It is tragic when one of your own turns on you!
I am sure that central bankers across the world are wondering just what they have done to deserve such a fate.
We all know that the Western world is in decline and that whatever growth we hear about is either made up or a temporary blip in a long trend line. Instead of working together as a cohesive fraternity, Federal Reserve Chairman Ben Bernanke and his antics have left the several central bankers in despair and licking their wounds.
The BRICS (Brazil, Russia, China, India and South Africa) have been taking it on the chin since the term "tapering" began its rounds in the United States. The fear of liquidity withdrawal has sent shock waves through the world. China's currency is tightly managed and oil is holding Russia steady somewhat, but the Brazilian, Indian and South African stock markets and currencies have been decimated.
One often wondered why the tidal wave of liquidity that Bernanke unleashed never created inflation in the United States. The reason is that this liquidity was wreaking havoc on the BRICS. As liquidity flowed into the BRICS, it created inflation there. To stem inflation, the central banks had to raise interest rates. As rates rose, hot money flowed in to garner yield-creating artificial bubbles in property and other asset markets.
As soon as Bernanke announced plans to withdrawing liquidity, these same markets that Bernanke depended upon to absorb his experiment have gone belly up. Let me give you some examples:
One country I have always admired is Singapore. I have often praised it and invested in it from time to time. It has been an example of how an economy should conduct itself and the central bank considered one of the most sane ones out there. Yet, it is nearly bankrupt.
Yes, central banks can go bankrupt!
Singapore's economy is a trade-based economy. It attracts capital from all over the world. As the U.S. dollar declined in 2009 and 2010, the Monetary Authority of Singapore (MAS) has been desperately trying to stop the rise of the Singapore dollar against the U.S. dollar. The insanity of unending printing of U.S. dollar led to people rushing to safe currencies. As a result, the MAS was forced to buy U.S. dollar and sell it at lower rates just to hold the Singapore dollar down. Yet the Singapore dollar rose by nearly 20 percent.
Because of these factors, MAS lost a prodigious sum trying to prevent its currency's natural rise; the S$10.2 billion they lost constitutes roughly 3 percent of GDP.
In fact, Singapore's economy only grew by S$11.5 billion from 2012 to 2013. So MAS managed to blow through 87 percent of the country's economic growth last year fighting Bernanke.
Over in India, the 'tapering' talks have forced a run on the rupee, which was already weakened by a looming trade deficit. South Africa is also reeling from massive currency devaluation.
Back in Europe, the Central Bank of Iceland is on the ropes as well. The forgotten story of collapse that was hyped as the poster child of the recovery story is unraveling fast. The government was selling its bonds to its own people at a furious pace. As the truth of the fake recovery started coming out, the people have started dumping the central bank bonds. As a result, Iceland is about to collapse again, soon.
Cyprus is still operating under the intense capital control framework they imposed after freezing and confiscating people's bank accounts.
Italy is facing an unprecedented crisis with its new generation of young adults having absolutely no prospects of jobs.
The worst insult was when the BRICS appealed to Bernanke to coordinate his tapering with them, he brushed them aside asking them to take care of themselves. Just a couple of years ago, he enjoyed the growth stint we saw surging through Asia and rested his laurels with the United States coasting on the backs of the BRICS. Today when they need him, he has turned his backs on them.
All I can say is beware, as soon you will need them and find out you have burnt your bridges with the BRICS and Asia. If the U.S. dollar does not implode on its own debt, the lack of friends will bring its demise faster.
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