Post date: Nov 07, 2010 11:2:26 PM
Saturday October 30, 2010
PRINT more money, inject them into the system and the problems will ease?
Not according to experts.
Many see such course of action – commonly termed as quantitative easing, which the US Federal Reserve will likely announce next week – will only cause more headaches; to other economies first before returning to haunt its own.
Presently, the speculation is still very much over the size and pace of this fresh dose of quantitative easing by the US Federal Reserve. But at the same time, concerns are already rising in some other parts of the world over the impact of further US monetary easing on their economies.
China’s commerce minister Chen Deming, for one, had over the week explicitly voiced his annoyance over the rising challenge of an “imported inflation” that his country now faced. He was quoted by foreign news agencies blaming the way the US government had been printing money as one of the main contributors to China’s rising inflation risks, which had subsequently created further uncertainties and problems to local businesses. Chen said the US dollar issuance had gotten “out of control”.
Indeed, quantitative easing is a risky strategy. The method, which involves the central bank increasing money supply by buying bonds or other form of debts from the market so as to promote private lending and liquidity, will only depress the value of its currency and push the prices of goods and services higher, hence leading to inflationary (or sometimes, hyperinflationary) pressure.
It’s a desperate attempt, economists say.
But for the US right now, inflationary pressure is favoured over the deflationary risk that the country is currently facing. Deflation, which is the opposite of inflation, is deemed to be a bigger problem because the continuous decline in general prices in an economy could potentially create a vicious spiral of declining profits, higher unemployment and, then, depression – certainly a situation they don’t want to be caught in.
Moreover, with its hands tight (as interest rates are already near zero, and fiscal deficits have already exceeded US$1 trillion), the US government has limited option but to embark on quantitative easing to revive its “unusually uncertain” economy.
Seeking higher returns
“The Fed needs to be patient,” John Ryding, chief economist at RDQ Economics LLC in New York, said in a Bloomberg television interview on Thursday. He explained that the slow recovery of the US economy was an inevitable process; throwing more money at a slow recovery would not help it along.
Ryding reckoned that by embarking on quantitative easing, the US economy would once again be running the same policies as it did in 2003-2004, which had then led to the devastating bubbles in the credit and housing markets. The bursting of the bubbles in both these markets in 2008 was the cause of the recent global financial and economic crisis.
“We’ve now pushed the bubbles to emerging markets,” Ryding said.
Rightly so, as we’ve seen the unrelenting spikes of property prices, for instance, since the economic recovery in several emerging markets in Asia, especially China, Hong Kong, Singapore and South Korea. Stock markets in the region are also in a bull run, and Asian currencies have been appreciating as the value of the US dollar becomes depressed.
These are largely a result of a flood of cheap US cash being pumped into emerging economies in search of higher returns.
And it doesn’t stop there. Cheap US money is also chasing after commodities such as crude oil, gold and silver. As volatile as they may be, prices of these commodities have also been on the rise lately. For instance, gold prices have risen 19.5% from around US$1,120 an ounce to more than US$1,340 an ounce yesterday, while crude oil prices have breached the US$80 per barrel mark since the beginning of the month.
Paris-based International Energy Agency on Wednesday raised concern over the risks of further monetary easing by the US government inflating prices of commodities.
Its senior oil demand analyst Eduardo Lopez told a conference in Singapore: “This could bring about inflation and possibly derail the recovery.”
Emerging risks
Fitch Ratings over the week released a report warning that the widely anticipated quantitative easing by the US Federal Reserve could potentially undermine the strong recovery of emerging Asian economies. The international credit rating agency on Wednesday said that strongly performing “Emerging Asia” was facing the risk of importing inappropriately loose monetary conditions from developed markets, which in turn could lead to higher inflation and volatility in local asset markets.
The report, which analysed 11 emerging Asian markets, including Malaysia, China, India, Indonesia, Thailand, South Korea and Taiwan, said those with poorer track records of price stability, already-loose domestic monetary conditions and weaker financial systems would be more vulnerable to the risks of further global monetary easing.
With that, according to Fitch Ratings’ analysis, Vietnam emerged as the most vulnerable country, while Taiwan was the strongest of the 11, thanks to its low and stable inflation as well as well-developed financial markets.
Indonesia was found to be the third-most vulnerable, while China ranked sixth, and India, seventh, in terms of vulnerability to the risks of further global monetary easing.
Malaysia was ranked ninth. So, it’s still among the stronger and more resilient ones in the region. “It’s not easy to generalise the impact of further US monetary easing on Asian economies. Each is unique, with its own characteristics to endure the potential risks,” Citigroup Inc’s Singapore-based senior Asia-Pacific economist Kit Wei Zheng explains to StarBizWeek.
According to Kit, for most emerging Asian markets, the inflow of cheap US dollar will not be reflected directly in the general prices of goods and services; rather, the effects on asset prices will be faster and more obvious.
“While the liquidity story is driving commodity prices, that is only part of the story. Commodities prices are also driven by overall demand and supply, and global growth is not super strong, so further upside could be capped by demand disruptions,” Kit says. As it stands, Malaysia’s inflationary pressure appears to be among the most contained in the region.
“General prices remain in check since we came out of the recession,” says TA Research economist Patricia Oh.
Consumer price index last month surprisingly slowed, registering a growth of 1.8% year-on-year (y-o-y), compared with 2.1% y-o-y in the preceding month. That was partly attributed to a stronger ringgit, which mitigated the effects of rising food prices, according to Maybank Investment Research.
Inflation in the year ahead for Malaysia will most likely remain steady below 3%, economists say.
“One thing to note is that prices of most goods in Malaysia are still controlled by the Government, so in any case, the Government can still play its part in managing the inflationary expectations in the country,” Kenanga Research economist Wan Suhaimie Saidi explains. With a relatively low and stable inflation and sound and well-guarded financial system, economists believe Malaysia will be able to better withstand the risks of hot money inflow compared to most other countries in the region. But that does not mean the country can be complacent.
In a positive note, it is encouraging to know that Bank Negara has been closely monitoring the rising bubble risks in the region, and it looks ready to implement the measures when necessary to curb those negative effects on the country’s economy. We need to be on guard, as economists say, to prevent our growth plans being derailed.