spotlight, but exert tremendous power. Some credit them for destroying the Soviet Union with a pull of the debt due lever. The US Defense cold war race surely set up the USSR for collapse financially, but the BIS pulled the plug!!!


Criticism and concern by the BIS is echoed by the International Monetary Fund, on US twin monster deficits and their threat to global economic stability. The IMF might be a tool of big US banker interests, might be a weapon used to wreck entire foreign economies (see Argentina, Brazil, Mexico) in our hemisphere. Nonetheless, the IMF carries some weight. Managing director Rodrigo Rato stated there was no sign of capital flows to the USA even beginning to decline, but conditions could change rapidly if markets took a "more negative" position. He has commented on the deficits. He noted the capital movements needed to sustain the widening US current account deficit could not be perpetuated. He warned that foreign investors could easily lose their appetite for US assets. He has offered a stern warning. "When we speak of global imbalances, we often are referring to the large current account deficit in the United States, and the matching surpluses in other countries. Unless action is taken… to facilitate an orderly resolution of these imbalances, we run the risk of investors drastically reducing the flow of capital into the United States. In that event, the dollar could depreciate rapidly, currency and capital markets could become disorderly, and interest rates could rise sharply, posing serious threat to global economic instability." One must wonder if the BIS had asked the IMF to speak publicly on its behalf as a convenient mouthpiece.

Rato noted the USGovt has promised action to cut in half its budget deficit over five years, but proposals required in his words "firm implementation." He said "Even bolder deficit reduction would be desirable and warranted, especially in view of the cyclical strength of the US Economy, and the importance of lowering government debt ahead of the retirement of the baby boom generation." In other words, words from Washington DC are meaningless, especially given the common practice of placing costs from the war in Iraq and Afghanistan off budget. Oh yes, let us not overlook the common constant confiscation of the Social Security Trust Fund on a quarterly basis, which adds further to the future obligation risk. The Medicare spending obligations fly in the face of federal budget deficit projections. Basic math drawn from the arithmetic we learn under the age of 12 suggest the recent USGovt federal deficit is more on the order of $900 billion. See the article by Doug McIntosh, which stands in contrast to the USGovt claims.

Rato of the IMF spoke about foreign financial matters. Report of his words might shed light on the BIS position on China as well. He advised Chinese bankers not necessarily to make its yuan currency convertible in a single step. He has suggested they keep some controls on capital flows in place. "China does not have to [have] immediate total flexibility, and China could perfectly live with some capital controls as a guarantee that the country would be able to handle some speculative money or short-term money." The IMF words chime in harmony with industrialized nations, in the common criticism that the fixed yuan exacerbates world economic imbalances as their exports are made too cheap. Nobody can stand up to Chinese competition. No timetable has been put forth by China, which is probably awaiting resolution of the Unocal deal, textile quota decisions, and other items on the bargaining table.


Back to the true alpha dog. Even the overarching BIS is capable of disputed economic analysis. They point to similarities between the current climate and the early 1970 decade. My work has identified the enormous differences later in that decade in "Lack of Parallel to the 1970 Decade" from almost a year ago. The BIS points to low interest rates on a real basis (after removing price inflation from the rate). They complain that loose monetary policy maintained by the USA has been spread around the world, exported if you will. They cite higher energy and commodity prices endured within the cost structures. Our federal budget deficits are huge and unchecked, aided and abetted by several major governments. They curiously find comfort, however, in a learning experience by central bankers to avoid rampant inflation, the basis of which escapes me. They point to functional independence by central banks to anchor and subdue inflationary expectations, which seem more than silly and baseless when housing is put on the radar. They overlook the frightening collusion among Wall Street and the USFed and the Dept of Treasury (see the Working Group for Financial Markets, aka Plunge Protection Team) which has become the norm. The BIS does cite differences from the past, which are indeed whoppers, but whose effects are in discord with my analysis. Cheaper Chinese import product prices are seen by them as positive, as they halt price inflation, even as how mature economies are recognized to require less oil than in the past. Herein lies the painful rub, a scratchy chafe indeed, not mentioned by the BIS, but regularly argued in my analysis. Cheaper Chinese imports kill US jobs, and thus reduce income. Also, if costs are rising but prices cannot due to a Chinese imposed ceiling, then corporate profit margins in the real economy (where things are made) can only diminish if not vanish. This is seen in the movement to offshore manufacturing in China and Asia generally, and in outsourced services to India. Imported productivity has not helped US job growth nor wage growth, but has certainly done so in China and India instead.

