The Bank of International Settlements (BIS), the international body responsible for coordinating action among central banks, says the global economy is at the "tipping point" of a downturn that could be so severe that inflation concerns could melt away in the face of a deflationary spiral (WSJ).
[T]he impact of rising food and energy prices on consumers' incomes, combined with heavy household debts and a pullback in bank lending, may lead to a slowdown in global growth that "could prove to be much greater and longer-lasting than would be required to keep inflation under control."
While the BIS maintains that deflation is still an unlikely outcome, it warned that the fallout from the ongoing credit crisis could be dire:
While a severe slowdown is not inevitable, the BIS believes that the risks of a sharp downturn are very real, and centered on the financial system. It warned that the process of cutting back on borrowing after many years of accumulating debt could lead to "much slower growth than is generally expected."
Within the financial sector, the BIS said the reduced availability of credit could force some institutions to sell assets at a time when buyers are hard to find -- an outcome that could lead to another round of price declines and losses at banks. "The impact of such fire sales on prices, and on the capital of financial institutions, could be substantial," it said.
Not to nitpick, but hasn't this already started happening?
