Emerging Market Economies Turn to Capital Controls; Forex Market in State of Disarray; Gold’s Message; Life Imitates Art

Emerging market economies are under increasing stress as a result of the horrendous economic policies of the Fed.

In order to prevent unwanted strengthening of their currencies, Emerging Asia sets up controls to curb capital inflowsThailand announced on Tuesday that it will impose a 15 percent withholding tax on interest and capital gains made by foreign investors on Thai bonds, accentuating the emerging economies’ drive to put in place regulatory controls to curb capital inflows that contribute to a surge in currencies.

A persistent low interest rate regime in the developed world is pushing global investors to tap into the high-yielding markets, leading to currency worries in most of emerging Asia.

Export-dependent economies like Japan, China and Brazil have been in a race to rein in their currencies of late as huge amounts of money flowed from anemic western economies to their systems. China has maintained a tight leash on the yuan to ensure their export competitiveness, while Japan intervened in the markets to stem the yen’s gains. Brazil last week raised a tax on foreign portfolio inflows into bonds and some other financial instruments to 4 percent to contain the rise of its real currency.

Traders believe South Korea has intervened repeatedly in the currency markets to rein in the won. In the Philippines, government officials have said the rise of the peso is a matter of concern.

Analysts say the afflicted Asian countries are addressing the problem in three ways.

In countries like South Korea, Australia, the Philippines and Indonesia policy rate hikes are either being scaled-back or delayed. “Less monetary tightening in Asia will help to contain interest rate differentials, thereby reducing the incentive for capital inflows,” say the analysts.

Secondly, currency market intervention has increased and foreign reserves are going up, providing the countries a cover against further shocks in the financial system.

The third route, the analysts say, is the imposition of capital controls.

“For now the restrictions are mild and targeted toward speculative inflows. This will probably stay the focus. Draconian measures were introduced in Thailand in late 2006 but these are widely-recognized across Asia as having been a disaster.”Japan’s Vows Decisive FX Moves

It’s not just emerging markets feeling huge stress as Japan’s Noda vows decisive FX moves after G7 meeting Japanese Finance Minister Yoshihiko Noda said on Tuesday that Japan will continue to take decisive steps against excessive currency moves, including intervention, helping the dollar to recover further from a 15-year low against the yen.

Noda’s reiteration of Japan’s currency stance highlighted the risk of another round of intervention to weaken the yen after Japan weathered a flurry of weekend Group of Seven and IMF meetings with no overt criticism of last month’s yen selling — its first in six years. Forex Market In State of Disarray

Rosenberg discussed Forex stress in Tuesday’s Lunch with Dave.
Meanwhile, the foreign exchange market is in a state of disarray and while everyone gazes at every nuance coming out of the Fed, a really big story is unfolding in this increasingly unstable currency backdrop. Thailand, following in Brazil’s footsteps, imposed a 15% tax on foreigner bond income. The Korean won is falling from its lofty heights on FX intervention concerns. The BoJ has already aggressively moved twice in the past month to weaken the yen to no avail — Japanese consumer confidence was released overnight and it fell for the third month in a row in September — as has been the case with the Swiss National Bank, which has tried with futility to weaken the Swiss franc.

China is printing money at nearly a 20% annual rate to prevent a yuan appreciation even in the face of intense global efforts to encourage the country to strengthen the unit. (The last thing China wants to do is buckle to U.S. pressure like Japan did following the 1985 Plaza Accord, which strengthened the yen and sent the country into a 25-year deflationary stagnation period.)

The Bank of England is talking about QE as well … these beggar-thy-neighbour money printing exercises to stimulate local economic conditions increasingly look like a zero-sum-game. Only the euro has held steadfast because Trichet refuses to cut interest rates or embark on quantitative easing — though the fiscal problems in the periphery are worrisome and will continue to cloud the future of the currency; however, don’t worry, owners of German bunds think they will ultimately get repaid in D-marks.

Of course, gold could be the only asset class that makes sense here. If the bond market is right then we get deflation and gold is a hedge against the uncertainty such an environment would entail. If the equity market is right, then we get gobs of liquidity out of the Fed and then we go off to a new reflationary credit cycle — gold benefits here too. And, if the commodity complex is right, then we are heading towards a new inflationary cycle and of course gold is a classic way to play this scenario. So in response to Mr. Tepper, it’s not the equity market that is in position for a win-win, it is the precious metals market. Gold is hugely overbought right now and long overdue for a corrective phase, which will likely pose yet another great buying opportunity.Life Imitates Art

I received an interesting email from reader “Jack B” regarding capital controls.

Jack writes …
Hello Mish

I recall reading last week that Brazil had imposed limits on incoming capital. Now Thailand has imposed a tax on interest and capital gains made by foreign investors to Thailand.

