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Emerging Market Rout Is Too Big For The Fed To Ignore

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Telegraph 28/8/13

' This has the makings of a grave policy error: a repeat of the dramatic events in the autumn of 1998 at best; a full-blown debacle and a slide into a second leg of the Long Slump at worst.

Emerging markets are now big enough to drag down the global economy. As Indonesia, India, Ukraine, Brazil, Turkey, Venezuela, South Africa, Russia, Thailand and Kazakhstan try to shore up their currencies, the effect is ricocheting back into the advanced world in higher borrowing costs. Even China felt compelled to sell $20bn of US Treasuries in July.

"They are running down reserves by selling US and European bonds, leading to a self-reinforcing feedback loop," said Simon Derrick from BNY Mellon.

We are told that emerging markets are more resilient than in past crises because they have $9 trillion of reserves. But any use of that treasure to defend the exchange rate entails monetary tightening, and therefore inflicts a contractionary shock on countries already in trouble.

We are also told that they borrow in their own currencies these days, immune to the sort of dollar squeeze that caused such havoc in the early 1980s and the mid-1990s. This is true, but double-edged. India, Brazil and others will surely be tempted to stop fighting markets, let their currencies slide and inflict the pain on foreigners - that is to say, on your pension fund.

Emerging markets were less than 15pc of global GDP in the early 1980s, when tightening by the Volcker Fed brought Latin America crashing down. That was an ugly episode for Western banks, but easily contained.

Emerging markets are half the world economy, according to IMF data.

The Fed has a duty of care to emerging markets, since its own hands are hardly clean. Zero rates and quantitative easing were the cause of dollar liquidity flooding these countries. It was the biggest reason why net capitals flows into emerging markets doubled from $4 trillion to $8 trillion after 2008, much of it wasted in a late cycle blow-off. '

I take it AEP wants the Fed to keep printing.

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All the macroeconomic analysts were saying this would be the consequence of the FED strategy in 2008.

I'm surprised it took this long.

They never were going to win in the long run because it can't be done, the BRICS are going to get burned... and so are we.

Edited by TwoWolves

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The New York Fed was forced to intervene in October 1998, rescuing the hedge fund Long Term Capital Management. The Fed cut rates again in October and November. Mr Greenspan said "the probability of systemic collapse was sufficiently large to make us very uncomfortable about doing nothing".

Not again.

They wheel out the same old tired excuse every time.

You know there's something fundamentally wrong with the way things are being run when "the probability of systemic collapse" being "sufficiently large" happens so often.

Edited by billybong

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Of course he does. It's the Telegraph house line. Capitalism for the poor, socialism for the rich.

It's not at all as simple as that.

Like it or not QE does paper over the cracks and stop systematic collapse of the world's monetary system, and as a result prevents a great depression the likes of which the world has never seen. We are so much more globally interconnected now that the depression would be a magnitude greater than that experienced in the 1920's. Everyone would lose enormously from this outcome not just the rich. I think AEP is smart enough to understand that.

Having said that, QE as it is currently undertaken is markedly increasing the wealth of the already wealthy and impoverishing everyone else.

The underlying problem is a fundamentally broken world financial system that needs root and branch reform, QE (along with other stuff) is now a stop gap measure become permanent because that reform was not undertaken. Invariably the world will swing back into crisis and then lurch from crisis to crisis as long as that reform is not undertaken.

The FT wrote an article alluding to this only a few days ago.

http://www.ft.com/cms/s/0/020103b6-0b4e-11e3-bffc-00144feabdc0.html#ixzz2dFMfc7vE

The world is doomed to an endless cycle of bubble, financial crisis and currency collapse. Get used to it. At least, that is what the world’s central bankers – who gathered in all their wonky majesty last week for the Federal Reserve Bank of Kansas City’s annual conference in Jackson Hole, Wyoming – seem to expect.

All their discussion of the international financial system was marked by a fatalist acceptance of the status quo. Despite the success of unconventional monetary policy and recent big upgrades to financial regulation, we still have no way to tackle imbalances in the global economy, and that means new crises in the future.

Indeed, the problem is becoming worse......

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It's not at all as simple as that.

Like it or not QE does paper over the cracks and stop systematic collapse of the world's monetary system, and as a result prevents a great depression the likes of which the world has never seen. We are so much more globally interconnected now that the depression would be a magnitude greater than that experienced in the 1920's. Everyone would lose enormously from this outcome not just the rich. I think AEP is smart enough to understand that.

Having said that, QE as it is currently undertaken is markedly increasing the wealth of the already wealthy and impoverishing everyone else.

The underlying problem is a fundamentally broken world financial system that needs root and branch reform, QE (along with other stuff) is now a stop gap measure become permanent because that reform was not undertaken. Invariably the world will swing back into crisis and then lurch from crisis to crisis as long as that reform is not undertaken.

The FT wrote an article alluding to this only a few days ago.

http://www.ft.com/cm...l#ixzz2dFMfc7vE

When did the world's central bankers acknowledge that the financial system was fundamentally broken? As late as 2005 with a US housing market collapse less than a year away they were publicly congratulating themselves on having brought about a Great Moderation. Even after the collapse of Lehman Brothers International (London) and AIG Financial Products (London) in 2008 they were still in complete denial about the scale of the impending catastrophe. And to this day they can offer no credible explanation for the Great Recession since the neoclassical models they have of the economy are incapable of simulating deflationary depressions. They're hayseeds, halfwits and charlatans in league with crooks.

