UK debt in a "dangerous pile-up" while "global cracks and imbalances" loom larger................
UK policy blamed for soaring debt levels
By Edmund Conway, Economics Editor (Filed: 20/02/2006)
Gordon Brown, the Chancellor, made inflation targeting the cornerstone of an independent Bank of England in 1997. But the powerful Bank for International Settlements (BIS) has now voiced grave doubts about the policy and called on politicians to begin debating an overhaul of the current global economic system.
In another radical move it has also suggested ditching many national currencies in favour of a small number of formal currency blocks based on the dollar, euro and renminbi or yen.
The BIS, which is controlled by a coalition of central banks and helps oversee the global financial system, warned that by pushing interest rates so low, inflation targeting has encouraged the public to take on more debt and has accelerated a flow of money out of the world's major economies.
The news will also cause concern in the US, where Ben Bernanke, the new chairman of the Federal Reserve, is thought to be considering adopting an inflation target.
The BIS's leading economist and head of monetary policy, William White, said growing levels of personal and corporate debt, both in the UK and internationally, were signs that while the fight against inflation may have been won, it has been at the cost of unbalancing the world economy.
In a new BIS report he said: "In a number of English-speaking countries what has been observed is a decade-long reduction in the household saving rate and a significant increase in consumption.
He said that the battle with inflation had been waged since the 1960s and 1970s. "Perhaps the first heretical point to raise is whether this should always be the objective of policy. The issue needs to be addressed again."
Despite the fact that low inflation and relatively high economic growth have been achieved across much of the western world in recent years, analysts are increasingly concerned with "imbalances" or cracks in the economic system. The US current account deficit is at a record level of almost 7pc of the country's economic output, meaning an unprecedented amount of money is flowing out of the country.
Mr White said: "Those countries with the biggest external deficits [the US, the UK, Australia and New Zealand] also tend to have the biggest internal imbalances. Rising asset prices in such countries (recently, for housing in particular) have led to higher perceptions of wealth, and more spending." However, he added, far from managing these worrying build-ups, inflation targeting can encourage them.
Mr White's comments mark a significant departure for the BIS, which for many years has championed inflation targeting as an essential component of stable economies.
Mr White also suggested ditching the current system of floating currencies and replacing it with "a small number of more formally-based currency blocks". He claimed that because of the record rate at which Asian central banks have been buying dollars in order to keep their currencies artificially low, "we do not really have a freely floating rate system".