BASEL, Switzerland – The Bank for International Settlements today released their 75th Annual Report to commemorate its founding in 1930. Most countries today have a central bank that is a private corporation that handles its monetary system. Bi-monthly, central bank ministers from 40 countries meet at the bank to review ways "to promote the co-operation of central banks and to provide additional facilities for international financial operations."
Once a year, the world's central bankers meet in Basel to take a closer look at the status of the world's central banking system. Besides the annual review, this year's report considered the need for new mechanisms to keep the financial system more in balance.
While the report noted that world output expanded by 5 percent in 2004, the highest rate in nearly 30 years, its growth showed a new uneven economic expansion. While the United States is an engine of growth in the advanced countries, a second pole of global dynamism is in key Asian economies, and slower growth can be seen in other larger advanced economies. The United States and China accounted for nearly 50 percent of the world's increase in global output. In spite of oil prices – which are projected to remain high for a prolonged period of time – the global economy is expected to grow by 4 percent in 2005.
The global financial system was birthed with the creation of the International Monetary Fund and World Bank in 1944. In 1971, President Richard M. Nixon took the dollar off the gold standard, thus changing it from a system of fixed currencies to one of floating currencies. Throughout the last 30 years, a new pattern of currency and trade liberalization has emerged. So too, has the pattern of booms and busts.
The annual report cited three such cycles. The first began in the 1970s when the dollar was taken off the gold standard. The second began in the mid-1980s, ending in a property bust. And now, the current cycle, which began in the mid-1990s. After the NASDAQ crash in 2000, central banks, including the Federal Reserve, injected large amounts of liquidity worldwide to keep the financial system moving. By doing this, interest rates dropped to 45-year lows, which, in turn, stimulated real estate prices that are at new highs.
As a result, household debt is at historic highs as a result of consumers trading up to a bigger house and by borrowing equity from its rising value. Countries with huge increases in property values include Spain, the United Kingdom, France, the United States, and the Nordic countries. Today household debt-to-income ratios are at unprecedented highs in many industrial and emerging-market economies. This also concerns central bankers.
Household saving is not evident in the United States to the same extent that it is in the Asian countries. World national savings rose to 25 percent of Gross Domestic Product, or about 1 percent point more than the annual average for the current decade. This was due to higher savings habits in the developed world and, in particular, China, where savings rose to 48 percent.
The annual report revealed some disturbing patterns of uneven growth worldwide. While the United States and China accounted for half of the world's growth, Europe and Japan have much slower growth. Furthermore, the prospect of reducing America's fiscal deficit is not encouraging. Citing concerns over disinflation, the BIS stressed the need for interest rates to rise in order to slow consumer spending. The bank's economic adviser, William White, explained: "The time has come for a measured withdrawal of the stimulus that has been put into the [economic] system."
Lastly, the report stated that the "underlying issue seems to be that we no longer have a system that somehow forces countries to alter their domestic absorption and associated exchange rates so as to reduce external imbalances in an orderly way." Recommendations include what several academics have suggested by way of establishing a single international currency or perhaps moving to regional currency blocks such as the dollar, euro and renminbi. A year ago, former U.S. Federal Reserve Chairman Paul Volcker told WorldNetDaily: "A new mechanism was needed for the world financial system" and that "in a globalized world, we should have an international currency."
A second recommendation is to allow the IMF more power to force both creditors and debtors to participate in the international adjustment process, while the last would be to require national policymakers to be accountable for their behavior.
Joan Veon is president of Veon Financial Services, Inc., an investment advisory firm, and an independent international reporter. Please visit her website, WomensGroup.org.