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September 18, 2010USA,Europe and Japan are in either in the midst of Deflation or on the brink of this scary scenario.Japan has been battling insidious Deflation for the last 20 years without much success.The problems associated with Deflation are low consumption,anemic growth, debtor problems etc.USA and Europe which were both victims of the Global Financial Crisis bought on by huge Debt Loads are now finding themselves fighting Deflation.Both have done prodigious quantitative easing in 2008 and 2009 but still find themselves no better off.This credit induced recession is more insidious and dangerous than your normal business cycle recession.With an imminent threat of a double dip recession,there is talk of another round of quantitative easing.This has huge implication on Developing Nations such as Indonesia,Brazil,India,China and others.
How Quantative Easing is affecting Developing Countries
In our Financial linked world where Capital is Globalized while Regulation is not,Hot Money Flows are fueling inflation and asset based bubbles in Developing Countries.Some of the Emerging Markets are either close to or have surpassed the 2008 all time highs.Inflation is also hitting dangerous levels in some countries like Argentina,India and others.The depreciating dollar brought upon the the US Federal Reserve Printing of money has made it necessary that the Central Banks purchase Dollars.This has been done not only by Brazil and Singapore but also by Japan.With more Dollar Printing,these Purchases will increase the Liquidity in the Developing Countries.This is a sure shot recipe for high inflation which will be difficult to control.India has already raised Interest Rates 5 times this year in order to rein in the pernicious effects of high inflation on its largely poor population.
The Developed Nations have embarked on the greatest experimentation in Financial History.The outcome of how this will exactly end is not known.One thing is for sure is that the denouement won’t be good and would lead to additional crises in the next few years.The interim period will be marked by asset bubbles in emerging markets,high volatility and rising commodity prices.
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[…] Deflating Developed Countries are fueling Inflation in Developing Ones with ultra low interest rates.QE2 has been heavily criticized around the world due to the dangers of it creating asset bubbles in emerging markets as yield hungry investors look for growth at any price.With hundred of billions flooding emerging debt and equity markets,the situation has become volatile for a lot of countries.Brazil has already seen its currency skyrocket in the last 2-3 years due to the huge spread between its bond yields and the US interest rates.With carry investors able to make around 10%,Brazil remains a favorite market for the inflow of dollars.Other countries like Thailand,Malaysia,Indonesia have seen their stock markets rallying to all time highs as well.Many of these countries have already imposed capital controls earlier.Now they are increasing further,as monetary authorities rush to close the gates. […]