Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
UK Coronavirus Infections and Deaths Trend Trajectory - Deviation Against Forecast - 1st Apr 20
Huge Unemployment Is Coming. Will It Push Gold Prices Up? - 1st Apr 20
Gold Powerful 2008 Lessons That Apply Today - 1st Apr 20
US Coronavirus Infections and Deaths Projections Trend Forecast - Video - 1st Apr 20
From Global Virus Acceleration to Global Debt Explosion - 1st Apr 20
UK Supermarkets Coronavirus Panic Buying Before Lock Down - Tesco Empty Shelves - 1st Apr 20
Gold From a Failed Breakout to a Failed Breakdown - 1st Apr 20
P FOR PANDEMIC - 1st Apr 20
The Past Stock Market Week Was More Important Than You May Understand - 31st Mar 20
Coronavirus - No, You Do Not Hear the Fat Lady Warming Up - 31st Mar 20
Life, Religions, Business, Globalization & Information Technology In The Post-Corona Pandemics Age - 31st Mar 20
Three Charts Every Stock Market Trader and Investor Must See - 31st Mar 20
Coronavirus Stocks Bear Market Trend Forecast - Video - 31st Mar 20
Coronavirus Dow Stocks Bear Market Into End April 2020 Trend Forecast - 31st Mar 20
Is it better to have a loan or credit card debt when applying for a mortgage? - 31st Mar 20
US and UK Coronavirus Trend Trajectories vs Bear Market and AI Stocks Sector - 30th Mar 20
Are Gold and Silver Mirroring 1999 to 2011 Again? - 30th Mar 20
Stock Market Next Cycle Low 7th April - 30th Mar 20
United States Coronavirus Infections and Deaths Trend Forecasts Into End April 2020 - 29th Mar 20
Some Positives in a Virus Wracked World - 29th Mar 20
Expert Tips to Save on Your Business’s Office Supply Purchases - 29th Mar 20
An Investment in Life - 29th Mar 20
Sheffield Coronavirus Pandemic Infections and Deaths Forecast - 29th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast - Video - 28th Mar 20
The Great Coronavirus Depression - Things Are Going to Change. Here’s What We Should Do - 28th Mar 20
One of the Biggest Stock Market Short Covering Rallies in History May Be Imminent - 28th Mar 20
The Fed, the Coronavirus and Investing - 28th Mar 20
Women’s Fashion Trends in the UK this 2020 - 28th Mar 20
The Last Minsky Financial Snowflake Has Fallen – What Now? - 28th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast Into End April 2020 - 28th Mar 20
DJIA Coronavirus Stock Market Technical Trend Analysis - 27th Mar 20
US and UK Case Fatality Rate Forecast for End April 2020 - 27th Mar 20
US Stock Market Upswing Meets Employment Data - 27th Mar 20
Will the Fed Going Nuclear Help the Economy and Gold? - 27th Mar 20
What you need to know about the impact of inflation - 27th Mar 20
CoronaVirus Herd Immunity, Flattening the Curve and Case Fatality Rate Analysis - 27th Mar 20
NHS Hospitals Before Coronavirus Tsunami Hits (Sheffield), STAY INDOORS FINAL WARNING! - 27th Mar 20
CoronaVirus Curve, Stock Market Crash, and Mortgage Massacre - 27th Mar 20
Finding an Expert Car Accident Lawyer - 27th Mar 20
We Are Facing a Depression, Not a Recession - 26th Mar 20
US Housing Real Estate Market Concern - 26th Mar 20
Covid-19 Pandemic Affecting Bitcoin - 26th Mar 20
Italy Coronavirus Case Fataility Rate and Infections Trend Analysis - 26th Mar 20
Why Is Online Gambling Becoming More Popular? - 26th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock Markets CRASH! - 26th Mar 20
CoronaVirus Herd Immunity and Flattening the Curve - 25th Mar 20
Coronavirus Lesson #1 for Investors: Beware Predictions of Stock Market Bottoms - 25th Mar 20
CoronaVirus Stock Market Trend Implications - 25th Mar 20
Pandemonium in Precious Metals Market as Fear Gives Way to Command Economy - 25th Mar 20
Pandemics and Gold - 25th Mar 20
UK Coronavirus Hotspots - Cities with Highest Risks of Getting Infected - 25th Mar 20
WARNING US Coronavirus Infections and Deaths Going Ballistic! - 24th Mar 20
Coronavirus Crisis - Weeks Where Decades Happen - 24th Mar 20
Industry Trends: Online Casinos & Online Slots Game Market Analysis - 24th Mar 20
Five Amazingly High-Tech Products Just on the Market that You Should Check Out - 24th Mar 20
UK Coronavirus WARNING - Infections Trend Trajectory Worse than Italy - 24th Mar 20
Rick Rule: 'A Different Phrase for Stocks Bear Market Is Sale' - 24th Mar 20
Stock Market Minor Cycle Bounce - 24th Mar 20
Gold’s century - While stocks dominated headlines, gold quietly performed - 24th Mar 20
Big Tech Is Now On The Offensive Against The Coronavirus - 24th Mar 20
Socialism at Its Finest after Fed’s Bazooka Fails - 24th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock and Financial Markets CRASH! - 23rd Mar 20
Will Trump’s Free Cash Help the Economy and Gold Market? - 23rd Mar 20
Coronavirus Clarifies Priorities - 23rd Mar 20
Could the Coronavirus Cause the Next ‘Arab Spring’? - 23rd Mar 20
Concerned About The US Real Estate Market? Us Too! - 23rd Mar 20
Gold Stocks Peak Bleak? - 22nd Mar 20
UK Supermarkets Coronavirus Panic Buying, Empty Tesco Shelves, Stock Piling, Hoarding Preppers - 22nd Mar 20
US Coronavirus Infections and Deaths Going Ballistic as Government Start to Ramp Up Testing - 21st Mar 20
Your Investment Portfolio for the Next Decade—Fix It with the “Anti-Stock” - 21st Mar 20
CORONA HOAX: This Is Almost Completely Contrived and Here’s Proof - 21st Mar 20
Gold-Silver Ratio Tops 100; Silver Headed For Sub-$10 - 21st Mar 20
Coronavirus - Don’t Ask, Don’t Test - 21st Mar 20
Napag and Napag Trading Best Petroleum & Crude Oil Company - 21st Mar 20
UK Coronavirus Infections Trend Trajectory Worse than Italy - Government PANICs! Sterling Crashes! - 20th Mar 20
UK Critical Care Nurse Cries at Empty SuperMarket Shelves, Coronavirus Panic Buying Stockpiling - 20th Mar 20
Coronavirus Is Not an Emergency. It’s a War - 20th Mar 20
Why You Should Invest in the $5 Gold Coin - 20th Mar 20
Four Key Stock Market Questions To This Coronavirus Crisis Everyone is Asking - 20th Mar 20
Gold to Silver Ratio’s Breakout – Like a Hot Knife Through Butter - 20th Mar 20
The Coronavirus Contraction - Only Cooperation Can Defeat Impending Global Crisis - 20th Mar 20
Is This What Peak Market Fear Looks Like? - 20th Mar 20
Alessandro De Dorides - Business Consultant - 20th Mar 20
Why a Second Depression is Possible but Not Likely - 20th Mar 20

