"The current policies of the developed countries are leading to very significant capital flows into some of the emerging countries. This is putting upward pressure on exchange rates," said South African Finance Minister Pravin Gordhan, chairman of the Group of 24." (Easy Money Churns Emerging Markets, Alex Frangos, Wall Street Journal)
Bernanke's zero-rate policy and the prospect of ongoing rounds of quantitative easing have put finance ministers everywhere in a frenzy. Some countries -- notably South Korea and Brazil -- have already taken steps to slow capital flows. As yet, the effectiveness of these measures remains unknown.
Naturally, capital seeks the best rate of return, which is why it is exiting the US (which is in the throes of a long-term slowdown) for greener pastures in China and emerging markets. That movement drives up the value of local currencies and creates lethal asset-price bubbles. The Fed is intensifying this process (via QE) to break the back of Bretton Woods 2 and force the dollar down. Eventually, the flood of liquidity will force foreign trade partners to accept a cheaper dollar thus restoring US export competitiveness and a way out of recession without raising workers wages. (The Fed's approach is grounded in class warfare.)
Tim Duy sums it up in a brilliant post that shines a light on the Fed's real objectives. The article should be read in its entirety, but here's a brief clip:
"The time may finally be at hand when the imbalances created by Bretton Woods 2 now tear the system asunder. The collapse is coming via an unexpected channel; rather than originating from abroad, the shock that sets it in motion comes from the inside, a blast of stimulus from the US Federal Reserve. And at the moment, the collapse looks likely to turn disorderly quickly. If the Federal Reserve is committed to quantitative easing, there is no way for the rest of the world to stop to flow of dollars that is already emanating from the US. Yet much of the world does not want to accept the inevitable, and there appears to be no agreement on what comes next. Call me pessimistic, but right now I don't see how this situation gets anything but more ugly." (The Final End of Bretton Woods 2?, Tim Duy, Fed Watch)
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