We are
indebted to one of our correspondents, a man of wide and varied interests but with
a background as a senior executive in the insurance industry, for the heads-up
on the warning from the IMF, in its latest Global Financial Stability report, that
there is a real danger that very high levels of borrowing by corporate entities
in emerging markets, which has built up beneath the radar because of low
interest rates and the actions of central banks in making cash available for lending,
could have such far-reaching effects as to create another global financial
crisis.
The warning,
on what could be the eve of the start of an interest rate increase cycle in the
US – the first in a decade - brings back memories of what became known as the ‘taper
tantrum’. What happened was that the then head of the Federal Reserve, Ben
Bernanke, made remarks, in May of 2013, to the effect that Quantitative Easing
(QE) in the USA would soon be reversed in a gradual fashion, or ‘tapered’. However,
news like this needs to be fed very carefully and very gradually to the
markets. The result of Mr. Bernanke’s remarks on that occasion was a sudden and
strong rise in US treasury yields (see chart above), and very serious problems
for the currencies of emerging markets, which were aggressively sold in
anticipation of an increase in US interest rates. As mentioned, this quickly
became known at the time as the ‘taper tantrum’. And it turned out to be a
false alarm, as US interest rates have, even over two years later, still not
started to rise.
But now the
IMF is worried that what was feared then is now about to come to pass. It would
appear that they have a point.
Are Yellen
et al learning from the Bernanke gaffe?
We have
noted here the on-again, off-again nature of the current Fed regime’s approach
to raising interest rates, now that QE has been confined to history, at least
in the US. The members, and in particular the chair of the FOMC, Janet Yellen,
have often said that the issues attached to emerging markets are not their
concern, as their mandate is to do whatever is necessary to create employment,
with due regard for inflation, in the US.
However, in
a global economy, what happens in other jurisdictions does matter as far as US
domestic wellbeing is concerned – especially when one of those so-called
emerging markets has the economic power that is now concentrated in the
governing class in Beijing.
The current apparent
gross indecision on the part of the Fed, combined with many and varied
briefings in a great number of speeches by FOMC members, could turn out to be
nothing more than elaborate stage-management designed to head off a repeat of
the taper tantrum of 2013.
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