From Istanbul to Brasilia to Mumbai comes a crescendo of complaints about dollar imperialism. Heads of state and central bank governors allege that the policies of central banks in industrial countries, especially the U.S. Federal Reserve, pursued in self-interest, are wreaking havoc in emerging-market economies. This allegation is mostly unfair. Emerging markets aren’t hapless and undeserved victims; for the most part they are simply reaping what they sowed.
The Fed’s decision to taper its large-scale asset purchases is causing turmoil in emerging markets. But neither the Fed nor the US Treasury seem remotely concerned. The FOMC’s latest decision to continue the taper at $10bn per month makes no mention of anything other than US domestic conditions. And Jack Lew, the Treasury Secretary, suggests that problems in emerging market are more down to bad policy on their part than anything the Fed is doing.
The solution to this is obvious. The Fed should not be “going it alone” on monetary policy decisions of this magnitude. The US benefited from the agreement of the G20 to QE, and it continues to benefit from the reserve currency status of the dollar. With the “exorbitant privilege” that reserve currency status grants goes exorbitant responsibility. Fed policy should no longer simply be determined by US domestic conditions. It must take into account the state of the global economy. The Fed is in effect the central bank of the world. It is time it behaved like it.
The larger point is that Turkey isn’t really the problem; neither are South Africa, Russia, Hungary, India, and whoever else is getting hit right now. The real problem is that the world’s wealthy economies — the United States, the euro area, and smaller players, too — have failed to deal with their own underlying weaknesses.
So Turkey seems to be in serious trouble — and China, a vastly bigger player, is looking a bit shaky, too. But what makes these troubles scary is the underlying weakness of Western economies, a weakness made much worse by really, really bad policies.
The chart indicates that the “taper talk” which began last May had a “stopping effect” on advanced economies stock markets (although a much smaller effect on the US markets itself).
The next chart shows the impact on the exchange rate to the dollar of different countries. Given that Japan´s exchange rate stopped depreciating with the “taper talk”, we may surmise that the depreciation observed in the other countries was also “deflationary”.
This quote from Tim Duy is pertinent in this regard:
Funny thing is that what the Fed sees as no tightening is evolving into a global tightening now as central banks rush to raise rates. Consequently, money surges into the global safe asset – US Treasuries. And, interestingly, I think that you can argue that this is much, much more disconcerting than last year’s taper tantrum. This seems to me to be a pretty clear global disinflationary shock. And it isn’t like inflation was on a runaway train to begin with.