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A "Dangerous Spiral" Has Taken Hold In Emerging Markets
Via Natixis Flash Economics,
We find the following cause-and-effect mechanisms in a "dangerous spiral":
- Capital outflows, leading to weak investment;
- Accordingly, exchange-rate depreciation;
- Hence inflation, loss of purchasing power and weakening of consumption;
- Hence problems for the central bank, which is faced with both sluggish growth and inflation;
- The sluggish growth amplifies the capital outflows.
Several major emerging countries are caught in this dangerous spiral; we will look at Russia, Brazil, Turkey, Argentina, India and South Africa.
This "dangerous spiral" is very clear in Russia, Brazil, Argentina and South Africa. Some of its components are appearing in Turkey and India.
First stage: Capital outflows and weakening investment
If a country is faced with large capital outflows because this capital is not being invested in the country, investment is weakened.
This can be seen for all types of capital in Russia and Argentina and since 2013 in South Africa (Charts 1A and B); for non-residents’ purchases of equities and bonds in 2011 and 2013, and since the summer of 2014 in Russia, Brazil, Turkey, South Africa and India (Charts 2A and B).
This has weakened investment in all six countries we are looking at (Charts 3A and B).
Second stage: Exchange-rate depreciation
The capital outflows lead to an exchange-rate depreciation. This has been very clear since 2011 in all six countries (Russia, Brazil, Turkey, Argentina, India and South Africa, Charts 4A and B).
Third stage: Imported inflation, loss of purchasing power, weakening of consumption
The exchange-rate depreciation leads to imported inflation and hence a deterioration in the terms of trade, a decline in real income and a weakening of consumption.
Inflation is rising in Brazil, Russia, Turkey, Argentina and South Africa, but no longer in India since the start of 2014 (Charts 5A and B). Inflation is reducing the real wage and consumption in Russia, Brazil, Turkey, Argentina and South Africa (Charts 6A and B, 7A and B).
Fourth stage: Problems for the central bank
These countries’ central bank is therefore faced with both sluggish growth (Charts 8A and B) and inflation (Charts 5A and B above).
It is then faced with a difficult dilemma:
- Either it reacts primarily to the sluggish growth; it will then choose a low interest rate which will amplify the capital outflows;
- Or it reacts primarily to the high inflation; it then hikes its interest rates, which will depress domestic demand even more.
Charts 9A and B show that among the countries studied:
- Brazil has chosen a restrictive monetary policy;
- The other countries have chosen to keep real interest rates low, close to zero or negative (Argentina).
Fifth stage: Amplification of the capital outflows
If there is sluggish growth and, even more so, if the central bank does not react to inflation and gives rise to negative real interest rates, the capital outflows are amplified and the "dangerous spiral" becomes self-sustaining. This seems to be the case currently in Russia, Brazil, South Africa and Argentina.
Conclusion: It is very difficult to get out of the "dangerous spiral"
We use the term "dangerous spiral" for the following cause-and-effect mechanisms:
How can the countries get out of it? The loss of growth caused by the capital outflows and by the deterioration in the terms of trade amplifies the capital outflows. If the central bank reacts to imported inflation by hiking interest rates, it amplifies the weakness of activity. If it reacts to the sluggish growth by keeping interest rates low, it amplifies the capital outflows.
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The CBs have paved the Highway to Hell. It is not a good song like AC/DC's version though.
Why isn't the USA on t his chart?
The 'uninteneded' consequences of FED financial engineering. Messing up the rest of the world (too.) Oops. We saw this before with high food inflation in the Arab world and elsewhere, which partially led to the 'Arab spring.' It's just taking a little longer in our corner. And they think they've got control of this?
Don't worry.
This will all be covered in detail tonight on Ronan Farrow's in depth fair and balanced news analysis on MSNBC so that all the plebes will be fully conversant in the morning.
edit: as soon as I punched the return key, I had an all way too brilliant visual of the little rat wanking off on the telly, drooling and giggling...
+100. Gezzzzus Knuckles. he he hee. "Somebody pass knuckles the pipe!"
Unpossible - ZH tells us how strong Russia and essentially every nation aside from the U.S. are daily.
Russia & China, in particular (along with their dependents such as Australia and Baltic nations) are screwed.
.........and farrow asks the rat pack,
are YOU my daddy?
Please move on. Nothing to see here!
Michael Hudson:
As of 1976, Argentina had a total foreign debt of $18 million, 17 percent of GDP. The military came in in ’76 with U.S. government support, established a junta. By 1983, the debt had soared to $48 billion–by a factor of seven.
You had the U.S.-backed military dictatorship that ran the debt up into 1983, but then, in 1989, you had another neoliberal takeover with the Washington Consensus, and they adopted the U.S. dollar as their basic monetary reserves and tied their money supply to the dollar.
