REVIEW & OUTLOOK ASIA
August 22, 2013, 12:46 p.m. ET
Ben Bernanke's Global Adventure
The markets show unwinding QE is not so easy.
Emerging market rout threatens wider global economy
The $9 trillion (£5.8 trillion) accumulation of foreign bonds by the rising powers of Asia, Latin America and the emerging world risks going into reverse as one country after another is forced to liquidate holdings to shore up its currency, threatening to inflict a credit shock on the global economy.
By Ambrose Evans-Pritchard
8:38PM BST 22 Aug 2013
Dilma Rousseff, Brazil’s president, held an emergency meeting on Thursday with her top economic officials to halt the real’s slide after it hit a five-year low against the dollar. The central bank chief, Alexandre Tombini, cancelled his trip to the Fed’s Jackson Hole conclave in order “to monitor market activity” amid reports Brazil is preparing direct intervention to stem capital flight.
Emerging markets have stronger shock absorbers today and largely borrow in their own currencies, making them less vulnerable to a dollar squeeze. However, they now make up half the world economy and are big enough to set off a crisis in the West.
Fears of Fed tightening have pushed borrowing costs worldwide to levels that could threaten global recovery. Yields on 10-year bonds jumped 47 basis points to 12.29pc in Brazil on Thursday, 33 points to 9.72pc in Turkey, and 12 points to 8.4pc in South Africa.
There had been hopes that the Fed might delay its tapering of bond purchases, chastened by the jump in long-term rates in the US itself. Ten-year US yields – the world’s benchmark price of money – have soared from 1.6pc to 2.9pc since early May.
Hans Redeker from Morgan Stanley said a “negative feedback loop” is taking hold as emerging markets are forced to impose austerity and sell reserves to shore up their currencies, the exact opposite of what happened over the past decade as they built up a vast war chest of US and European bonds.
The effect of the reserve build-up by China and others was to compress global bond yields, leading to property bubbles and equity booms in the West. The reversal of this process could be painful.
“China sold $20bn of US Treasuries in June and others are doing the same thing. We think this is driving up US yields, and German yields are rising even faster,” said Mr Redeker. “This has major implications for the world. The US may be strong to enough to withstand higher rates, but we are not sure about Europe. Our worry is that a sell-off in reserves may push rates to levels that are unjustified for the global economy as a whole, if it has not happened already.”
Sovereign bond strategist Nicolas Spiro said India is “caught between the Scylla of faltering growth and the Charybdis of currency depreciation” as hostile markets start to pick off any country with a large current account deficit. He said India’s central bank is playing with fire by reversing its tightening measures to fend off recession. It has instead set off a full-blown currency crisis that is crippling for companies with dollar debts.
India is not alone. A string of countries across the world are grappling with variants of the same problem, forced to pick their poison.
Worse, the current Bric thinking goes in the wrong direction. All have large state sectors and are relatively protectionist. Because of their recent economic successes and the western financial crisis, their policy makers increasingly see state capitalism as the solution, and private enterprise and free markets as problems. Especially in Russia and Brazil, influential circles call for a greater role of the state, although the corrupt state is their key problem.
Last month Igor Rudensky, the United Russia parliamentarian who chairs the State Duma’s committee on economic policy, even stated: “The leading role and the commanding heights in the economy should belong to state corporations ... We have to preserve all the positive from [the Soviet] historical experience.” Back to the future!
The writer is a senior fellow at the Peterson Institute for International Economics
22, 2013 8:53 pm
Central bank reserves
The US Federal Reserve’s plan to reduce its monetary stimulus has spooked investors and driven many to pull money out of the developing world, sending most emerging market currencies tumbling.
Although reserves are held precisely for these sorts of squalls, the pace and extent of the declines have been particularly eye-catching in some countries.
Indonesia has lost 13.6 per cent of central bank reserves, Turkey 12.7 per cent and Ukraine almost 10 per cent. But India and Brazil, two other countries with struggling currencies, have lost a more moderate 5.5 and 1.8 per cent respectively.
While depreciating currencies make exports cheaper, they also fuel inflation by increasing the cost of imports. And many emerging market companies, governments and households have loans denominated in dollars or other foreign currencies that become pricier to pay off if the domestic currency is in the doldrums.
While most emerging markets no longer have heavily managed or pegged exchange rates, central banks nonetheless occasionally intervene in currency markets to prevent depreciations or appreciations becoming too volatile.
But the overall decline in reserves stands in sharp contrast to a long trend of healthy and climbing financial firepower in the developing world, driven both by trade surpluses and prudence following past crises in the 1980s and 1990s.
A series of financial calamities triggered a seismic shift in thinking among emerging market policy makers: higher reserves to prevent any more humiliating western bailouts.
All these structural improvements should serve emerging markets well in a less easy monetary policy environment. However, not all countries have accumulated reserves at the same pace. China and the oil-rich Gulf states represent a large chunk of the IMF’s estimates. Even relatively high reserves can be quickly depleted if a country has a large current account deficit.
