26 California has $17 billion on deposit in banks that refuse to honor its IOUs - Ellen Brown

(1) California has $17 billion on deposit in banks that refuse to honor its IOUs - Ellen Brown
(2) Steve Keen on Rudd: he replaces Private Debt with Public Debt
(3) Ross Gittins: Rudd praises Hawke-Keating "reform"; hides Net Foreign Debt (56% of GDP) by talking of (minimal) Federal Government Debt
(4) Bill White former chief economist of the BIS, warned of a Great Depression (June 2008):

(1) California has $17 billion on deposit in banks that refuse to honor its IOUs - Ellen Brown

From: Ellen Brown <ellenhbrown@gmail.com>  Date: 23.07.2009 04:26 PM

How California Could Turn Its IOUs Into Dollars

http://www.huffingtonpost.com/ellen-brown/how-california-could-turn_b_242901.html

Ellen Brown

Posted: July 22, 2009 02:17 PM

How California Could Turn Its IOUs into Dollars

California has over $17 billion on deposit in banks that have refused to honor its IOUs, forcing legislators to accept crippling budget cuts. These austerity measures are unnecessary. If the state were to deposit its money in its own state-owned bank, it could have enough credit to solve its budget crisis with funds to spare.

"We make money the old-fashioned way," said Art Rolnick, chief economist of the Minneapolis Federal Reserve. "We print it." That works for the federal government's central bank, but states are forbidden by the Constitution to issue "bills of credit," a term that has been interpreted to mean the state's own paper money. "Sacramento is not Washington," said California Governor Arnold Schwarzenegger in May. "We cannot print our own money." When legislators could not agree on how to solve the state's $26.3 billion budget deficit, the Governor therefore did the next best thing: he began paying the bills with IOUs ("I Owe You's," or promises to pay bearing interest).

The problem was that most banks declined to honor the IOUs, at least after July 24. "They said something about not wanting to enable the dysfunctional state legislature," observed a San Diego Union-Tribune staff writer, "which is kind of funny as the federal government has been enabling the dysfunctional financial sector for almost a year."

On July 21, California legislators were strong-armed into a tentative agreement on budget cuts, a forced move that was called "painful" by the Speaker of the Assembly and "devastating" by the executive director of the California State Association of Counties. The cuts involve more job losses, more bleeding of school funds, more closing of facilities. Worse, they will not solve the budget crisis long-term. The state's economy is expected to continue to deteriorate along with its revenues. But without banks to honor the state's IOUs, California has no time to negotiate or explore alternatives. There is no "quick fix," says UCLA Professor Daniel Mitchell.

Or is there?

More Than One Way to Solve a Budget Crisis

Among the banks rejecting California's IOUs are six of particular interest: Citibank, Union Bank, Bank of America, Wells Fargo, U.S. Bank, and Westamerica Bank. These banks are interesting because they are six of the seven depository banks in which the state of California currently deposits its money. (The seventh is Bank of the West, which loyally said it would accept the IOUs indefinitely.)

Banks operate under federal or state charters that grant them special rights and privileges. Chartered banks are endowed with a gift that keeps on giving: they can "leverage" the value of their deposits into anywhere from ten to thirty times that sum in interest-bearing loans. This "multiplier effect" is attested to by many authorities, including President Obama himself. He said in a speech at Georgetown University on April 14:

    [A]lthough there are a lot of Americans who understandably think that government money would be better spent going directly to families and businesses instead of banks -- "where's our bailout?," they ask -- the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth.

The website of the Federal Reserve Bank of Dallas explains:

    Banks actually create money when they lend it. Here's how it works: Most of a bank's loans are made to its own customers and are deposited in their checking accounts. Because the loan becomes a new deposit, just like a paycheck does, the bank . . . holds a small percentage of that new amount in reserve and again lends the remainder to someone else, repeating the money-creation process many times.

