In a recent speech at the Federal Reserve Bank of Boston, Ben Bernanke laid out his case for further Fed action. His speech fell short on many counts. Bare Talk would restrict himself to commenting on one of them. He cites two potential concerns to be set off against the benefits of unconventional monetary policies. Both of them are relatively less important than the ones he fails to mention.
He said that the two challenges in conducting unconventional monetary policy were determining the exact quantum of asset purchases and communication to the public. The more important and potentially far-reaching challenges stemming from the US’ pursuit of unconventional monetary policies are that it induces beggar-thy-neighbour reactions from others, sets off asset price bubbles, speculative run-up in the prices of commodities bringing misery to the poor and encourages the mindset that free lunches are possible, can be had and eaten too.
Nevertheless, the reality for the world is that the US Federal Reserve is going to print more money to buy bonds and other assets with a view to holding down interest rates and supporting asset prices. In the last six weeks, other countries have already had a foretaste of the consequences that would befall them.
Some countries might choose the easy option of accommodating the increased liquidity that would inevitably result from the looser policy stance in the developed world. Some other countries would adopt a mixture of policies—“leaning against the wind” and accommodation. Very few would choose to focus on the long term and resist unsustainable and speculative asset price booms resulting from excess liquidity. Investors would have to choose the latter two for they would deliver sustainable returns. Let us examine the actions of a few countries in Asia.
The jump in China’s property prices at the rate of 9.1% against consensus expectations of 8.8% in September, the rise in the property sales volume and the growth in investment in real estate development (35% year-on-year or y-o-y in September vs 34.1% y-o-y in August) underscore two things. They highlight the difficulties that the government in China faces in controlling the property bubble and/or its half-hearted approach to really pricking the property bubble. Administrative measures are going to be increasingly ineffective in fine-tuning the economy as long as cost of capital is too low for an economy growing at above 10% nominally.
As Christopher Wood, the popular Asian equities strategist for CLSA, writes in his latest Greed & Fear missive (14 October 2010),
“…the People’s Republic of China (PRC) understands only too well the critical political point that it will lose control of the game if it allows total capital account convertibility. For China has been able to get away with its long standing policy of controlling both the renminbi exchange rate and renminbi interest rates precisely because it has not allowed the free flow of capital…
“Still in the long run the more the Chinese capital account opens up the bigger the risk that poses to the command economic model run so successfully by the PRC. For now, Greed & Fear will continue to assume that a conservative Beijing will remain cautious on full-scale capital account convertibility. If that assumption proves wrong, and full-scale liberalisation happens sooner than anticipated here, then it will raise systemic risks in Asia.”
In its recent monetary policy review meeting, the Monetary Authority of Singapore (MAS) announced that it would widen and steepen the band in which the Republic’s currency traded against a weighted basket of currencies. Market opinion had anticipated no change in the monetary policy stance of MAS. This “widening and steepening” is an incremental tightening effort, in deference to incipient inflation pressures in the city-state. MAS has done the right thing by giving emphasis to the inflationary consequences of global capital inflows rather than be sidetracked by the third-quarter economic contraction. Long-term, Singapore would also have to examine the relevance of exchange rate targeting given the rising importance of capital as opposed to trade flows to its economic growth.
As for India, I would leave readers with the observations of Amol Agrawal from his superb blog, Mostly Economics.Commenting on a recent speech by Reserve Bank of India (RBI) deputy governor Shyamala Gopinath on India’s experience with macro-prudential policies, he wrote thus in his blog:
“When RBI could see the trends then, why is it ignoring the trends now? I had written this post after April 2010 monetary policy. RBI chose to do nothing despite noting worrying trends in housing sector. And again nothing was done in July 2010. Most experts are now saying prices are way above the crisis peaks and have reached these levels in very quick time. Pick up anything—food, basic utilities, housing, financial assets…all are out of reach for majority of the citizens. You may choose not to buy financial assets but can’t ignore the other basics. The inequality and income gap just keeps rising. All the gaps RBI deputy governor points in real estate sector are glaring at your face right now.”
V. Anantha Nageswaran is chief investment officer for an international wealth manager. These are his personal views. Your comments are welcome at email@example.com
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