South Korea Aggressively Considers Curbing Capital Inflows
On Wednesday South Korea Warns It's Close to Curbing Capital Inflows
South Korea on Thursday issued its strongest warning in months that it was close to taking steps aimed at curbing fund inflows, saying it would "aggressively" consider taking such measures.Brazil Central Bank Says QE Causes Distortions and Excessive Liquidity
"The government believes it needs to turn away from the perception that controlling capital flows is always bad and consider introducing measures to improve the macroeconomic prudence," the Ministry of Strategy and Finance said in a statement.
"The government will 'aggressively' consider implementing relevant measures, the ministry said after listing recent remarks made internationally in favor of capital controls.
The statement titled "a message to the markets" was issued hours after the U.S. Federal Reserve said it would buy billions more in government bonds by the middle of next year.
Please consider Brazil's Meirelles: Fed's latest move on G20 agenda
The head of Brazil's central bank said on Thursday that the U.S. Federal Reserve's latest plan to lower domestic borrowing costs and jumpstart the ailing economy would cause further "distortions" in world markets and complicate his country's efforts to stem the rise of its currency.Hong Kong Monetary Authority Warns of QE Related Housing Bubbles
"QE creates excessive liquidity that flows over to countries like Brazil," Meirelles said. "Definitely, for Brazil it does create a problem and Brazil will present proposals in that regard to several countries -- the U.S. and China -- to reach a different agreement not to generate so many distortions."
Bloomberg reports Fed Easing Worsens Hong Kong �Bubble� Risk, Chan Says
The U.S. Federal Reserve�s expansion of stimulus will add to the risk of a housing bubble in Hong Kong and may force extra measures to cool prices, said Norman Chan, the head of the city�s central bank.China Central Bank Says "Unbridled Printing is Biggest Risk to Global Economy"
The Hong Kong Monetary Authority will �take measures that are specific to the housing market if necessary,� Chan said at a press briefing in the city today. �The risk of an asset bubble in Hong Kong�s property market is rising.�
Hong Kong has already tightened purchase requirements after home prices rose about 50 percent from the start of 2009 to the highest level since 1997, according to an index compiled by Centaline Property Agency Ltd.
The Fed�s move to buy another $600 billion of Treasuries, announced yesterday, will �definitely add pressure to the asset markets in emerging-market economies,� Chan said.
A China central bank says U.S. dollar printing is huge risk
Unbridled printing of dollars is the biggest risk to the global economy, an adviser to the Chinese central bank said in comments published on Thursday, a day after the Federal Reserve unveiled a new round of monetary easing.Fed Governor Richard Fisher Blasts QEII
China must set up a firewall via currency policy and capital controls to cushion itself from external shocks, Xia Bin said in a commentary piece in the Financial News, a Chinese-language newspaper managed by the central bank.
"As long as the world exercises no restraint in issuing global currencies such as the dollar -- and this is not easy -- then the occurrence of another crisis is inevitable, as quite a few wise Westerners lament," he said.
Li Daokui, another academic adviser to the central bank, said loose money in the United States would translate into additional pressure on the Chinese yuan to appreciate. "A certain amount of capital will flow into China, either through Hong Kong or directly into the mainland," Li said.
On October 7, Fed Governor Richard Fisher blasted the idea of QEII in To Ease or Not to Ease? What Next for the Fed?
In my darkest moments I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places. Far too many of the large corporations I survey that are committing to fixed investment report that the most effective way to deploy cheap money raised in the current bond markets or in the form of loans from banks, beyond buying in stock or expanding dividends, is to invest it abroad where taxes are lower and governments are more eager to please. This would not be of concern if foreign direct investment in the U.S. were offsetting this impulse. This year, however, net direct investment in the U.S. has been running at a pace that would exceed minus $200 billion, meaning outflows of foreign direct investment are exceeding inflows by a healthy margin. We will have to watch the data as it unfolds to see if this is momentary fillip or evidence of a broader trend. But I wonder: If others cotton to the view that the Fed is eager to �open the spigots,� might this not add to the uncertainty already created by the fiscal incontinence of Congress and the regulatory and rule-making �excesses� about which businesses now complain?Why QEII Will Backfire
In performing a cost/benefit analysis of a possible QE2, we will need to bear in mind that one cost that has already been incurred in the process of running an easy money policy has been to drive down the returns earned by savers, especially those who do not have the means or sophistication or the demographic profile to place their money at risk further out in the yield curve or who are wary of the inherent risk of stocks. A great many baby boomers or older cohorts who played by the rules, saved their money and have migrated over time, as prudent investment counselors advise, to short- to intermediate-dated, fixed-income instruments, are earning extremely low nominal and real returns on their savings. Further reductions in rates earned on savings will hardly endear the Fed to this portion of the population. Moreover, driving down bond yields might force increased pension contributions from corporations and state and local governments, decreasing the deployment of monies toward job maintenance in the public sector. Debasing those savings with even a little more inflation than what is above minimal levels acceptable to the FOMC is unlikely to endear the Fed to these citizens. And if?and here I especially stress the word if because the evidence is thus far only anecdotal and has yet to be confirmed by longer-term data?if it were to prove out that the reduction of long-term rates engendered by Fed policy had been used to unwittingly underwrite investment and job creation abroad, then the potential political costs relative to the benefit of further accommodation will have increased.