Combine this with another interesting fact: according to the California Treasurer's report, as of May 2009 the state had aggregate deposits and investments exceeding $55 billion. Of this sum, $1.1 billion was held in demand deposit accounts (non-interest-bearing accounts allowing unlimited deposits and withdrawals) and $16.5 billion was in NOW accounts (interest-bearing accounts allowing unlimited deposits and withdrawals). According to the Treasurer's office, the non-interest-bearing demand deposits are held at the seven depository banks named earlier, while the NOW accounts are held at Citibank and Union Bank. Applying a "multiplier effect" of ten to the total sum on deposit at these seven banks ($17.6 billion), the banks collectively have the ability to make $176 billion in loans. At 5%, $176 billion can generate $8.8 billion in interest for the banks.

Rather than showing their gratitude by reciprocating, however, six of the seven depository banks have refused to honor California's IOUs. Worse, three of these six actually received federal bailout money from the taxpayers, something that was supposedly done to keep credit flowing to the states and their citizens. Citibank got $45 billion in bailout money, Wells Fargo got $25 billion, and Bank of America got $45 billion, not to mention guarantees of $300 billion for Citibank and $118 billion for Bank of America. When Governor Schwarzenegger asked for a loan guarantee for a mere $6 billion to bolster California's credit rating, on the other hand, he was turned down. Californians compose one-eighth of the nation's population.

When the state's appeal for aid was rejected by the banks, California State Treasurer Bill Lockyer said he was "disappointed." He and other state leaders should show their disappointment with their feet. California could pull its deposits out of those depository banks refusing its IOUs and put them instead in its own state-owned bank, following the lead of North Dakota, which now has the only state-owned bank in the country. Set up in 1919 to escape Wall Street predators, the Bank of North Dakota has been generating low-interest credit for the state and its residents for nearly a century. North Dakota is one of only two states (along with Montana) currently able to meet their budgets.

A state-owned bank could be fast-tracked into operation in a matter of weeks. With over $17 billion available to deposit in its own bank, California could create $170 billion or more in credit -- enough not only to meet its budget shortfall but to fund many other much-needed projects; and rather than feeding an ungrateful Wall Street, the bank's profits would return to the state and its people.

To sign a petition that will go electronically to Governor Schwarzenegger and to elected officials in your State, click here. You could also try faxing this article or a letter to Governor Schwarzenegger at 916-558-3160. See http://gov.ca.gov/interact#contact.

(2) Steve Keen on Rudd: he replaces Private Debt with Public Debt

From: ERA <hermann@picknowl.com.au> Date: 27.07.2009 04:24 AM

Date:  Monday, 27 July, 2009
Source: Steve Keen's Debtwatch  < http://www.debtdeflation.com/blogs/>

Rudd's essay is on the money
by Steve Keen

http://www.debtdeflation.com/blogs/2009/07/27/rudds-essay-is-on-the-money/

Australian Prime Minister Kevin Rudd has followed up his critique of neoliberalism with a new essay in the Sydney Morning Herald on the causes of the crisis, and the policies needed after recovery.

With one exception, his key explanations for the crisis are the same as those identified by myself and the handful of other economists who predicted this crisis before it happened:

The roots of the crisis lie in the preceding decade of excess. In it the world enjoyed an extraordinary boom… However, as we later learnt, the global boom was built in large part on a three-layered house of cards.

First, in many Western countries the boom was created on a pile of debt held by consumers, corporations and some governments. As the global financier George Soros put it: "For 25 years [the West] has been consuming more than we have been producing living beyond our means."

In the United States, in particular, consumers went on a long, debt-fuelled shopping spree. Household debt rose from about 65 per cent of income in 1983 to nearly 140 per cent of income by 2007. The commentator Bill Gross summarised the US consumption boom as: "For too long it's been McHouses, McHummers and McFlatscreens, all financed with excessive amounts of McCredit What a colossal McStake."

Australian consumers also spent up big. Between 1996 and 2007 there was a 460 per cent increase in credit card debt, a 340 per cent increase in household debt, a 450 per cent increase in corporate debt and a 200 per cent increase in net foreign debt.