The reason I find this so fascinating is it is an eerie example of life imitating Hollywood. In the 1983 wall street movie “Rollover,” there’s a great scene in which an older “statesman of Wall Street warns a young upstart that, “…first you’ll see a lot of jawboning by the president, and that won’t work. Then, they’ll take to selling gold, and that won’t work. (BIS has already done this) And then you’ll see capital controls!

And that will be the end. Then you’ll see a Depression that makes the thirties look like a Kindergarten!”

Bernanke & Co are just continuing the ol’ Greenspan PUT: always and everywhere, coddle the Wall Street fraternity. Well, if that is the Chairman’s wish, fine; but the entire global economy is at risk.

Please keep up the excellent coverage of our post-WW II-like global economy!

JackRollover 1981… world economic collapse

With thanks to Jack, please consider

Message of Gold

Gold is up another $25 today and has been on a tear ever since late 2008.

By now it should be obvious to everyone (including Prechter), that gold is acting like a currency for the simple reason that gold is money. Gold is performing well in these conditions because it should.

For more about why Gold is Money, please see …

Why does fiat money seemingly work? Misconceptions about Gold
By the way, those articles were penned under the name “Trotsky” who is also my friend “HB”, who now has his own fine blog on Austrian economics: Acting Man

As money, one should expect gold to perform well against all the other currencies that every country is in a mad race to debase.

Finally, please note that Gold is not rising because of inflation in the US, but rather because of the Fed’s foolish attempt to defeat deflation. For more on this line of thinking, please see Inflation Expectation Noise

Because all the central banks have joined in on competitive currency debasement, gold is rising in terms of every fiat currency, again, just as one should expect.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Bookmark and Share
Posted by Michael Shedlock at 11:42 AM…. Print…. Email

To sign up for a free copy of our Monthly Client Newsletter, please register your email address at the bottom of the Sitka Pacific Commentary Page.

Buy Gold and Silver Online at GoldMoney
The Best Way to Buy Gold and Silver

Disclaimer:The content on this site is provided as general information only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of sponsors or firms affiliated with the author(s). The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

Comment Guidelines: Comments should be succinct, constructive and relevant to the story. We encourage engaging, diverse and meaningful commentary. Comments that include personal attacks, racial, religious, or ethnic slurs are not permitted. We continuously review and remove any inappropriate comments.

Comments(0)

Newer PostOlder PostHomeSubscribe to:.About Mike Shedlock Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Continue reading…    
 Mish Audio VideoMish with Marc Faber 2010-03-12
“Inflation or Deflation?” Debate: Mish vs. Dr. Doom

On the Edge with Max Keiser 2010-02-12
Spotlight on China, Japan, Jobs, Pensions, Part 1

Spotlight on China, Japan, Jobs, Pensions, Part 2

Tech Ticker 2009-12-09
“Bank Lending, Jobs, The Great Retrace

King World News October 30 2009
Mish and Eric King discuss Gold, the Stock Market, the US Dollar, Sideline Cash, China, and US real estate

May 2009: My Speech at Google – on Blogging and the Economy
Thoughts on Blogging and the Economy – Speech at Google

Podcasts Every ThursdayHoweStreet

May 18, 2009Jay Taylor and Mish discuss deflation and other issues on Voice America

April 27, 2009
The Lew Rockwell Show – “It’s Fallen and It Can’t Get Up”

April 26, 2009
TDI Podcast 106: ZeroHedge and Mish-O-Nomics

January 25, 2009TDI Podcast 92: An Unavoidable Depression? (Dent and Shedlock)

January 7, 2009Commodity Watch Radio – 2009 : Mish and Mike Hampton Give Their Views

November 12, 2008
The Lew Rockwell Show

October 23, 2008
TDI Episode 80: Predicting another 40% DOWN

October 17, 2008
Commodity Watch Radio – A look at the markets Michael Hampton, Mish

August 24,2008
Commodity Watch Radio – Inflation or Deflation? Part 1 James Turk, Michael Hampton, Mish

 John Dennis Beat Pelosi Mish Endorsement of John Dennis  Lawson for Congress Mish Endorsement of B.J. Lawson  Doug Cloud For Congress Mish Endorsement of Doug Cloud  
 
 
Calculated RiskLoading…naked capitalismLoading…Steve Keen’s DebtwatchLoading…oftwomindsLoading…Acting Man Austrian Economics DiscussionLoading…Copyright 2009 Mike Shedlock. All Rights Reserved.View My StatsHomeAboutContactSitka Pacific.js-kit-comments { background-color: #ffffff; } white-space: nowrap; color: #ff0000; margin: 0px 0px 0px 0px; padding: 0px 0px 0px 0px; }.js-singleComment { font-size: 9pt; color: #000000; line-height: 1.0em; margin: 0px 0px 0px 0px; padding: 0px 0px 0px 0px; font-family: Verdana, Helvetica; border: solid 1px #c0c0c0; text-align: left; }

View the Original article

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s