LIQUIDITY TALK. STILL MORE ON THE "NEW BRETTON WOODS"
[Latest Global Dollar Liquidity Measure: +13.84% annual growth rate; latest Endogenous Liquidity Index: +12.68%]
The New Bretton Woods framework is the key to understand global liquidity conditions. That's clearly the idea behind this Financial Times article by Alan Ruskin, chief international strategist at RBS Greenwich Capital. Mr. Ruskin highlights what we have called in a recent report the risk of "explosive liquidity dynamics". Here's how it works. Brazil decides to check the appreciation of the real by buying U.S. dollar-denominated bonds. Stock market analysts applaud the move, as it is sure to lead to stronger corporate profits. Hedge funds buy Brazilian stocks — and the currency. The Brazilian real appreciates. The central bank steps in, buying up Treasuries. More global liquidity is created, more hedge funds invest, and the process starts all over again.
On the growth incentives behind this scheme, check out this post by Dani Rodrik [HT: Brad Setser]. By the way, it's worth rememberting that Dooley, Folkerts-Landau and Garber always considered the New Bretton Woods scheme a second best development strategy. It would be better, of course, if developing countries would beef-up their financial systems, strenghten property rights, and generally improve governance. But herein lies a paradox: the more successful they become at playing the FX reserves game, the less they care about good governance. Argentina is a case in point: maybe I'll write about that next week.
1 comment:
I think you bring up a critical point. The ROW still isn't changing. Its reliance on US consumption is still alive and well. Rather than make the tougher political choices ROW is going to play the recycling game into something fatal goes wrong. How much longer does the ROW expect US consuumption to be a driver of growth? Its been driving growth since the early 90's. Young people in the US have to have decent paying jobs and the ability to pay down debt to keep consumption going and they are not getting those chances right now. Too much job pressure and the servicing of existing debt.
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