Second, these debts were racked up on the back of skyrocketing asset prices. In several countries, stock prices and house values soared far above their true long-term worth, creating paper wealth that millions of households used as collateral for their growing debts. The value of global financial assets grew from less than 45 per cent of global GDP in 2003 to nearly 490 per cent in 2007. Of course, this bubble was fed by a regulatory system that encouraged excessive greed. Weak financial regulation allowed corporate cowboys to take on dangerous financial risks that began to threaten the financial system itself…

The finance sector, rather than servicing the needs of the real economy, began to primarily service itself.

The final layer of the house of cards was the huge volume of money funnelled from China, Japan and the Middle East to Western banks and governments. Cheap savings from the East flooded into the West to finance ballooning deficits. From 1999 to 2006 the US current account deficit more than tripled, from $US63.3 billion to $US214.8 billion, balanced by huge surpluses in other countries, especially China. (the emphases in these and subsequent quotes is my own)

The only element of that with which I disagree is the third point–which I'll get back to later on.

Rudd also provides some interesting "insider's" statistics on the size of the collective efforts taken by OECD governments to try to limit the scale of the crisis:

On the fiscal front, governments from the world's largest 20 economies are expected to collectively pump about $US5 trillion into their economies by the end of next year (or nearly 8 per cent of global GDP since the crisis began). Altogether, the measures are the equivalent of an extraordinary and unprecedented 18 per cent of global GDP.

That's an extraordinary injection–against which the scale of this crisis should be apparent. Inject an additional 18 per cent of activity into a global economic system over about 3 years, and yet the system still falls by about 6 per cent over that period? Without that intervention, output could have fallen by 25 per cent over 3 years, which is a Depression in anyone's language.

Where I differ again with the Prime Minister is over whether this government stimulus alone is sufficient to avoid a Depression. Though his case is far more nuanced than most, the "green shoots" phrase nonetheless gets an airing:

We have already begun to see the results. Early signs of "green shoots" have emerged in recent economic data. And this month the International Monetary Fund revised up its forecast for the global recovery, from 1.9 per cent to 2.5 per cent growth next year. An IMF report this month noted "the world economy is stabilising, helped by unprecedented macro-economic and financial policy support". The truth, however, is the world is still a long way from recovery.

The extent to which Rudd is "levelling" with his audience is also quite welcome:

The average budget deficit for OECD economies increased more than sixfold, from 1.4 per cent of GDP before the crisis in 2007 to 8.8 per cent of GDP in 2010. Public borrowing is required to finance these deficits and is expected to increase from 73.5 per cent of GDP in 2007 to 100.2 per cent in 2010. Among the big advanced economies, net debt will increase from 52 per cent of GDP in 2007 to 79 per cent in 2010.

Australia's deficit and debt position have inevitably been affected, albeit much less than in other advanced economies. The combined effects of collapses in revenue ($210 billion) and policy interventions to support our economy ($77 billion) are expected to result in a deficit that peaks at 4.9 per cent of GDP in 2009-10. Net public debt is expected to rise to 4.6 per cent of GDP this financial year and peak at 13.8 per cent of GDP in 2013-14. Both are the lowest by an order of magnitude of all major advanced economies.

Clearly, government global action has come at a cost. But as the IMF argued earlier this year: "While the fiscal cost for some countries will be large in the short run, the alternative of providing no fiscal stimulus or financial sector support would be extremely costly in terms of the lost output."

Without government intervention, global growth, global unemployment and prospects of global financial recovery would be much, much worse.

We never got to see whether Howard or Costello would have provided a reasoned explanation of policies in the light of an economic catastrophe, because they never experienced one–instead, they were amongst the lucky incumbents who held office while the global financial excess that caused this crisis held aloft the illusion of prosperity, and lost office before The Piper called to collect on The Tune.

Had they held on to power, I have no doubt that they would have–by force of necessity–been undertaking very similar fiscal policies to those Rudd now is (though the additional expenditure may have gone on the military and border patrols rather than ports and schools). Whether they would have presented as reasoned an explanation for their actions I think would have been less likely.

