The huge moves in the market at the moment are sending a big warning signal to those who are willing to listen.
The threat of a new round of quantitative easing (QEII) by Federal Reserve chairman Ben Bernanke has set off a chain reaction in world markets that can only end in tears. Emerging market economies are being placed under extreme pressure as their currencies appreciate under the weight of hot money looking for a home.
Thailand announced on Tuesday that it will impose a 15 per cent withholding tax on interest and capital gains made by foreign investors on Thai bonds. Export dependent economies like China, Brazil and Japan have been trying to fight back huge flows of capital chasing yield. Brazil last week raised a tax on foreign portfolio inflows into bonds.
Korea has been rumoured to be intervening repeatedly in the currency markets and in the Philippines, government officials are saying that the rise of the peso is a matter of concern.
Australia has even had to react to the flow of money by delaying the raising of interest rates to keep the interest rate differentials between Australia and the USA to a minimum.
Global imbalances are increasing in response to the ridiculous attempts by Bernanke to reflate the system. All he is managing to do by threatening QEII is to force investors to search for a safe haven for their money while Bernanke tries to trash the currency.
Hard assets are of course the desired destination and the huge spike in the Australian dollar and rally in commodity markets are seeing this race accelerate.
Bernanke’s desire is to stoke lending in America and inspire investment and job growth. I assure you that printing money is going to do no such thing.
Long term interest rates in America are at generational lows already and banks are unwilling to lend and consumers and businesses are unwilling to borrow. Lowering the 10-year bond by another half a percentage point is not going to miraculously change this situation.
Instead of inspiring more lending at home it is going to inspire capital flight out of America and into high yielding currencies as is happening right now.
What will be the outcome of commodities going through the roof?
Input costs for businesses are going to go up and disposable income for consumers is going to go down. There is a lack of demand anyway so why would a business invest to increase production when his input costs are going up and he has no pricing power because the end demand is so weak.
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