Wisely, the BIS highlights the need for the United States to curb credit and to discourage the unprecedented rampup in credit. The USFed is perfectly willing to create bubbles as long as their narrow-minded consumer price index shows no strain. For years, since 1996, the USFed has lost its way and proceeds to inflate with abandon with only a half-cocked queer eye on the CPI for green light guidance. This is heretical and has wrought horrendous damage. The BIS sees a housing correction as inevitable, with painful consequences. Without directly mentioning the bond conundrum, they urge the USFed to force long-term rates higher, but do not propose a way for that to happen. Perhaps they urge the USFed to stop their secretive monetized support of Treasurys generally. They propose that home mortgages be secured with HIGHER down payments and SHORTER repayment periods, the exact opposite of the current borrowing climate. A grand conflict is brewing behind the scenes. The USFed has created bubbles in every conceivable economic closet. They cannot expect the sympathetic help of the most powerful financial institution on earth if things go awry. Most investors are unaware of either the existence or powerful reach of the BIS.

A recent quote is brief but important. The BIS issued a statement that "Growing domestic and international debt has created the conditions for global economic and financial crises." The statement was made at a global meeting of 55 central bankers. The BIS has long been at odds with the USFed, in competition for the "alpha dog" role among bankers. The USFed mismanages the world reserve currency. The BIS acts as the underwriter insurance institution for all central bankers, more like all Western banks. Between the lines, fully understood at the meeting, was the directive for central banks to distance themselves from the USA monetarily, financially, and economically before the inevitable debt crisis arrives. The nucleus of the debt threat is the twin deficits of the USA, which have peculiarly been accepted as normal inside the USA but declared as a major cancer outside the USA.


Of more immediately concern, the bankers have pushed hard to win a crisis management arrangement, as they are desperately seek to preserve their control under the threat of meltdown. Among the largest risk factors, according to the BIS report, is "the widening current account deficit of the United States, which could eventually lead to a disorderly decline of the dollar, associated turmoil in other financial markets, and even recession. Equally of concern, and perhaps closer at hand, it could lead to a resurgence of protectionist pressure." As identified by the group is the explosive growth in the credit derivatives securities (CDS) market, called one of "the most significant developments in finance in recent years… The notional amount outstanding on CDS contracts globally reached $4.5 trillion at end-June 2004, up sixfold from end-June 2001." They regard the GM/Ford events as only a glimpse, with the real stress test to come. They believe "Two-way markets could conceivably disappear as protection sellers exit at precisely those times when default insurance is needed most… The events of spring 2005 might not be a true reflection of how these markets would function under stress."

At the forefront of the credit derivative distress are the hedge funds. Several prominent groups have either been killed or suffered major losses. The GLG Partners firm of London made the news this spring, the details of which are $3.5 billion in losses. A description was made by Executive Intelligence Review, "What Argentina was for the loans of sovereign debtors, and General Motors was for investment loans, so was GLG Partners for the European hedge fund sector." The much awaited rogue event could be hedge fund deaths, following big changes such as the GM/Ford events, European Union disintegration, or Chinese currency revaluation.


The annual BIS report summarized the ongoing discussions among world banking circles about whether a "new international macro-financial stabilization framework" is needed. Three approaches have dominated the high-level private debate, each either frightening or highly encouraging:

  • establishment of a single international currency
  • return to a system more like that of Bretton Woods, with a gold standard in force
  • informal crisis management through cooperation

Hold onto your hats. Big changes are coming. When big dogs enter a fight, plenty of blood is spewed, plenty of changes occur, plenty of opportunities arise, plenty of victims will be laid waste, plenty of shifts could come to the landscape. The USA, by means of the USFed, has attempted to perpetrate a grand fraud. We have replaced legitimate income generation with speculation and fraud amidst grand attraction of world savings. We have blessed asset inflation as legitimate wealth generation. The Bank for International Settlements might have made the statement "NO MORE." The biggest question in my mind is how far will the BIS permit the USFed to stray into "NO MAN'S LAND - WORLD OF IMBALANCES" before cutting off the arms of the US central bank. If arms and hands know nothing more than pulling levers and pressing buttons marked "INFLATE" in their role as central banker, then an authority from on high is there to stop it. Some mistakenly believe the Greenspan Fed operates without oversight, without checks & balances, with total impunity. They do not. Watching from above is the BIS.


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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 23 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at

Jim Willie

Jim Willie

Jim Willie CB, also known as the “Golden Jackass”, is an insightful and forward-thinking writer and analyst of today's events, the economy and markets. In 2004 he launched the popular website that offers his articles of original “out of the box” thinking as well as content from top analysts and authors. He also has a popular and affordable subscription-based newsletter service, The Hat Trick Letter, which you can learn more about here.  

Jim Willie Background

Jim Willie has experience in three fields of statistical practice during 23 industry years after earning a Statistics PhD at Carnegie Mellon University. The career began at Digital Equipment Corp in Metro Boston, where two positions involved quality control procedures used worldwide and marketing research for the computer industry. An engineering spec was authored, and my group worked through a transition with UNIX. The next post was at Staples HQ in Metro Boston, where work focused on forecasting and sales analysis for their retail business amidst tremendous growth.

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