Rudd also revisits the anti-neoliberalism theme of his previous essay:

As I have argued elsewhere, the boom-and-bust economic cycle of the past decade has been an unavoidable consequence of a decade of neo-liberal free market fundamentalism that reinforced a culture of corporate greed and excess in the financial sector. The central principles of this extreme form of capitalism are that markets are self-regulating; that government should get out of the road of the market altogether and that the state itself should retreat to its core historical function of security at home and abroad.

As someone who has long argued that the economic theory that underlies neoliberalism (Neoclassical Economics) is intellectual drivel, I of course support this critique.

Where I beg to differ is Rudd's dating of this – merely the last decade? We've been following Neoclassical-Economics-inspired policies ever since 1975, including under the preceding Australian Labor Party government of Bob Hawke and Paul Keating  (or since 1973 if we include Whitlam's 25% overnight cut in tariffs). And of course, the last decade wasn't one of boom and bust around the globe, which was partly the problem: the mild US downturn after the 2000 Stock Market Crash occurred because the huge runup of private debt-financed spending that was the Subprime Crisis overwhelmed the negatives of the DotCom swindle, and of course set us up for the far bigger crash we are now experiencing.

The absence of economic downturns since 1993 – and the mildness of the mainly US recession after the DotCom Bubble burst – played a large role into deluding neoclasssical economists like Bernanke into believing that they had tamed the trade cycle in what they termed "The Great Moderation":

… the low-inflation era of the past two decades has seen not only significant improvements in economic growth and productivity but also a marked reduction in economic volatility…, a phenomenon that has been dubbed "the Great Moderation." Recessions have become less frequent and milder, and … volatility in output and employment has declined significantly… The sources of the Great Moderation remain somewhat controversial, but … there is evidence for the view that improved control of inflation has contributed in important measure to this welcome change in the economy … ( Bernanke, 2004)

Bollocks to all that. The prediction I made in 1995 in my paper "Finance and Economic Breakdown: Modelling Minsky's Financial Instability Hypothesis" has stood the test of time rather better:

From the perspective of economic theory and policy, this vision of a capitalist economy with finance requires us to go beyond that habit of mind which Keynes described so well, the  excessive reliance on the (stable) recent past as a guide to the future. The chaotic dynamics explored in this paper should warn us against accepting a period of relative tranquility in a capitalist economy as anything other than a lull before the storm. ( Keen, 1995)

A Nascent Recovery?

Like most global leaders, Rudd is now speaking as if recovery has already begun. But to give him his due, even here there is a word of caution:

The first phase of Australia's response to the global crisis has legitimately focused on crisis management, emergency interventions and implementing a strategy for recovery. But we must now deal with two challenges that arise in the context of a possible recovery.

There is also welcome realism that a debt-financed recovery is barely possible and certainly undesirable, and an awareness that deleveraging and deflation are the major risks facing the global economy.

This crisis has shown we have reached the limits of a purely debt-fuelled global growth strategy. Not only will the neo-liberal model of the past not provide growth for the future, its after-effects will make recovery more difficult. Mountains of global public and private debt, global imbalances, and a weakened global financial system will drag on global growth for a long time. As the renowned financial columnist Martin Wolf has written: "Those who expect a swift return to the business-as-usual of 2006 are fantasists. A slow and difficult recovery, dominated by de-leveraging and deflationary risks, is the most likely prospect."

Since Rudd has properly entertained the prospect that the next decade will be dominated by deleveraging rather than rising debt levels, let's get a handle on what that might mean for aggregate demand over that decade.

Australia has experienced two previous bouts of deleveraging, in the Depressions of the 1890s and 1930s. In both those previous Depressions, deflation and falling real output drove the debt to GDP ratio higher after the onset of the crisis – something we have yet to experience – after which the painful process of deleveraging began.

In the 1890s, we began with a debt to GDP ratio of just over 100 per cent, which then fell to a low of roughly 40 per cent over a 15 year period. In the 1930s, we started with a lower level of 75 per cent, which fell over a similar period to a low of 25 per cent–but the Second World War clearly accelerated the deleveraging process, which prior to then was running more slowly than after the 1890s Depression.

