♠ Posted by Emmanuel in Bretton Woods Twins,Currencies
at 10/20/2010 12:10:00 AM
Well, in so many words. As you know, I needn't be convinced who the aggressors are in "international currency war" [1, 2, 3] as the American game plan of further bulking up its central bank's balance sheet with junk assets purchased through debased currency are well-known. What I didn't expect, however, is that World Bank research would come to the same conclusion:Inflows of capital are posing a growing risk to East Asian macro-economic stability, according to the World Bank’s half-yearly review of regional trends. The report comes amid concern in Asia that a likely fresh round of US Federal Reserve quantitative easing, dubbed “QE2”, will unleash a destablising wash of funds into the region.So China has indeed tightened today, presciently enough. However, there is still reason to be wary that Asian countries may be cannon fodder for Yankee helicopter pilots dropping dollars like there's no tomorrow (which, as far as America goes, is a pretty accurate assessment IMHO). The report quoted above is from the East Asia and Pacific Update released just today. Here is the key part on the helicopter dropping leaving countries in the region vulnerable from dollarized aerial assaults. From p. 5:
Capital flows driven by easy monetary policies, low yields in advanced nations and confidence in East Asian prospects were helping to drive up asset valuations in some countries, “precipitating fears of a new bubble”, the World Bank said in its East Asia and Pacific Economic Update.
The report highlighted a rapid increase in equity prices as sparking memories of the market turmoil caused by Asia’s financial crisis in the late 1990s. “The authorities in East Asia need to take adequate precautions to ensure that they do not repeat the same mistake twice in slightly over a decade,” the report said.
Vikram Nehru, World Bank chief economist for East Asia and the Pacific, said the most immediate policy option for countries in the region would be to push forward with “unwinding” monetary easing policies adopted during the global downturn. “If these flows were to continue and to pose a threat, as we expect they probably will, then a…further tightening of the monetary stance will probably be appropriate,” Mr Nehru said.
The return of large capital inflows to the region, combined with rising inflationary pressures and climbing asset prices, presents an emerging policy challenge and a growing risk to macroeconomic stability. The large increase in inflows, driven by abundant global liquidity and low yields in advanced countries [I wonder who that may be], and reflective of foreign investor's confidence in East Asia’s growth prospects, has been mainly responsible for a substantial appreciation of exchange rates, despite sustained exchange market interventions by central banks. The surge in inflows, combined with ample domestic liquidity and rising confidence, has boosted equity and real estate prices in some countries. Most monetary authorities have refrained thus far from introducing new capital controls although some have liberalized rules for resident investment abroad. But should inflows remain strong, especially against a background of weak global growth, the authorities will be faced with the challenge of balancing the need for robust capital inflows (especially foreign direct investment) with ensuring competitiveness, financial sector stability, and low inflation.So the World Bank is still wary about capital controls, but does mention that it's a path countries may take in trying to ward off dollar emissions. Best of luck, but the real key IMHO is for the rest of us to get together and put America in its place. Meanwhile, watch the skies. When will we finally get fed up with such abusive Yankee behaviour that involves externalizing homegrown woes?