Market Oracle FREE Newsletter

Coronavirus-bear-market-2020-analysis

BRICS Currency Crisis Is Looming

Currencies / Emerging Markets Aug 22, 2013 - 10:28 AM GMT

By: Andrew_McKillop

Currencies

FORGET THE DYING DOLLAR
Federal Reserve taper-down is becoming almost certain, and with it higher interest rates. One direct result is a strengthening US dollar. The US trade deficit, notably due to fast-growing shale oil production trimming imports and sufficient shale gas output to support LNG export trade, is likely to go on shrinking, strengthening the dollar. The myth of an “always weakening dollar”, which was a reality for years, now has realworld Emerging economy rivals actively slumping towards national currency crises. This concerns major “BRIC's” economies – unlike the 1997-98 Asian NIC crisis.


The Federal Reserve’s ultra-loose monetary policies “diluting the dollar”, a slow-growth economy eroding the value of the greenback, and endless chat about the dollar losing is status as world reserve currency due to raging deficits and out-of-control budgets were always on hand as reasons to bet on dollar weakness. This has changed for reasons as basic as the USA's energy transition – and huge inflows of capital to play US equity markets as they tear upward. Since first-quarter 2013, data indicates that net equity flows into the US could be running at $150 billion-a-year, to compare with 2011's annual net outflow of $47 billion, followed by a $62 billion inflow in 2012.