In the Figure above, these historical episodes are fitted by an exponential decay process. The rate of decay in the 1890s was roughly 4% per year; it began at roughly 3% in the 1930s prior to the War, but over the entire period including the War it fell at an average rate of 8% a year.

There was no policy intervention to accelerate economic recovery in the 1890s, so 4% might be taken to be the endogenous capacity of a Depressed economy to de-lever, whereas 8% can be regarded as a policy-accelerated rate (where however that "policy" was an arms race during a global military conflict). Both these rates are considered as hypotheticals for reduction of our debt levels today.

Taking 50% of GDP as a level at which normal economic activity might resume (higher than the 40% level that applied in the 1920s and 25% level of the 40s-60s), this implies that deleveraging could take anywhere between 15 years (at the accelerated 8% rate) and 30 years (at the "natural maximum" 4% rate).

We can get a preliminary handle on what this might mean for economic growth by calculating the percentage of GDP represented by each year's deleveraging–effectively by converting the percentage reduction in debt each year into a fraction of GDP for that same year (this ignores feedbacks between the rate of change of debt and GDP itself, but it will do as a first pass). In the first year (2009) when debt started at 165% of GDP, a 4% reduction in debt levels is equivalent to a 6% reduction in GDP; the size of this hit then falls as the debt to GDP ratio itself falls.

The following chart shows each year's deleveraging as a percentage of GDP, at the rates of 4% and 8% per year:

We are currently deleveraging at the 4% rate, and debt has fallen from 165% of GDP in March 2008 to 159% today–a 6% fall as a percentage of GDP, as noted above. At this rate, debt will not fall below 50% of GDP until 2038, and the annual reduction in debt will be equivalent to 3% of GDP until 2028.

To compare this to what happened during the 30s and 40s, the next Figure shows the impact of deleveraging in the 1930s: the actual 3% rate that applied from 1932 till 1939, what a "natural maximum" rate of a 4% fall per year would have meant as a percentage of GDP, and how bad things might have been without a World War if the achieved rate for 1932-45 of an 8% reduction had come via reducing debt rather than increasing GDP via a huge militarisation effort.

Even the worst rate of 1930s deleveraging (including WWII) only just compares to the impact of deleveraging today at the 4% rate  – because the debt ratio in 2008 peaked at 2.2 times the peak level in the 1930s. And throughout the 1930s, deleveraging never subtracted more than 3% from GDP – again because debt was so much lower then than it is now.

While Rudd is therefore aware that deleveraging will probably be the defining economic experience of the next decade, I doubt that he is aware of the scale of its potential impact. Though Treasury – if it has had any input into Rudd's paper – seems more aware of the dangers of deleveraging than the RBA, deleveraging is surely not factored into Treasury's economic modelling of the post-crisis recovery scenarios on which some of Rudd's budget predictions are based. These presume a return to real economic growth of 3%+ by 2010, which imply a capacity for the economy to grow at upwards of 7% per annum in real terms, to counteract deleveraging subtracting more than 5% from GDP every year till 2015.

If we rely upon the "natural maximum" process of deleveraging, we face a 30 year period in which changes in debt will cut at least 3% from the growth potential of the economy

This is why I propose a far more radical policy to deal with the crisis than the government stimulus package that Australia and other OECD nations have followed to date. These policies are attempting to address a crisis caused by irresponsible private lending, yet they involve continuing to respect this debt. They attempt to counteract private deleveraging by running up public debt instead. And they drastically underestimate the impact of deleveraging: rather than achieving a return to growth by 2010, these policies alone are likely to result in zero or sub-zero growth for most of the next decade.

That private debt does not deserve respect. It was irresponsibly lent in the first place, and the financial institutions that lent it should pay the price – not the public nor the public purse – via deliberate debt reduction. This of course would bankrupt those financial institutions, but as should be obvious from the US experience, these institutions are effectively bankrupt already.

A Copernican Switch on Savings

I noted above that the one aspect of Rudd's analysis of the crisis that I disagreed with was the proposition that:

The final layer of the house of cards was the huge volume of money funnelled from China, Japan and the Middle East to Western banks and governments. Cheap savings from the East flooded into the West to finance ballooning deficits.

