Find below a excellent interview with the Governor of the South African Reserve Bank, Gill Marcus, with which I agree, that the emerging markets crisis (yes, it is one) is only the latest episode in the GFC as the various policy responses push the consequences around the world:
This may be right but it is also tactical analysis, not strategic. The more fundamental cause of the entire process is captured at FTAlphaville:
There is a destabilising force pounding its way through the global economy, generating untold chaos in its wake. You can’t see it, you can’t touch it, and you definitely can’t kill it. At best, you can scare it away (temporarily). Sometimes, if you’re lucky and it serves your interests, you can woo it back as well.
What we’re talking about, of course, is idle capital, the sort that greedily seeks out guaranteed returns without any respect for conditionality, commitment or risk. Something also frequently referred to as ‘hot money’.
…The story is wonderfully summed up Frances Coppola at Pieria this week.
As she argues, capital controls or global cooperation could be the best policy action we have for stamping out the plague of such faux ‘hot money’ friends.
Though, as she also argues, the trick then becomes filtering out the bad friends from the good friends, without necessarily putting off or closing yourself off from new friends entirely:
The problem really is where the flows go. If they go into new business development, creating jobs and economic activity that eventually is self-sustaining – sort of “priming the pump” – then they are to be welcomed. But if they go into real estate and/or construction (whether housing or infrastructure), or into funding consumer or government spending, then they could be creating sustainable economic growth – or they could be blowing up potentially damaging bubbles. So the challenge is to determine when inward flows are helpful and when they are not. And this is not easy for governments to do.
This, needless to say, can be a difficult task for even the most established and discerning governments:
It is very easy for even supposedly responsible governments to make the mistake of confusing inflows of hot money due to investors reaching for yield or safety with genuine foreign direct investment. In my view this mistake is currently being made by the UK government, which is hanging both its economic and its election strategy on house price appreciation driven by demand for high-end London property by overseas investors, most of whom have no intention of living in the UK and are simply treating prime residential real estate as a safe high-yield investment. They have no commitment to the UK and will sell up when better opportunities come along – and when they do, the housing market will collapse. The right-wing think-tank Civitas has proposed a mechanism for restricting sales of prime residential property to overseas investors. It should be taken seriously.
Hence why those economies that didn’t take hot money inflows at anything other than face value — i.e. didn’t judge them to indicate an amazing improvement in their underlying fundamentals or mistake them as anything other than false flattery — are likely to fare much better at this point in the cycle.
As Coppola notes:
It is fair to say that some emerging market countries are better able to cope with the present market turbulence than others, and this is directly related to the soundness of their macroeconomic and fiscal policies in the last few years. Those countries that have used the QE-driven inflows of capital since 2008 as an excuse to pursue highly expansionary monetary and fiscal policies are already facing the possibility of severe economic contraction, inflation and even debt default as their currencies collapse:
All of which begs one question. Should some of the blame associated with what happens when false friends leave be directed to those who sent them your way to begin with?
According to Coppola, on the basis that the flows were probably incentivised by the Fed’s unilateral QE actions — the Fed using QE as the primary tool to mitigate the harmful effects of idle capital on home turf — then the answer is yes, the Fed should be blamed, and it should also be held accountable for any cross-border chaos its actions create.
As Coppola notes:
In other words, the Fed should not “go it alone” on monetary policy decisions if those decisions would cause disruptive capital movements and place at risk global financial and economic stability. Yes, there are basket case economies out there: no-one is suggesting that the Fed should construct policy to help them avoid the consequences of their stupidity.But if the Fed’s policy puts the global economy or financial system at risk, the US will be behaving even worse than Argentina and Venezuela. After all, their stupidity only places themselves at risk. The US’s “self-determination” could place the entire world at risk. The IMF warned the US that tapering QE would make the financial system riskier, and that policymakers in other countries might have to intervene to protect their economies. And there have been calls from the World Bank as well as from central bankers and finance ministers in significant emerging market economies for co-operation between central banks as suggested in the IMF’s paper. So far this has fallen on deaf ears.
Coppola concludes that cooperation between central banks is ultimately preferable to capital controls being imposed by EM states to prevent capital leaking out — because even if they were effective, once they are imposed they’d be very difficult to reverse. It’s also hard to disagree that overall free-movement of capital is economically desirable.
That may be ideal but it’s a delusion. As Doug Noland has documented so well for a decade, Anglospheric central banks, and the Fed in particular, do not see it that way. Bernanke (and Greenspan before him) created the very crisis that history will credit him with resolving through the embrace of freewheeling capital market innovation that has hot money at its core. Western central banks rely on these flows to reflate each more destabilised cycle and very little has been done to contain it.
EMs will have no choice in the end but to cut off the flows if they no longer wish to be blown up every cycle. It’s not anti-capitalist to do so. It’s preserving capitalism from a rampant speculator that is tearing it apart bubble by bubble.