Part of our cost/benefit analysis should include where the inertia of quantitative easing might take us. Let�s go back to that eye-popping headline in yesterday�s Wall Street Journal: �Central Banks Open Spigot.�
My reaction to reading that article was that it raises the specter of competitive quantitative easing. Such a race would be something of a one-off from competitive devaluation of currencies, a beggar-thy-neighbor phenomenon that always ends in tears. It implies that central banks should carry the load for stymied fiscal authorities?or worse, give in to them?rather than stick within their traditional monetary mandates and let legislative authorities deal with the fiscal mess they have created. It infers that lurking out in the future is a slippery slope of quantitative easing reaching beyond just buying government bonds (and in our case, mortgage-backed securities). It is one thing to stabilize the commercial paper market in a systematic way. Going beyond investment-grade paper, however, opens the door to pressure on a central bank to back financial instruments benefiting specific economic sectors. This inevitably leads to irritation or lobbying for similar treatment from economic sectors not blessed by similar monetary largess.
Let's review a snip from Three Reasons QEII Will "Backfire"; Pavlov's Dogs and the "No Choice" Argument Yet Again
Dr. El-Erian, CEO and co-CIO of PIMCO states several reasons why QEII will backfire.Bernanke Out of Control
1. The Fed is going it alone, without meaningful structural reforms
2. Emerging economies burdened by capital inflows in the wake of QEII will react with currency wars, protectionism, and capital controls
3. Resultant commodity price increases will increase input costs and reduce earnings of American companies
The position of El-Erian is interesting given that PIMCO founder, managing director and co-CIO endorsed QEII as discussed in Bill Gross' Arrogant Endorsement of Fed's QE Policy he calls History's Most "Brazen Ponzi Scheme".
Unintended Consequences of QEII
Mohamed El-Erian addresses the unintended consequences of Fed policy actions and the reasons Quantitative Easing will fail in QE2 blunderbuss likely to backfire.
....
Intended vs. Unintended Consequences
Add a junk bond bubble to the list of consequences (unintended or otherwise).
Bernanke is clearly misguided enough and arrogant enough to purposely blow a junk bond bubble as an "intended consequence", even though the housing bubble bust proves without a doubt the asininity of such policies.
Thus, it's hard to say if Bernanke wants a junk bond bubble or is merely willing to live with one.
Then again, Bernanke is dense enough to not have any clues about what is happening. He did not see the housing bubble, the recession, the huge rise in unemployment, and any number of other things that happened. In fact, he even denied there was a housing bubble.
In the academic wonderland in which Bernanke lives, it is perfectly possible he is oblivious to the bubbles he is creating.
However, looking at things from every angle, given that Bernanke Admits Targeting Stock Prices, I am leaning towards the first option: Bernanke is misguided enough and arrogant enough to purposely blow more asset bubbles as an "intended consequence", hoping he can deal with them later.
Points number 2 and 3 are already in play.
2. Emerging economies burdened by capital inflows in the wake of QEII will react with currency wars, protectionism, and capital controls
3. Resultant commodity price increases will increase input costs and reduce earnings of American companies
Paul Volcker on QE
Please consider Volcker: future inflation risk limits QE effect
Former U.S. Federal Reserve Chairman Paul Volcker on Friday repeated his scepticism about the benefits of the Fed's latest quantitative easing, citing concern about long-term inflation.There is no way QEII can possibly do any good, and at least two current Fed governors know it. So does former Fed chairman Paul Volcker.
He told reporters after a lecture in Seoul that short-term U.S. interest rates had almost no room to go down further, while long-term bond prices were under pressure from increasing concern about future inflation.
Bernanke claims to be a student of the Great Depression. The reality is he is an academic wonk with no real world experience in anything. He has proven three things however:
1. He will not listen and cannot be taught
2. He has no common sense whatsoever
3. He is dedicated to bubble blowing in response to crises
Other than that, Bernanke is perfectly suited for the job. On second thought, those traits are why he was appointed in the first place.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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