This is the "Savings cause Loans" perspective of the conventional model of money. As I explained in The Roving Cavaliers of Credit, this model is rather like the pre-Copernican view that the Sun orbits the Earth: it's easy to understand (we still speak of "sunrise" and "sunset" after all) and also completely wrong. Just as the Earth orbits the Sun, "Loans cause Savings".

The "excess savings" of the East were thus caused by the excess borrowing of the West. Chinese, Japanese and Middle Eastern accounts accumulated money because Western consumers and firms borrowed up big, and spent that borrowed money buying goods produced in China, Japan and the Middle East. Now that the borrowing binge in the West has come to an end, those "excess savings" in the East should start to diminish.

{Comment - Peter M.: Free Trade was the cause. But Steve Keen is an internationalist; he never criticises Free Trade. Mandatory Free Trade, combined with Asia Model current account surpluses, led the surplus countries to recycle their surpluses within the deficit countries, so that the surpluses would not drive their currencies up. }

Conclusion

Rudd's essay shows a stronger appreciation of the causes of this crisis, and the fragility of the economy in its wake, than I've yet seen from any other official source (with the sole exception of the Bank of International Settlements, where Bill White's influence appears to remain, even though he is no longer its Economic Adviser–check this story on Bill and his forlorn attempts to raise the alarm during the Bubble).

Its one weakness is continued reliance upon neoclassical economic models to predict the future course of the economy after this crisis–when those same models ignore the role of private debt (which caused the bubble in the first place) and deleveraging (which will in fact drive the future course of the economy).

We can expect Rudd and Swann to continue with a large scale fiscal stimulus, in the hope that this will end the crisis. The next stage will come when this stimulus fails to achieve the level of growth predicted by neoclassical economic models, and as a result unemployment exceeds forecasts, public debt continues to run up, and deficit reduction strategies get pushed back in time.

So though Rudd is aware of the problem of deleveraging, he hasn't yet taken developed policies that directly tackle it. But awareness of the problem is a necessary first step in addressing it, and Rudd has taken that first step. ...

(3) Ross Gittins: Rudd praises Hawke-Keating "reform"; hides Net Foreign Debt (56% of GDP) by talking of (minimal) Federal Government Debt

Rudd's new bogy: fearing the pain of recovery

Ross Gittins
July 27, 2009

http://business.smh.com.au/business/rudds-new-bogy-fearing-the-pain-of-recovery-20090726-dxj3.html?page=-1

I have done it. For once I've forced myself to read every bit of a Kevin Rudd diatribe - his latest, 6100 words on economic recovery. Now I know what it must be like to sit through one of Fidel Castro's three-hour speeches.

It was a combination of the sensible and the self-serving, marred by its partisanship. Rudd nowhere acknowledges the role of his Liberal predecessors in pursuing the policies that left us so well placed in the global crisis.

It was the Libs who formalised the Reserve Bank's independence and put up with its politically inopportune rate rises. Rudd quotes the International Monetary Fund's praise for our medium-term fiscal strategy, but fails to acknowledge that it was formulated by and inherited from his predecessors.

He fails to admit that the relatively low and unconcerning levels of public debt that are in prospect for us are the product of his predecessors' budget surpluses and zero net debt. Whatever silly things they say now, they left the perfect platform for him to spend big on stimulus without worry.

The Libs also deserve credit for the good shape our banks are in. It was them who reformed our prudential supervision system, putting it in the hands of a single, well-armed regulator, and them who persisted with the Four Pillars policy that did so much to keep our banks out of trouble.

The notion that the Libs could be fairly described as "neo-liberal free-market fundamentalists" is laughable.

And yet Rudd boasts about the success of the Hawke-Keating government's micro-economic reforms and promises more reforms of his own.

Micro-economic reform and neo-liberal mean the same thing. As an ideological warrior, this guy's a phoney.

He says the purpose of his "essay" is to review the Government's progress in dealing with the crisis, outline the challenges likely to arise in the economic recovery and set out a "sustainable economic recovery strategy".