That essentially drove the country into debt because it brought on an economic collapse by 2002.
So you have a destructive neoliberal government coming in, driving the country into debt, ’cause that’s what neoliberals do.
http://michael-hudson.com/2014/07/vulture-funds-trump-argentinian-sovereignty/
Why isn't the USA on t his chart?
It's on the "Submerging Markets" chart.
Because the USA is a submerging market.
Dude...relative to gold the dollar is in the stratosphere! Incredibly....equities continue to hit one new record after another.
The USA could end up with fifty thousand tons of gold before this dollar mania subsides!
I must have missed the part about all that capital investment occurring in the USA.
They get out of it by picking a side in the upcoming West versus East World War III.
I assume this is positive for the S&P.
Welcome to the Gordian Knot World.
Central Banking built that !
SHORT BRAZIL BIzaaaaaaaaaatches.....
easy..opt out of the dollar system, trade with other 'weak' countries, withhold goods from the broader international market, allow dollar debts to default, then...wait...
That includes four out of five of the so-called BRICS countries. That's noteworthy but I do not know what to make of it.
it gives the BRICS very good incentive to stick together and figure out how to jettison their rottenchildern CB''s and regain control of their currency and resources.
Many traders think this scenario is $usd positive. It's anything but... Asian countries/exporters know full well that the strong $usd is bad for their export demand.
As the $usd strengthens it drives Asian input production costs higher, and also drives American exports down. (higher purchasing/commodity costs) Global demand is slow, and production capacity is overbuilt.
China, being the leader in global manufacturing realizes this and has been trying to increase internal demand through a stronger yuan policy.(purchasing power internally to drive demand) With Japan pulling it's recent shenanigans, China will have to lower the yuan valuation eventually.
I do think we're on the verge of a major currency war. There's no way the $usd will continue to strengthen when currency swaps and derivative's deals turn sour. The Fed. can't continue to print or devaluation will eat them alive. If the Fed. continues to print, they will be seen as monetizing debt, because the debt surplus has dropped to almost 1/2 of what it was 2-3 years ago.
In either scenario I see the $usd weakening and commodity demand growing.
Normally I would categorically agree with this but simply put there is zero deflation in the USA and a STUPENDOUS energy boom. Gold is absolutely FLOODING into the USA right now...basically "free of charge." Don't even get me started on silver which in my view is basically being given away. I wouldn't TOUCH copper if you paid me.
The USA could end up producing some truly and profoundly good industrial "contrivances" here...ones that could add markedly to GDP growth.
Number one on the list is oil refining.
A close number two is a huge revival in the chemical complex. Prices for gasoline in Delaware were almost below two bucks. They're about to head much lower.
Maybe my numbers are wrong, but seems like only 1.05 Million jobs in Mining, Drilling, transporting, storing Oil & Gas & Chemicals.
Makes me think all the benefits go to the Executives.
Employment, Hours, and Earnings from the Current Employment Statistics survey (National)
Series Id: CEU1021100001
Not Seasonally Adjusted
Super Sector: Mining and logging
Industry: Oil and gas extraction
NAICS Code: 211
Data Type: ALL EMPLOYEES, THOUSANDS
Download:
Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Annual
2014 205.0 206.9 206.2 207.1 209.6 212.9 214.7 214.3 212.9(P) 215.5(P)
All Employees: Transportation and Warehousing: Pipeline Transportation
2014-10: 45.6 Thousands of Persons
Monthly, Seasonally Adjusted, CES4348600001, Updated: 2014-11-07
All Employees: Transportation and Warehousing: Warehousing and Storage
2014-10: 744.5 Thousands of Persons
Monthly, Seasonally Adjusted, CES4349300001, Updated: 2014-11-07
http://research.stlouisfed.org/fred2/series/CES4349300001
All Employees: Nondurable Goods: Chemicals
2014-10: 808.1 Thousands of Persons (+ see more)
Monthly, Seasonally Adjusted, CES3232500001, Updated: 2014-11-07
---------------
Where as compared to Finance, there are still almost 6 Million Jobs
All Employees: Financial Activities: Finance and Insurance
2014-10: 5,927.9 Thousands of Persons (down from 6.2 million)
Monthly, Seasonally Adjusted, CES5552000001, Updated: 2014-11-07
The differences between these countries, which consist of people; are far greater than any similarity; focusing on a fairly articifical issue such as a foreign exchange rate; which if nothing else, is alwalys guaranteed to be changing; ie: if you don't like your foreign exchange rate come back in six months and check again, and the actions of a "central Bank" which doesn't even have the same meaning or abilities in the couintries listed; is so shallow as to leave us devoid of meaningful insight. Russia and Turkey are so different they might as well be on different planets. Surely, t here is a hugely significant difference between countries with a current account surplus and a current account outflow. just to pick one differentiator practically at random.
