THE risk of a 1930s-style economic slump has been heightened by "euphoric" markets tapping cheap global credit, one of the world's pre-eminent financial institutions has said.
In its annual report, the Bank for International Settlements noted that the conditions that led to the Great Depression of the 1930s and the Asian crises in the 1990s reflected the current environment....From FuturesMag:
Inflation, growth perceptions driving markets: BIS
The BIS Quarterly Review for June 2011, released today, discusses how the reassessment of growth and inflation prospects in the advanced economies, as well as euro area sovereign debt concerns, drove asset prices.
The June issue also provides highlights from the latest BIS data on international banking and financial activity.
In addition, it features four articles (more detailed abstracts follow):
Growth and inflation prospects take centre stage
- The global output gap may be gone: while structural estimates show some slack, these tend to overestimate the gap. Statistical estimates that are less subject to bias suggest that the gap has closed entirely over the past year.
- New methodologies lead to downgrades: in their ratings of financial institutions, credit rating agencies are putting more emphasis on systemic risk, the volatility of profits, and especially the potential for public support. As a consequence, the recent downgrading of the banking sector is likely to continue.
- The financial cycle can lead to output fluctuations: measures that condense several financial indicators into a single variable have some predictive power for near-term output fluctuations.
- Dealers can afford to move to central clearing: the major derivatives dealers already have sufficient unencumbered assets to meet initialmargin requirements of central counterparties. A few may need to increase their cash holdings to meet variation-margin calls.
Investors retreated to less risky assets after the devastating Japanese earthquake and tsunami in early March, but this reversed quickly as uncertainty about the economic impact of these events diminished. Since late March, investors have refocused on global growth and inflation prospects as well as possible monetary policy responses....MORE