To be sure, these “hot flows” can reverse in an instant, but the safe-haven status of the dollar also has to be added on the positive side. Where none of these factors safeguarding currency strength are in play – when deficits grow, inflation soars and the economy slows – the currency can only weaken.  This is the fate now assailing the Indian rupee which has depreciated by 45% in the past two years against major currencies led by the dollar, and hit a record low against the US dollar this week.

ASIAN CRISIS REVISITED
Betting on the Indian Sensex stock market gauge continuing to tank is an easy bet. Indian bond yields are nudging 10% a year, inflation is soaring, capital is flooding out of the country. Supposedly anecdotal evidence of sinking confidence in the national money is shown by the Indian government's increasingly radical and authoritarian attempts to prevent private citizens from buying gold.

Only theoretically because the time needed for a currency-triggered change of economic fortune can be long – on the positive side – but short on the downside, the argument for deliberately weakening the national money by operating “currency wars” is tempting. Capital inflows push up the exchange rate, making imports cheaper and exports dearer. The trade deficit balloons, growth slows, and deep-seated structural flaws in the economy leap into prominence - and the hot money flees. Keeping the money weak, despite the inflation danger, is therefore a supposed “no brainer” better choice. In the US, Bernanke is regularly, almost ritually accused of doing just that.

Already today, India's deepening money-and-economic crisis is called a deja vu revisit of the Asian crisis of 1997-98 that was an unheeded warning sign of what was in store for the global economy from 2008. The region's then-NICs or Newly Industrializing Countries were exhibiting record economic growth.  Inward investment surged, along with hot money flows to cherrypick local stock exchange flyers, and the region's shadow banking system went into high gear. Capital controls existed - only in theory. Local exchange rates soared against world moneys led by the dollar, the price of imports went down, exports were dearer. When the 1997-98 crisis hit, rolling devaluation in double digit percentage rates exceeding 40% was the the norm, investment plummetted, bankruptcies and unemployment soared. The region took at least 5 years to get over the crisis – but the crisis was local or indigenous.

Since 2008 we have a world crisis-prone financial and monetary system. A localized or “regionally contained crisis” like the Asian one of 15 years ago is no longer possible.

The trigger for the run on India's rupee has been the news and talk that the US Federal Reserve is considering scaling back - "tapering" - its bond-buying stimulus programme from as early as next month. This has consequences for all Emerging economies, firstly that reduced “fiscal stimulus” will mean weaker growth in the US, trimming imports from today's NICs including the two Asian giants, China and India - as well as Russia, Brazil, Indonesia, South Africa and Turkey. The upward trend in US interest rates is a death cross for previously high-yielding currencies like the rupee. When the dollar gets more attractive, the rupee is a loser.

While the Brazilian real, Indonesian rupiah, Turkish lira and South African rand are only beginning to feel the heat, it is India – with its large trade, capital and budget deficits – that looks like the first accident waiting to happen. Unfortunately, exactly as in 1997-98 and again in 2008, firstly in Asia's then-NICs, and then in developed countries policymakers did nothing in the hope that the problem would go away. The next entirely predictable phase of the crisis were hastily cobbled panic measures.

In the case of India we are already at stage two, featuring a range of announced, and probable capital controls and very likely central bank selling of dollars in an attempt to underpin the rupee. Stage three, as we know from the Asian crisis as well as Europe's post-2008 PIIGS crisis features calling in the IMF, along with the ECB and Germany in the PIIGS case. India is now on the cusp of stage three.

A CRISIS TOO FAR  FOR THE IMF
Asking the IMF how it rates its own handling of the Asian crisis 15 years ago is still a loaded question for this organization. For a decade after the Asian financial crisis the Fund experienced a slow-burning institutional crisis driven by a decline in the organisation’s practical legitimacy, controversy over the
distribution of voting power on its Executive Board, and widespread criticism of the stringent policy conditions attached to IMF loans. For international financial scholar Andre Broome writing in the February 2010 issue of the Australian Journal of International Affairs, the Asian crisis was a gamechanger for the IMF.