While most developing country governments have weaned themselves off an addiction to foreign currency-denominated loans, many companies have gone on a dollar borrowing splurge. Many investors still see this as a big vulnerability. For that reason, investors expect many central banks to step away from direct currency market interventions and attempt to stanch outflows through interest rate increases. That may hurt growth, but many countries may have no choice.
Brace Yourself: This is What the Fed’s QE Has Done for Our Economy
By Tara Clarke, Associate Editor, Money Morning
August 21, 2013
But now there are signs the QE policy will finally come to a close.
On June 19, Federal Reserve Chairman Ben Bernanke announced the Fed may start to taper its QE by the end of the year if it met an unemployment target of 7%, while keeping a targeted inflation rate at 2%.
Indeed, today's (Wednesday) Fed minutes reflect that policymakers are forming a plan to taper the stimulus sometime this year and plan for a full stop come mid-2014.
At the outset, the Fed hoped to stimulate a stagnant U.S. economy by increasing the money supply. And now, five years later, some mainstream media would have you think the economy is in decent shape...
A recent Associated Press article described the U.S. economy as "growing at a steady pace." Other analysts feel the economy is stable and a long shot from the 1970s, when the Fed churned out cash on a much smaller scale, which led to damaging rates of inflation.
But the truth is the economy only appears stable.
Beneath the surface, the Fed is roiling, building up to a breakdown that could be worse than 2008's subprime/solvency crisis.
Much like prodding a sick child, the symptoms of economic bad health are there, even if you can't see them at first glance.
Take U.S. car inventories, for example...
3.27 million new cars are presently glutting up dealerships across the U.S. - a greater excess than has been seen in nearly five years.
In fact, that's enough automobiles to equip every man, woman, and child in the state of Iowa, and nearly enough to equal the number of iPhones added to Verizon's network last quarter.
Last year, there were 2.7 million fewer vehicles in the nation's car inventory; back in 2011 it was a million fewer than that.
With 70% of the economy powered by consumer spending, the indications that auto consumers aren't spending is a danger sign.
And the retail sector continues to show mixed results that suggest consumer spending isn't rising to levels needed for a healthy economy.
When paired with another measure of economic health, this glut could very well feed into a scary cycle that will put a major drag on the economy - all this despite the Fed's attempts to goose activity with QE...
The Car Glut Will Affect Unemployment
Even though the unemployment rate fell to 7.4% in July - the lowest rate since December 2008 - U.S. joblessness is still a huge concern.
A significant part of the drop is due to discouraged workers exiting the labor force. Overall the labor force dropped by 37,000 in July, marking a 35-year low in the percentage of working-age Americans looking for jobs.
Moreover, the number of temporary workers who want full-time jobs continues to increase, as the below chart illustrates:
In sum, over 4 million people have been out of work for more than six months, and a doleful 11.5 million are looking for work in total.
22.1 million Americans are either unemployed or underemployed.
And numbers like the car inventory glut show us joblessness is about to get worse...
Come September, most 2014 models will hit the market. The excess cars will have to be sold at big discounts. Automakers will also cut back on production to deal with the glut.
This means lower profits, which translate to lower share prices.
And because automakers are part of a grand supply chain - from plants that assemble cars to parts-makers and suppliers - lower profits and share prices will also affect other sensitive businesses.
For instance, during 2008's economic downturn, suppliers were forced to consolidate operations. They closed plants, laid off workers, and reduced capacity by as much as 30%.
A squeeze on the auto supply chain, joblessness, and a dissatisfied work force are all factors lining up to drag down the U.S. economy.
On top of that, Bernanke's signal of the end of QE starting in 2013 has had an immediate effect on interest rates, driving them higher. Borrowing costs will rise in turn.
This will slow the economy even further.
So what has the Fed's QE done for the economy? It's placed Americans at great risk.
Meanwhile, Bernanke's printing presses are still running...for now.
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Las convicciones son mas peligrosos enemigos de la verdad que las mentiras.
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
No soy alguien que sabe, sino alguien que busca.
Only Gold is money. Everything else is debt.
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Quien no lo ha dado todo no ha dado nada.
History repeats itself, first as tragedy, second as farce.
We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.
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- BEN BERNANKE´S GLOBAL ADVENTURE / THE WALL STREET ...
- EMERGING MARKET ROUT THREATENS WIDER GLOBAL ECONOM...
- NOW THE BRIC´S PARTY IS OVER, THEY MUST WIND DOWN ...
- EMERGING MARKETS ENDURE WILD ROLLERCOASTER RIDE / ...
- BRACE YOURSELF: THIS IS WHAT THE FED´S QE HAS DONE...
- INTERNET LAUNCHES FIGHTBACK AGAINST STATE SNOOPERS...
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