Bloomberg: Here's a $9 Trillion Question

This article on Bloomberg looks at the potential impact of the Fed raising interest rates on the existing US debt held by others around the world. The link also has a video interview with Jim Rickards explaining why he does not think the Fed can raise rates. Below are some quotes and then a few comments.

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"When Group of 20 finance ministers this week urged the Federal Reserve to “minimize negative spillovers” from potential interest-rate increases, they omitted a key figure: $9 trillion."

"That’s the amount owed in dollars by non-bank borrowers outside the U.S., up 50 percent since the financial crisis, according to the Bank for International Settlements. Should the Fed raise interest rates as anticipated this year for the first time since 2006, higher borrowing costs for companies and governments, along with a stronger greenback, may add risks to an already-weak global recovery."

"The dollar debt is just one example of how the Fed’s tightening would ripple through the world economy. From the housing markets in Canada and Hong Kong to capital flows into and out of China and Turkey, the question isn’t whether there will be spillovers -- it’s how big they will be, and where they will hit the hardest."

. . . . .

"Most central bank officials are forecasting that they will raise the benchmark federal funds rate this year from near zero, where it’s been since December 2008. The probability of a Fed liftoff by June, based on trading in futures and options, was about 23 percent on Thursday, with the odds of an increase by September at 56 percent, data compiled by Bloomberg show."

. . . . 

"The expected increase in U.S. interest rates makes the dollar-denominated debt of emerging markets “a source of concern,” World Bank Managing Director Sri Mulyani Indrawati said Tuesday. Developing nations “are going to have to face this new reality” of higher rates, Indrawati, a former Indonesian finance minister, said in an interview with Bloomberg Television."

"Fed tightening could be especially problematic for China, where policy makers are already battling capital outflows and may exacerbate them with easing measures, resulting in a “circular trap,” said Manik Narain, a currency strategist at UBS AG in London."

"The U.S. central bank should take into consideration the global impact of any interest-rate decision, China Vice Finance Minister Zhu Guangyao said at the G-20 meeting this week." . . . . 
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My added comments:

In an earlier blog post we noted a Bloomberg article that pointed out that central banks are making adjustments "on the fly" these days. It also said “Certain big central banks are making moves, leaving a lot of others having to respond on the fly to the implications of those moves,” said Carnell. “They have to keep a step ahead and we’ve seen that on a number of occasions. There will probably be more surprises.”

Here we have similar concerns being expressed by China. I don't think anyone really knows what will happen, not even the central banks.