Monday, February 3, 2014

John Mauldin on "The Central Banker Throwdown"

Financial analyst and publisher John Mauldin writes this lengthy but very good article titled "Central Banker Throwdown".

The article is long but touches on some themes we have noted here recently. Especially related to Central Bankers not getting along. Stuff like this can lead to a reset one of these days.

If you don't have time to read the whole article, here are some quotes that relate directly to what we have discussed on here:

"For years now, central bankers across the emerging markets have complained that QE, ZIRP, and other “financial repression” policies coming out of the developed world – and most importantly from the Federal Reserve – have been driving hot capital flows into emerging markets. It was all part of the developed world’s plan, they say."
"Whether the Fed can actually turn the taper into a true exit strategy ultimately depends on how much longer households and businesses must deleverage, but the markets now believe this is the beginning of the end. And the Fed sent a very clear message to the rest of the world: now it really is every central banker for himself."
"I know a lot of people are wondering why EM central bankers are complaining about capital flows going out after they have been complaining about too much hot money coming in over the last five years. Rajan’s comment on that point is very direct: “We complain when it goes out for the same reason it goes in. It distorts our economies. And the money coming in made it more difficult for us to do the adjustment which would lead to sustainable growth and prepare for the money going out.”
So central bankers like Bernanke have essentially told emerging markets they are on their own. That does not sit well, and Rajan (Head of Central Bank in India) has clearly thrown down his own gauntlet in response.
In his Bloomberg interview last Thursday (the day after the Fed meeting), he said:
Industrial countries have to play a part in restoring that [co-operation], and they cannot at this point wash their hands off and say, we will do what we need to and you do the adjustment you need to.

If they insist on that, we will certainly do the adjustment we need to, and we are certainly in India in the process of doing that, but they may not like the kinds of adjustments we will be forced to do down the line.

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