Michael Snyder
Activist Post
This time, the Federal Reserve has created a truly global problem. A
big chunk of the trillions of dollars that it pumped into the financial
system over the past several years has flowed into emerging markets.
But now that the Fed has decided to begin "the taper", investors see it
as a sign to pull the "hot money" out of emerging markets as rapidly as
possible. This is causing currencies to collapse and interest rates
to soar all over the planet. Argentina, Turkey, South Africa, Ukraine,
Chile, Indonesia, Venezuela,
India, Brazil, Taiwan and Malaysia are just some of the emerging markets that have been hit hard so far.
In fact, last week, emerging market
currencies experienced the biggest decline that we have seen since the
financial crisis of 2008. And all of this chaos in emerging markets is
seriously spooking Wall Street as well. The Dow has fallen nearly 500
points over the last two trading sessions alone. If the Federal
Reserve opts to taper even more in the coming days, this currency
crisis could rapidly turn into a complete and total currency collapse.
A lot of Americans have always assumed that the U.S.
dollar would be the first currency to collapse when the next great
financial crisis happens. But actually, right now just the opposite is
happening and it is causing chaos all over the planet.
For instance, just check out what is happening in Turkey according to a recent report
in the New York Times...
Turkey’s currency fell to a record low against the dollar
on Friday, a drop that will hit the purchasing power of everyone in the
country.
On a street corner in Istanbul,
Yilmaz Gok, 51, said, “I’m a retiree making ends meet on a small
pension and all I care about is a possible increase in prices.”
“I will need to cut further,” he said. “Maybe I should use my natural gas heater less.”
As inflation escalates and interest rates soar in these countries,
ordinary citizens are going to feel the squeeze. Just having enough
money to purchase the basics is going to become more difficult.
And this is not just limited to a few countries. What we are watching right now is truly
a global phenomenon...
"You've had a massive selloff in these emerging-market
currencies," Nick Xanders, a London-based equity strategist at BTIG
Ltd., said by telephone. "Ruble, rupee, real, rand: they've all fallen
and the main cause has been tapering. A lot of companies that have
benefited from emerging-markets growth are now seeing it go the other
way."
So why is this happening? Well, there are a number of factors involved of course. However,
as with so many of our other problems, the actions of the Federal Reserve are at the very heart of this crisis. A recent
USA Today article described how the Fed helped create this massive bubble in the emerging markets...
Emerging markets are the future growth engine of the global
economy and an important source of profits for U.S. companies. These
developing economies were both recipients and beneficiaries of massive
cash inflows the past few years as investors sought out bigger returns
fostered by injections of cheap cash from the Federal Reserve and other
central bankers.
But
now that the Fed has started to dial back its stimulus, many investors
are yanking their cash out of emerging markets and bringing the cash
back to more stable markets and economies, such as the U.S., hurting
the developing nati ons in the process, explains Russ Koesterich, chief
investment strategist at BlackRock.
"Emerging
markets need the hot money but capital is exiting now," says
Koesterich. "What you have is people saying, 'I don't want to own
emerging markets.'"
What we are potentially facing is the bursting of a financial bubble
on a global scale. Just check out what
Egon von Greyerz, the founder of Matterhorn Asset Management in Switzerland, recently had to say...
If you take the Turkish lira, that plunged to new lows this
week, and the Russian ruble is at the lowest level in 5 years. In
South Africa, the rand is at the weakest since 2008. The currencies are
also weak in Brazil and Mexico. But there are many other countries
whose situation is extremely dire, like India, Indonesia, Hungary,
Poland, the Ukraine, and Venezuela.
I’m mentioning these countries individually just to stress that this situation is extremely serious.
It is also on a massive scale. In virtually all of these countries
currencies are plunging and so are bonds, which is leading to much higher interest rates. And the cost of credit-default swaps in these countries is surging due to the increased credit risks.
And many smaller nations are being deeply affected already as well.
For example, most Americans cannot even find Liberia on a map, but
right now the actions of our Federal Reserve have pushed the currency of
that small nation
to the verge of collapse...
Liberia's finance minister warned against panic today after
being summoned to parliament to explain a crash in the value of
Liberia's currency against the US dollar.
"Let's
be careful about what we say about the economy. Inflation, ladies and
gentlemen, is not out of control," Amara Konneh told lawmakers, while
adding that the government was "concerned" about the trend.
Closer to home, the
Mexican peso
tumbled quite a bit last week and is now beginning to show significant
weakness. If Mexico experiences a currency collapse, that would be a
huge blow to the U.S. economy.
Like I said, this is something that is happening on a
global scale.
If
this continues, we will eventually see looting, violence, blackouts,
shortages of basic supplies, and runs on the banks in emerging markets
all over the planet just like we are already witnessing
in Argentina and Venezuela.
Hopefully something can be done to stop this from happening. But once a
bubble starts to burst, it is really difficult to try to hold it
together.
Meanwhile, I find it to be very "interesting" that last week we witnessed the largest withdrawal from JPMorgan's gold vault
ever recorded.
Was someone anticipating something?
Once again, hopefully this crisis will be contained shortly. But if
the Fed announces that it has decided to taper some more, that is going
to be a signal to investors that they should race for the exits and the
crisis in the emerging markets will get a whole lot worse.
And if you listen carefully, global officials are telling us that is
precisely what we should expect. For example, consider the following
statement
from the finance minister of Mexico...
"We expected this year to be a
volatile year for EM as the Fed tapers," Mexican Finance Minister Luis
Videgaray said, adding that volatility "will happen throughout the year
as tapering goes on".
Yes indeed - it is looking like this is going to be a very volatile year.
I hope that you are ready for what is coming next.
This article first appeared here at the Economic Collapse Blog. Michael Snyder is a writer, speaker and activist who writes and edits his own blogs The American Dream and Economic Collapse Blog. Follow him on Twitter here.