Emerging economies on defense
The Federal Reserve announced last month an additional $10 billion tapering of the economic stimulus program that encouraged vast flows of investment money into emerging economies.
The tapering caused emerging market economies to suffer huge outflows of money, leading to currency depreciation and falling stock markets. The Dow, as those watching their 401(k)s will attest, has taken hits flirting with a correction.
Emerging countries' appeals to the Fed against the tapering were ignored. Many emerging nations raised interest rates, while others imposed exchange controls. If these fail to stem the outward flow of money, these nations may be tempted to introduce trade tariffs. Higher interest rates, exchange controls and trade tariffs could severely damage world trade, threatening international recession and the viability of “too-big-to-fail” banks.
In 2007, developed economies, fearing deep recession, reeled under the shock of widespread real estate speculation. The Fed-led international financial markets faced catastrophic collapse. Then-Fed Chairman Ben Bernanke's unprecedented recipe was stimulus bond-buying by the Treasury. For the moment, this appears to have saved Wall Street and emboldened investors and consumers to spend, even on credit.
Bernanke combined his stimulus with a Zero Interest Rate Policy, which forced savers to seek ever-greater risks to gain a reasonable return. The result of Bernanke's actions was to establish a pool of low-cost capital seeking higher-risk returns. Money flowed heavily to fast-growing but volatile emerging markets, driving up their asset prices, stock markets and currencies.
Sensing that sustained stimulus was damaging the economy, Bernanke announced in June the possibility of tapering the stimulus. Money started to leave emerging economies. In late 2013, Bernanke announced a $10 billion taper, causing a further fund flow from emerging economy markets and currencies.
By announcing a second $10 billion taper before his departure, Bernanke appeared to set a trend. Shocked emerging market governments initiated a wave of defensive interest rate hikes.
In so-called developed economies, where politicians talk in trillions, $10 billion appears as chump change. But it equals the combined average monthly portfolio investment into Brazil, Chile, Indonesia, India, Thailand, Turkey and Ukraine. At $20 billion, it would include Canada and Mexico.
A continued tapering trend would affect many nations, causing a huge exit of money. This would result in falling asset prices, stock markets and currencies, causing rising inflation and interest rates.
India's MIT-trained central bank governor, Raghuram Rajan, was among the first to predict the financial fiasco of 2007. Presciently, he raised Indian interest rates immediately on taking office in September. Late last month, Rajan said that in tapering the stimulus, the Fed was “attacking” emerging markets.
Creating $4 trillion by computer strokes and injecting it into the international economy was relatively easy. Unwinding it could cause international hardship and challenge.
John Browne, a former member of Britain's Parliament, is a financial and economics columnist for Trib Total Media. Contact him at firstname.lastname@example.org.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Steelers notebook: Starting DEs not leaving the field
- NHL notebook: Former Penguin Despres gets $18.5 million deal from Ducks
- MLB notebook: Mariners fire McClendon after 2 seasons as manager
- PA Cyber Charter School employees to vote on union representation
- House OKs end of oil export ban adopted in 1970s in response to Arab embargo
- Steelers quarterback Vick getting more acquainted with offense
- Yatesboro teen died from artery anomaly
- Starkey: Pirates gaining bad big-game rep
- Stocks wrap best week of year with slight gains
- Nobel Peace Prize goes to Tunisia groups united to foster political diaglogue
- Backlash against Merkel over migrant flow grows