After the crisis, major sponsors starting with the United States sidelined the IMF in the construction of new global financial rules, choosing instead to work through other international forums, notably the G8 and G20 and the Financial Stability Forum. The IMF's handling of the Asian crisis – in the same heavy handed way as it handled in the 1980s Latin American and African Third World debt crises -  prompted the Emerging economies to take strenuous measures to not compromise their economic sovereignty through submitting to IMF loan programs. 

Put another way, it is almost sure and certain that India would reject IMF conditions – even IMF advice – on resolving its present monetary-and-economic crisis. India would demand “hands off aid”, or reject any aid at all.

As Broome says in his article looking at the Fund's world role since 2008, the organisation’s relative importance in the world economy tends to increase during episodes of international economic crisis
and to decrease during periods of macroeconomic stability. Therefore, since late 2008 the IMF has once again emerged as “the lender of last resort” and a crucial source of external financial support for Europe's PIIGS, and emerging market and less developed countries facing financial distress.

The G-20 heads of government meeting in London in April 2009 agreed - in principle - to triple the IMF’s lending capacity from $250 billion to $750 billion. Impressive on paper, this seems to imply the Fund is “back in business”, but its track record in the 1980s, and in the Asian crisis of 1997-98, and again in Europe's PIIGS after 2008 in tandem with the ECB has generated a backlog of distrust and disinterest in the IMF among potential borrowers. With a now very complex (called “flexible”) set of loan conditions and for scheduling repayments, it is also questionable as to whether the IMF could act fast enough if confronted by an Indian-scale crisis, where through sheer panic India was finally forced to go to the Fund for aid.

CONVERGENT CRISIS
The Asian crisis of 15 years partly converged with the Russian monetary and financial crisis of 1998, but the net result was contained, as the then-NICs of Asia started recovering quite fast, but Russia plunged into crisis. The crises were not exactly convergent and the knock impact of the Asian crisis on Russia was small or very small.

Today's potential “BRICs crisis” is highly convergent, even self-converging in major part due to what the 'Economist' calls the “unprecedented” growth of the Emerging economies – and as this IMF-source  chart shows, below, the “unprecedented” slowdown in Energy economy growth rates since 2010.

Today, the four BRIC economies are four of the world's ten largest economies, placing them at an entirely different rank of global damage potential, relative to the Asian NICs of the 1990s. The striking slowdown in BRIC growth rates is shown by a few figures. In 2007 China’s economy expanded by an eye-popping 14.2%. India managed 10.1% growth, Russia 8.5%, and Brazil 6.1%.

In 2013, using often disputed and controversial data form different sources including the IMF, China will probably grow by 7.5%, India by 5%, Russia by less than 2% and Brazil by 1.75%. India's rupee crisis signals that the above-cited forecast, for India, is already too optimistic. Present outlooks for Brazil place its likely 2013 GDP growth rate in real terms at about 1.6%.

The main argument used by “benign outlook” specialists like England's 'Economist', is that firstly another Asian crisis is not possible, but that secondly, if it was possible, it could be fuddled and muddled through for example by using the IMF's now-greater theoretical financial resources. This “benign outlook” theory finally reposes on the fact the world economy is much larger than it was 15 years ago -  twice as big in real terms as it was in 1992, using IMF figures.

The main problem is that emerging markets— whether the BRIC economies or what Goldman Sachs calls the N11 countries such as Bangladesh and Turkey “following on” from the BRICs — must deliver larger absolute increases in output every year to generate the same marginal economic boost to the global economy as they did during the 1990s and in 2000-2008. This is not possible. Put another way, the BRICs have to keep growing at “belle epoque” rates – or the global economy slows down rapidly.

The second “hypothesis” is a simple fact – not a theory – but the role of Emerging economy slowdown in accelerating global economic slowdown is under-appreciated. At least as important, IMF policy musing and theorizing about global monetary stability, which is in permanent high gear since 2008,  does not include the scenario of a BRICs country suffering a currency meltdown. As India's rupee crisis unravels we must hope that IMF experts in their Washington K-Street Ivory Towers are waking up to what this means.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2013 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

Andrew McKillop Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules