Currency Massacre in Emerging Markets by Pater Tenebrarum

Pater Tenebrarum of Acting Man blog provided a useful overview of recent economic turmoil in Venezuela, Argentina, and Turkey.

Both Venezuela (socialist worker’s paradise) and Argentina (nationalist socialist paradise) have a problem with their foreign exchange reserves. In both cases it stems from trying to keep up the pretense that their currencies are worth more than they really are. The central banks of both countries are (and have been for some time) printing money like crazy, and inflation is galloping with gay abandon. Their governments publish misleading economic statistics, that inter alia attempt to hide the true extent of the monetary debasement – in short, their inflation statistics are even more bogus than those of other governments (we are leaving aside here that the mythical ‘general price level’ cannot really be measured anyway).

Since they have maintained artificial exchange rates – coupled with capital controls, price controls and other coercive and self-defeating economic policies – people have of course felt it necessary to get their money out any way they can. This includes making use of every loophole that presents itself, so that e.g. in Venezuela, so-called ‘dollar tourism’ has developed, whereby citizens travel abroad for the express purpose of using their credit cards to withdraw the allowed limit in dollars at the official exchange rate (and buy some toilet paper while they have a chance to grab a few rolls).

Now the governments of both Venezuela and Argentina have reacted – the former by introducing a ‘second bolivar exchange rate’ for certain types of exchanges, the latter by stopping to defend the peso’s value in the markets by means of central bank interventions.

It should be pointed out that the foreign lenders with the biggest exposure to Turkey are actually Greek banks. We kid you not, the bailed-out remnants of the Greek banking system are right in the line of fire again. That’s definitely one from the ‘you couldn’t make this up’ department. It should also hasten the deployment of Super-Mario’s ‘QE-bazooka’.

On Thursday, a number of stock markets, from Japan’s Nikkei to the US stock market incidentally had quite a bad hair day. Although most press reports identified the fact that China’s manufacturing PMI came in slightly lower than expected as the culprit, it seems to us that there is perhaps a more profound problem boiling under the up until recently tranquil surface.

One of the sources of all this recent trouble is quite possibly Japan’s decision to inflate with the help of a generous dose of ‘QE’ and deficit spending. Although the yen’s anticipatory move lower could so far not really be justified by actual money supply growth, the fact remains that it did decline rather sharply. This in turn has put pressure on Japan’s competitors in Asia, which in turn has put pressure on their suppliers in commodity-land and has altered capital flows, etc.

Recall that the Asian crisis of the late 1990s was preceded by a devaluation in China, after which the yen started weakening rather precipitously as well. Of course the situation was different in that many of the countries hit by the crisis had their currencies pegged to the dollar at the time, but the point remains that a weakening yen preceded the event. A parallel is that there are once again quite a few countries that sport large current account deficits and have experienced major credit and asset booms. In short, there are many balloons waiting for a pin.

The entire article can be read here.

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