Structural reforms are needed to bolster growth but their upfront costs further strengthen opponents of change
Kit Juckes, top currency strategist at Societe Generale, reckons that the market turmoil has been sparked by a loss of faith in central bankers.
In a new note to clients, he writes:
We’ve relied on central bankers to fix all the world’s woes, when all they could really do was to get the global financial system back on an even keel. Keeping policy too easy for too long and boosting asset markets in the vain hope that this would deliver a sustainable demand pick-up has meant that even a timid attempt at normalising Fed policy has caused two months of mayhem. Now, a growing realisation that central banks’ powers are waning has prompted a rush into safe havens.
And, of course, years of ultra-loose monetary policy have also led us to this point:
We’re just getting the stickers saying ‘Easy Money may cause harmful side-effects if consumed persistently for long periods’ printed….
The next financial crisis is coming, it’s a just a matter of time – and we haven’t finished fixing the flaws in the global system that were so brutally exposed by the last one. That is the message from the International Monetary Fund’s latest Global Financial Stability report, which will make sobering reading for the finance ministers and central bankers gathered in Lima, Peru, for its annual meeting.
Massive monetary policy stimulus has rekindled growth in developed economies since the deep recession that followed the collapse of Lehman Brothers in 2008; but what the IMF calls the “handover” to a more sustainable recovery – without the extra prop of ultra-low borrowing costs – has so far failed to materialise.
Meanwhile, the cheap money created to rescue the developed economies has flooded out into emerging markets, inflating asset bubbles, and encouraging companies and governments to take advantage of unusually low borrowing costs and load up on debt.
[…] Meanwhile, the failure to patch up the international financial system after the last crash, by ensuring that banks in emerging markets hold enough capital, and constraining risky borrowing, for example, means that a new Lehman Brothers-type shock could spark another global panic.
The relative „peg” to the dollar has been hurting Chinese exports ever since the dollar appreciated strongly, and the PBOC had to end it to recover export efficiency.
ooops… This is negative for the US$ and positive for US stocks.