Beet
Atlas Star
Posts: 28,916
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« on: April 05, 2009, 07:32:37 PM » |
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The world economy is showing signs that it will stabilize and recover in the future-- but if this occurs, and this is a big if, we may run the risk of net capital outflow from the United States, as we saw in the Fed's latest report in January.
Currently, there is capital flight from emerging markets to safety in the United States. This has reversed the decline of the U.S. dollar which had been taking place in 2007 and early 2008, and was the market's way of reacting to the United States current account deficit. There is even capital flight from China, which has for several months in late 2008 and early 2009 negative pressure on its currency, the RMB, despite its record of huge reserves and a huge current account surplus. Now there are signs that emerging market currencies are recovering, and the futures markets are predicting a slight (though still slight) uptick in the RMB in the coming months.
If the world economy stabilizes, emerging markets will have a lower risk premium and there will be capital flight from the U.S. This will make it harder for the U.S. to borrow. The Fed should respond to this situation by quantitative easing. The world community must allow the dollar, the pound and other countries that have traditionally run significant current account deficits to depreciate their currency in an orderly fashion. This could be a one-off or it could be a gradual process. Mass capital flight as a result of psychological panic must be avoided at all costs.
As the dollar and pound depreciate, import costs will rise in the U.S. and U.K., creating inflationary pressures. But exports will also become more competitive. Conversely, in current account surplus countries, exports will become less competitive, and fiscal stimulus measures must be used to increase domestic demand.
The G-20 should help Arab nations such as Egypt, Iraq, Jordan, Syria and Algeria develop their capital markets. This will allow the Arab members of OPEC to invest in productive resources in their own backyards, if the U.S. is unable to continue its role in vendor financing.
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