Yeah, this is difficult for me. I see this as more of a prediction that a layout of leading indicators.
Looks like Economics & Finance. Fits well on ZH.
I can't conclude how helpful it is till later. I'm glad someone is looking at this stuff. Might show how lucky US People are today. Might show the true strength of the US global economic Position. Might show US Mastery to target these countries????
BS! Friends of China won't sink or China sinks. Is the USSA making REAL FRIENDS? Watch the RATS change SHIP!
Video Palestinians break through West Bank barrier to mark Berlin Wall anniversary
Redistribution of Hydrocarbons According to Henry Kissinger
Four out of five BRICS…..what BRICS country doesn’t fit and why?
It seems the outlier is the non-resource exporting manufacturer, who also happened to be the primary driving force behind the other countries' growth. When it sneezed, the BRI-S caught a cold.
Ironically, perhaps, the serial printer amongst the BRICS is the one still doing the best. People here blame the Fed, but China’s fiat spigot topped the US, EU and Japan combined, despite having an economy around a third of the size of the others at the start of the printing process. As ZH has repeatedly catalogued, China added $23 trillion of bank assets to its system over the last five years.
Across the world consumers lost the capacity to consume, except via debt, because labor lost pricing power in a globalized and increasingly efficient world. As billions of folks tried to join the party, there simply wasn’t available space or need, and living standards had nowhere to go but drift toward a common mean.
All the debt is merely a symptom. It was the stopgap measure to buy time until, hopefully, a place could be found for everybody. Productivity and efficiency, however, continue to outrun absorption capacity.
For unskilled and non-rare labor, this is the real New World, and whatever Birth Advantage might have existed in the past is slowly disappearing. India or America, labor of similar skill has the same international price. As that adjustment continues to occur, those whose expectations were most severely dashed are going to take to the streets. The world could end Feds, fiats and fractional reserve, and it would change nothing in this inexorable trend toward a common lifestyle.
Everything and anything becomes a bargain at some price point! It's called price discovery 101. Investment will return when the right risk to return ratio returns.
Ergo, short EEM?
Upside risk sure seems limited, and there are Black Swans and stick saves everywhere. All it takes is one miss.
WHAT'S GOING ON IN THERE?
NASA HANDS OVER OPERATIONS OF AIRFIELD TO GOOGLE...
Projects involving aviation, space exploration, robots... MORE...
.gov contracts out NASA. Space flight, National space flight is Privatized Bitchez.
Next is your highway, your bridges, your parks (not paying park fees yet?), utilities, your dam (paying a dam fee yet?)
Interesting, sort of a Central Bankers remake of Atlas Shrugged.
The Fed loans money for nothing to insolvent banks.
Banks loan money overseas in carry trade and use proceeds to slowly rebuild their shattered reserve ratios while regulators neglect to notice that they are technically insolvent at the moment.
Continuing global instability and signs of domestic weakness in carry trade markets leads to withdrawl of funds while it is still possible to do so.
Funds repatriate to US and leave overseas players in serious financial trouble with loads of USD denominated obligations and collapsing revenues. Ross Perot "giant sucking sound" but in reverse.
Your comment is spot on. This is all becoming very surreal. Few people really think about the economy to any great degree or even try to understand it. The study of economics is often baffling and confusing. Many economic theories exist but many are full of holes and conundrums. Much of how people react to a policy may have to do with timing and perception instead of reality.
Economics is full of loops that feed back upon themselves and unexpected pitfalls based on expectations. All this can become quite abstract. Economist often predict events that never tend to unfold as expected or planned. Many of the "modern monetary theories" in use today have not been proven over time, but reflect an attitude that we can control economic cycles better than in the past. The basis of the economy we have today is unsustainable and because it has been able to exist for so long does not mean it can continue. The fact the system muddles through does not guarantee that we will not suffer financial harm as individuals.
http://brucewilds.blogspot.com/2014/03/few-people-really-understand-economy.html
If the economy was healthy and balanced we would not be experiencing slow growth while massive amounts of money are being printed and poured into the system. The crux of our problem remains in the fact that both people and governments have lived beyond their means by taking on debt they cannot repay. Over the last several decades we have created entitlement societies built on the back of the industrial revolution, technological advantages, capital accumulated from the colonial era, and the domination of global finances.
Promises were made on the assumption that the advantages we enjoyed would continue in both Europe and the US. Ever greater prosperity and entitlements were to be sustained through debt financed consumption growth. In that eerie fantasy world, debt fueled consumption was to be the catalyst to bring about evermore growth. Debt does matter and the following article delves deeper into why kicking the can down the road will ultimately fail.
http://brucewilds.blogspot.com/2014/08/modern-monetary-theory-is-wrong-debt.html