So much for the “economy will improve in 2014 (really!)” stories. The stock market is struggling to avoid another big sell-off today. But bargain hunters are facing the downdraft of jitters over emerging markets. As their stock markets crash and fear gathers about Chinese manufacturing and debt, it will be more difficult to continue the…More
Topic: Fed tapering
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Over lunch this week, a Seattle financial executive told me he believed the market has already priced in the “tapering off” of the Federal Reserve’s massive bond-buying program. Maybe so. It’s an open question as to whether the central bank should change course with the economy growing so slowly and unemployment still high. But Chairman Ben Bernanke seems committed to the move. Overseas, things might not go so well. Stephen Roach, the former chief economist for Morgan Stanley, wrote on Project Syndicate recently that “the global economy could be in the early stages of another crisis” partly because of the Fed.
As I wrote last week, the problem is centered in emerging economies. “Hot money,” short term investments, rushed into nations such as India, Indonesia, Brazil and Turkey because of the artificially low interest rates of the Fed’s QE programs. This allowed for large current account deficits to be cloaked by seeming prosperity. Now, investment is flowing back out with damaging results. Roach writes:
Under the leadership of Ben Bernanke and his predecessor, Alan Greenspan, the Fed condoned asset and credit bubbles, treating them as new sources of economic growth. Bernanke has gone even further, arguing that the growth windfall from QE would be more than sufficient to compensate for any destabilizing hot-money flows in and out of emerging economies. Yet the absence of any such growth windfall in a still-sluggish US economy has unmasked QE as little more than a yield-seeking liquidity foil.