{"id":107080,"date":"2014-01-29T04:12:58","date_gmt":"2014-01-29T04:12:58","guid":{"rendered":"http:\/\/rinf.com\/alt-news\/?p=107080"},"modified":"2014-01-29T04:12:58","modified_gmt":"2014-01-29T04:12:58","slug":"big-one-new-wave-financial-instability","status":"publish","type":"post","link":"http:\/\/rinf.com\/alt-news\/latest-news\/big-one-new-wave-financial-instability\/","title":{"rendered":"Is This the Big One? The New Wave of Financial Instability"},"content":{"rendered":"

Mike Whitney\u00a0<\/strong>
\nRINF Alternative News<\/a><\/strong><\/p>\n

Global stocks were hammered on Friday for a second straight day on news of a slowdown in China and turbulence in emerging markets. The Dow Jones Industrials suffered its worse drubbing in more than two years, tumbling 318 points on Friday to end a 490 point two-day rout. Emerging markets currencies were whipsawed by capital flight as foreign investors fled to the safety of U.S. Treasuries. Turkey\u2019s lira and the Argentine peso were particularly hard hit setting record lows in the 48 hour period. The scaling back of the Fed\u2019s $85 billion per month asset purchase program, called QE, has altered the dynamic that made emerging markets the \u201cengines for global growth\u201d. The policy reversal has triggered a selloff in risk assets and sent EM currencies plunging. Here\u2019s a summary from Bloomberg:<\/p>\n

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\u201cThe worst selloff in emerging-market currencies in five years is beginning to reveal the extent of the fallout from the Federal Reserve\u2019s tapering of monetary stimulus, compounded by political and financial instability.<\/p>\n

Investors are losing confidence in some of the biggest developing nations, extending the currency-market rout triggered last year when the Fed first signaled it would scale back stimulus. While Brazil, Russia, India, China and South Africa were the engines of global growth following the financial crisis in 2008, emerging markets now pose a threat to world financial stability.\u201d (\u201cContagion Spreads in Emerging Markets as Crises Grow<\/a>,\u201d Bloomberg)<\/p>\n<\/blockquote>\n

Paradoxically, Bloomberg editors blame the victims of the Fed\u2019s failed policy for the current ructions in the markets. In an article titled, \u201cWhat\u2019s Behind the Emerging-Market Meltdown<\/a>\u201d the editors say,\u201demerging-market governments \u2026 should recognize that this week\u2019s financial-market turmoil was, to varying degrees, their own fault.\u201d \u2026 \u201cthe best way for emerging-market governments to restore confidence would be to improve their policies.\u201d<\/p>\n

Logically, one would assume that the editors would throw their support behind capital controls or other means of stemming the destructive flow of speculative capital into domestic markets. But that\u2019s not the case. What the editors really want, is policies that trim deficits, slash public spending, and allow foreign investors to continue to wreak havoc on vulnerable economies that follow their free market diktats. The article is a defense of the status quo, of maintaining the same ruinous policies so that profit-taking can continue apace.<\/p>\n

The Fed was warned early on that its uber-accommodative monetary policy was spilling over into emerging markets and creating conditions for another financial crisis. Take a look at this excerpt from an article in Bloomberg back in 2010 where Nobel prize winning economist, Joseph Stiglitz, explicitly warns the Fed of the dangers of QE.<\/p>\n

Bloomberg:<\/p>\n

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\u201cThe U.S. Federal Reserve\u2019s plan to boost purchases of bonds poses \u201cconsiderable\u201d risks by increasing capital inflows to emerging markets, Nobel Prize- winning economist Joseph Stiglitz said in Santiago today.<\/p>\n

\u201cAll this liquidity that they\u2019re creating is not going back to grow the American economy and is going to Asia and other emerging markets where it\u2019s not wanted,\u201d Stiglitz said\u2026..Increased capital inflows could cause emerging market currencies to appreciate and could create asset bubbles, he said.\u201d (\u201cStiglitz Says Fed Stimulus Poses `Considerable\u2019 Risks for Emerging Markets<\/a>,\u201d Bloomberg, Dec 2010)<\/p>\n<\/blockquote>\n

Events have unfolded exactly as Stiglitz predicted they would, which means the Fed is 100% responsible the carnage in the stock and currencies markets.<\/p>\n

The policy has pumped nearly \u201c$7\u00e2\u20ac\u2030trillion of foreign funds\u201d into EMs since QE was first launched in 2009. According to the Telegraph\u2019s Ambrose Evans-Pritchard, \u201cmuch of it \u201chot money\u201d going into bonds, equities and liquid instruments that can be sold quickly\u2026.Officials are concerned that this footloose capital could leave fast in a crisis, setting off a cascade effect,\u201d Pritchard adds ominously.<\/p>\n

