Western High risk and low rates are creating a tidal wave of Eastbound investment
Hopping around the Eastern media today, it’s been fascinating to watch various governments prepare for what’s been on the cards for some time now: a huge outflow of investment monies from the Atlantic West to the Pacific East.
Although effectively a flight to safe havens – the Swiss Franc hit record values against the Euro and US Dollar yesterday – it is also a reflection of long-term zero-interest rates (ZIRP) in the West coupled with China’s determination to cap off its volcanic progress towards potential hyper-inflation.
Indonesia passed twenty new technical legal instruments to curb any inflationary pressures from the inflow. Taiwan has introduced a maximum level of allowed currency derivatives, and South Korea is expected to follow suit next week. Thailand too has levied a 15% withholding tax on bond sales.
Almost certainly, these measures will be followed by rate rises in the Pacific theatre, as China’s Asian neighbours seek to remain investment-competitive. Beijing has put through two rises in quick succession – a sign that the overheating predicted here last May is now beginning to worry the Politburo.
For the West, this is an unfortunate but inevitable double-whammy: to fears about low growth and banking collapse are added better rates in safer places. So as China clamps down on growth, to currency wars are added interest rate wars.
This is bad news for Australia, 80% of whose raw material exports head up towards China. One suspects that it too will ratchet up rates another notch. But the key knock-on effect will be in the mainstream Western economies.
For the EU, it is a very long nail in an already tight coffin. For while it makes exports potentially cheaper in the very short term, it also makes borrowing more expensive for the debtor members. They must raise bond yields….and thus, in turn, enhance the value of the Euro….making exports more expensive again.
In the US, it will be disastrous for a banking sector sitting on rubbishy derivatives, and waiting for their value to recover: they’ll become worth less – and eventually worthless – while the uniquely enormous American debt will start to spiral out of control, as it too has to raise rates and push up yields.
The UK, it’s probably fair to say, lies somewhere between the two….although its own very unwise commitment to eurozone trade means further economic shrinkage, reduced tax income, rising welfare costs….and falling further and further behind on the Never-Never payments.
As 2010 limps to the finishing line, it is the intinsically flawed nature of globalist bourse-and-bond debt capitalism that comes under the unforgiving spotlight. While China should come out of the mess more or less even – and the south American damage ought to be minimal – everyone else is going to be squeezed until the pips squeak. This is no longer a matter for conjecture: the rock and hard-place analogy has been done to death, but it’s gone beyond that now. The vice is a much closer parallel….and there is no escape.
Who knows how it will all pan out? Our banks are unsafe, our recoveries stuttering, our Treasuries nearly empty, our markets stalling, and our citizenry angry. A very tough year lies ahead. One senses it may well be crucial in the passage from the old to the new.
Related articles: The discreet complacency of the British Ruling Class.