He boasts his intention is to maintain Australia's position as having "the best national balance sheet of the major advanced economies" (I didn't know we were a major economy). Really? With a net foreign debt equivalent to 56 per cent of gross domestic product?

I don't think so. This is Rudd playing the same dissembling game as his predecessors: drawing attention away from the nation's foreign debt (which just keeps growing) to the much less significant Federal Government's net debt (which even at its height won't be anything to worry about).

Rudd and his ministers finally admitted the economy was in recession before the budget in May, but now he's using the lack of two successive quarters of contraction to claim the Government's budgetary stimulus is "keeping Australia out of recession".

With the rate of unemployment having risen from 3.9 per cent to 5.8 per cent - and according to the Government's own forecast, headed for 8.5 per cent - we're not in recession? Tell him he's dreaming.

But then he bangs on at length about the "paradox" of how terrible the recovery from the non-recession is going to be. It will be "a long, tough and bumpy road with many twists and turns".

Paradox is certainly the right word for that proposition. Get this: "As growth returns, the economic conditions facing many families will deteriorate."

His first point is that, on average in past recessions, unemployment has continued rising for 13 months after GDP growth turns positive.

That's a point worth making - mainly to counteract the misperceptions spread by silly prime ministers who measure recessions by whether there's a minus sign in front of the quarterly change in GDP. ...

(4) Bill White former chief economist of the BIS, warned of a Great Depression (June 2008):

BIS slams central banks, warns of worse crunch to come

Published: 12:01AM BST 30 Jun 2008

http://www.telegraph.co.uk/finance/markets/2792450/BIS-slams-central-banks-warns-of-worse-crunch-to-come.html

Bill White of the BIS has renewed fears of a global slump

The central bankers' bank renews fear of second depression, writes Ambrose Evans-Pritchard

A year ago, the Bank for International Settlements startled the financial world by warning that we might soon face challenges last seen during the onset of the Great Depression. This has proved frighteningly accurate.

The venerable body, the ultimate bank of central bankers, said years of loose monetary policy had fuelled a dangerous credit bubble that would entail "much higher costs than is commonly supposed".

In a pointed attack on the US Federal Reserve, it said central banks would not find it easy to "clean up" once property bubbles have burst.

If only we had all listened to the BIS a long time ago. Ensconced in its Swiss lair, it has fired off anathemas for years, struggling to uphold orthodoxy against the follies of modern central banking.

Bill White, the departing chief economist, has now penned his swansong, the BIS's 78th Annual Report, released today. It is a disconcerting read for those who want to hope the global crisis is over.

"The current market turmoil is without precedent in the postwar period. With a significant risk of recession in the US, compounded by sharply rising inflation in many countries, fears are building that the global economy might be at some kind of tipping point," it said.

"These fears are not groundless. The magnitude of the problems yet to be faced could be much greater than many now perceive," it said. "It is not impossible that the unwinding of the credit bubble could, after a temporary period of higher inflation, culminate in a deflation that might be hard to manage, all the more so given the high debt levels." ...

"The fundamental cause of today's emerging problems was excessive and imprudent credit growth over a long period. Policy interest rates in the advanced industrial countries have been unusually low," he said.

The Fed and fellow central banks instinctively cut rates lower with each cycle to avoid facing the pain. The effect has been to put off the day of reckoning.

They could get away with this as long as cheap goods from Asia kept a cap on inflation. It seduced them into letting asset booms get out of hand. This is where the central banks made their colossal blunder.

"Policymakers interpreted the quiescence in inflation to mean that there was no good reason to raise rates when growth accelerated, and no impediment to lowering them when growth faltered," said the report.

After almost two decades of this experiment - more or less the Greenspan years - the game is over. Debt has reached extreme levels, and now inflation has come back to life. ...

"Should governments feel it necessary to take direct actions to alleviate debt burdens, it is crucial that they understand one thing beforehand. If asset prices are unrealistically high, they must fall. If savings rates are unrealistically low, they must rise. If debts cannot be serviced, they must be written off.

"To deny this through the use of gimmicks and palliatives will only make things worse in the end," he said.

Let us all cheer Dr White off the stage.