Whether last week\u2019s bloodbath was just a prelude to a bigger crash is impossible to say, but it is worth noting that the Fed has only reduced its purchases by a mere $10 billion per month while still providing $75 billion every 30 days. That suggests that markets will probably face greater turmoil in the months ahead. Check out this clip from USA Today:<\/p>\n

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\u201cEmerging markets need the hot money but capital is exiting now,\u201d says (Blackrock\u2019s Russ) Koesterich. \u201cWhat you have is people saying, \u2018I don\u2019t want to own emerging markets.\u2019\u2026<\/p>\n

The bigger fear is if the current crisis in currency markets morphs into a full-blown economic crisis and leads to financial contagion, says Matthias Kuhlmey, managing director of HighTower\u2019s Global Investment Solutions.<\/p>\n

\u201cThe currency story is fascinating and can be a slippery slope \u2014 be cautious,\u201d says Kuhlmey, adding that the Asian crisis in the summer of 1997 that started with a sharp drop in the value of Thailand\u2019s baht, turned into a broader economic crisis that engulfed Indonesian, South Korea and a handful of other countries. It also rocked financial markets.\u201d (\u201cWhy emerging markets worry Wall Street<\/a>,\u201d\u00a0USA Today)<\/p>\n<\/blockquote>\n

So, is this the Big One, the beginning of the next financial crisis?<\/p>\n

It\u2019s too early to say, but investors and analysts are worried. Fed tightening (via \u201ctaper\u201d) will be felt in markets around the world. The trouble in emerging markets will intensify deflationary pressures in the Eurozone and put a damper on China\u2019s growth. Slower global growth, in turn, will create balance sheets problems for undercapitalized and over-leveraged banks and other financial institutions which will increase the probability of another Lehman Brothers-type default.<\/p>\n

According to Reuters, a normalizing of interest rates in the US, (which most analysts expect) \u201ccould cut financial inflows to developing countries by as much as 80 percent for several months. In such a case, nearly a quarter of developing countries could experience sudden stops in their access to global capital, throwing some economies into a balance of payments or financial crisis, the Bank said.\u201d (\u201cRout in emerging markets may only be in Phase One<\/a>,\u201d\u00a0Reuters)<\/p>\n

Clearly, the potential for another financial meltdown is quite real.<\/p>\n

For more than four years, the Fed has buoyed stock prices and increased corporate margins through massive injections of free cash into the financial markets. Now the Central Bank wants to change the policy and ease its foot off the gas pedal. That\u2019s causing investors to rethink their positions and take more money off the table. What started as a selloff in emerging markets could snowball into a broader panic that could wipe out the gains of the last four years.<\/p>\n

The Federal Reserve is entirely responsible for this new wave of financial instability.<\/p>\n

Mike Whitney<\/strong>\u00a0lives in Washington state. He is a contributor to\u00a0Hopeless: Barack Obama and the Politics of Illusion<\/a>\u00a0(AK Press).\u00a0Hopeless is also available in a\u00a0Kindle edition<\/a>.\u00a0He can be reached at\u00a0fergiewhitney@msn.com<\/a>.<\/em><\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

Mike Whitney\u00a0 RINF Alternative News Global stocks were hammered on Friday for a second straight day on news of a slowdown in China and turbulence in emerging markets. The Dow Jones Industrials suffered its worse drubbing in more than two years, tumbling 318 points on Friday to end a 490 point two-day rout. Emerging markets […]<\/p>\n","protected":false},"author":1,"featured_media":106991,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[18],"tags":[],"class_list":{"0":"post-107080","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-latest-news"},"_links":{"self":[{"href":"http:\/\/rinf.com\/alt-news\/wp-json\/wp\/v2\/posts\/107080","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/rinf.com\/alt-news\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/rinf.com\/alt-news\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/rinf.com\/alt-news\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/rinf.com\/alt-news\/wp-json\/wp\/v2\/comments?post=107080"}],"version-history":[{"count":0,"href":"http:\/\/rinf.com\/alt-news\/wp-json\/wp\/v2\/posts\/107080\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/rinf.com\/alt-news\/wp-json\/wp\/v2\/media\/106991"}],"wp:attachment":[{"href":"http:\/\/rinf.com\/alt-news\/wp-json\/wp\/v2\/media?parent=107080"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/rinf.com\/alt-news\/wp-json\/wp\/v2\/categories?post=107080"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/rinf.com\/alt-news\/wp-json\/wp\/v2\/tags?post=107080"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}