O nouă criză

Texte selectate sau scrise de echipa redacţională: Vasile Ernu, Costi Rogozanu, Florin Poenaru.

Până la redresarea mult dorită, o noua fază a crizei economice care pare sa pornească din zona economiilor emergente.

Emerging market crisis?

Back in early December, I wrote that injections of money by the major central banks of the world through what is called quantitative easing was causing not inflation of prices in goods and services but instead in financial assets. Stock markets were booming as banks and (large) companies were flush with cheap credit and cash. Rather than lend to businesses or invest in new productive capacity, they preferred to look for higher returns in fictitious capital (property, stocks and bonds). House prices have jumped back up everywhere, while governments get the banks to buy their bonds and keep interest rates low. It’s a circular process in fictitious capital expansion.

One extra aspect of this was the boom in commodities (base metals, gold, food crops etc) for emerging economies, where most of the world’s raw materials for production are. Also, as yields are much higher for bonds and equities in emerging economies, much of this cheap credit flew to these economies, driving up financial asset prices and to some extent, inflation of goods prices too . Because central banks there were not ‘sterilising’ these foreign currency cash inflows, they led to sharp rises in domestic money supply and falling interest rates that engendered property price booms and rising inflation.

But then last summer, the US Federal Reserve, the leader in quantitative easing, decided that the time had come to begin to ‘exit’ from these injections (see my post, https://thenextrecession.wordpress.com/2013/09/19/tapering-maybe-not/). The Fed announced that it would taper its programme of purchases in the autumn, just ever so slightly from $80bn a month to $70bn. It was still injecting, but at less of a rate. In the event it delayed its ‘tapering’ until December. But it has now started. It’s only a small reduction so far but the financial market investors see this as the thin end of the wedge. They are expecting QE to end this year and then for interest rates to start to rise. As a result, there has been a sharp drying up of credit to emerging markets and also into commodities (the gold price has plummeted). As I said last December, “If the Fed reverses QE as it will start to do shortly, then flows to EMs could turn round and cause a nasty credit squeeze.”

The change in Fed injections is marginal but it is the emerging economies which are at that margin. They are the first to be hit, but especially those economies that depend heavily on trade, but are running deficits because they were trying to maintain living standards and avoid austerity. Some of these economies already have large debts owed to foreigners and the cost of servicing those debts will rise sharply. Foreign investors got even more worried and tried to get their assets out of local currencies and into dollars or euros – this is called capital flight. So the currencies of those economies with big foreign debts like Argentina, Turkey, South Africa, Brazil have plummeted in short order.

Argentina is suffering the most because it already defaulted on its debts back in 2001 and has had large deficits on its balance of payments with the rest of the world. The irony here is that many Keynesians like to use the example of Argentina as a way out of the austerity that the likes of Greece or Portugal are suffering in the Eurozone (see my

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joint paper with G Carchedi, The long roots of the present crisis). Do what Argentina did in 2001: default on your debts, leave the euro and devalue your currency, then you can get growth, the argument went. Well, the proverbial chickens have come how to roost on that strategy.

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