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When did the world's central bankers acknowledge that the financial system was fundamentally broken? As late as 2005 with a US housing market collapse less than a year away they were publicly congratulating themselves on having brought about a Great Moderation. Even after the collapse of Lehman Brothers International (London) and AIG Financial Products (London) in 2008 they were still in complete denial about the scale of the impending catastrophe. And to this day they can offer no credible explanation for the Great Recession since the neoclassical models they have of the economy are incapable of simulating deflationary depressions. They're hayseeds, halfwits and charlatans in league with crooks.

Agreed they made a heck of a lot of mistakes.

But what do you honestly expect them to do right now? Say f**** it and let the next great depression start?

They are politically extremely limited, by the systems within which they operate.

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They are politically extremely limited, by the systems within which they operate.

The degree to which so many people fail to understand the above point, never fails to amaze me.

Of course the political constraints derive as much from the expectations of voters as they do from any elite conspiracy.

In so far as voters are conditioned to expect X y or Z by an elite conspiracy, that conspiracy must have been running for generations to ensure that said expectations are sufficiently deeply embedded,

At which point the conspiracy becomes identical to our institutions and culture, and those who refuse to recognise these realities as raging impotently against the machine.

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Agreed they made a heck of a lot of mistakes.

But what do you honestly expect them to do right now? Say f**** it and let the next great depression start?

They are politically extremely limited, by the systems within which they operate.

Say ****** it and let the next great depression start is exactly what they've done! A trillion pounds has been squandered in the UK alone holding up zombie businesses, households and banks. And to what end? The UK economy is flat on its face, house prices are still insane, our debt-to-GDP is vastly higher than it was even at the peak of the crisis.

What could they have done? An admission that they got it utterly wrong would have been a start. Jailing a few hundred bankers and seizing their assets would have been another. Not using QE to re-inflate the housing bubble, that would help. Clawing back King's unearned knighthood and pension would carry huge symbolic weight.

A debt jubilee? A building boom? Alas. Too late, too late.

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Gotta love Ambrose.

India pushes 'shock and awe’ currency plan to save BRICS

India is pushing for joint “shock-and-awe” intervention by key developing states to halt capital flight and shore up currencies, in a move that risks backfiring and triggering a vicious spiral.

“It is going to happen in a matter of days rather than weeks, Brazil and India can start the move,” said Dipak Dasgupta, a top Indian official.

Mr Dasgputa told Reuters that China, Brazil, India, Turkey, Russia and South Africa have all been squeezed as the US Federal Reserve prepares to tighten monetary policy. Joint action would give emerging markets greater firepower, allowing them to deploy their combined $8.7 trillion (£5.6 trillion) of reserves and crush “speculators”, rather than being picked off one by one.

However, it is unclear whether such action would serve any useful purpose if the real problem is exhaustion of catch-up growth models in these countries, and boom-bust credit cycles. “This could backfire,” said Ian Stannard, of Morgan Stanley. “If they did this, they would have to sell US and European bonds and that would push up yields. It was rising yields that started this process in the first place.”

http://www.telegraph.co.uk/finance/currency/10277392/India-pushes-shock-and-awe-currency-plan-to-save-BRICS.html

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That 2008 feeling is coming back

Genuine question:

In 2008 did the "man on the 'bus" think everything was ticking along fine? 2008 was before I became interested/aware of the whole situation...

I ask as the roads have been packed these past couple of weeks, people obviously busy with stuff, as though the money is flowing again.

Also speaking to several people convinced property is on the way up again and the bust is over.

Literally in a fortnight I just seem to have sensed a colossal change of attitude. My phone rang three times in one day for jobs that I'd not heard from for ages and assume were cancelled or given to others. Today I won one of them!

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Genuine question:

In 2008 did the "man on the 'bus" think everything was ticking along fine? 2008 was before I became interested/aware of the whole situation...

I ask as the roads have been packed these past couple of weeks, people obviously busy with stuff, as though the money is flowing again.

Also speaking to several people convinced property is on the way up again and the bust is over.

Literally in a fortnight I just seem to have sensed a colossal change of attitude. My phone rang three times in one day for jobs that I'd not heard from for ages and assume were cancelled or given to others. Today I won one of them!

Osborne is still spending like there's no tomorrow. Mortgage origination is up sharply yoy thanks to Help to Buy. Bernanke's Housing Bubble 2.0 is running at nearly 20% p.a. A tsunami of QE is sloshing round the world chasing yield. All this borrowing creates growth and the illusion of prosperity while pushing the prospect of recovery further and further away.

Congrats on the job! Optionality is the key to survival.

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Osborne is still spending like there's no tomorrow. Mortgage origination is up sharply yoy thanks to Help to Buy. Bernanke's Housing Bubble 2.0 is running at nearly 20% p.a. A tsunami of QE is sloshing round the world chasing yield. All this borrowing creates growth and the illusion of prosperity while pushing the prospect of recovery further and further away.

Congrats on the job! Optionality is the key to survival.

I can see how people think that this is actually a/the recovery. Scary to think it's an illusion. I generally can't read people or situations that well but even to me the mood of the crowd has been palpable.

Thanks - by won I mean a contract (I'm a sparky) as well as, quite literally, EVERY other sparky I know suddenly needing more men for the influx of work that's arrived.

Edited by chronyx

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I can see how people think that this is actually a/the recovery. Scary to think it's an illusion. I generally can't read people or situations that well but even to me the mood of the crowd has been palpable.

Thanks - by won I mean a contract (I'm a sparky) as well as, quite literally, EVERY other sparky I know suddenly needing more men for the influx of work that's arrived.

Can turn on a dime though. Up until 10.30 last night we were going to war, if you believed the hype that was.

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