"Whatever the tortures of hell, I think the boredom of
heaven would be even worse."
- Isaac
Asimov (American, 1920-1992)
Word for the day
Tommyrot (n)
Nonsense; utter foolishness.
(Source: Dictionary.com)
Malice
towards none
Who has inched closer to UNSC permanent seat:
India
Germany
Japan
All of the above
None of the above
It's not about monetary policy alone
I am not sure how many people will agree with me on this.
Regardless, I have an opinion - the autonomy and objectivity of central bankers
is highly overrated. I find a variety of events (including politics and
geo-politics) reflecting on the monetary policies of central bankers across the
world - Our RBI and US Federal Reserve being no exception.
With this premise, I believe that the FOMC decision on reversing
the rate cycle needs to be anticipated in the following light.
Post Lehman collapse, it appeared that the US is becoming a
marginal force in the emerging global order. Emerging economies like BRIC,
South Africa. Mexico, Indonesia etc. asserted themselves as leaders in a new
multipolar world. G-20 was formed to undermine the supremacy of US led G-3, G-8
etc. The global multilateral financial and development institutions also saw
rise in influence of these countries in their affairs.
However, the events of past one year are a clear subtle pointer to
the fact that Uncle Sam may have lost a few battles, but it is close to winning
the war. Consider this:
(a) Plagued by sub-prime crisis which crippled its
financial institution, the US did not bow down. It successfully transmitted the
disease to these resurgent emerging economies and rescued its financial
institutions. Most emerging economies, especially India and China are now
struggling with huge sub-prime assets with no clue as to how to get rid of
these. US banks are now inarguably amongst the strongest global financial
institutions.
(b) Many influential voices from the US have already
suggested that the era of global economic cooperation and coordinated policy
action is over. We will do only what is in the best interest of the US is the
new mantra. No one is mentioning Plaza Accord of 1980s. If monetary tightening
in the US disrupts common man’s life in over 100 countries - so be it.
(c) After becoming energy independent, the US
does not bother about situation in Middle East or South Asia. Iraq was raided
merely on the basis of unfounded doubts about weapons of mass destruction.
Syria has actually used these weapons and no action is promised. The proposed
Immigration Bill also indicates towards rising protectionism.
(d) US Federal Reserve, who bought all the bonds that
came its way in past 3years has ended up making much more money than what
people thought it would have sank in saving US financial markets. In past
10months, Fed has contracted its balance sheet and USD has seen its strongest
rally since 1984 (see
here).
In my view, at the most opportune time US will strike hard on the
opponents. A swift reversal of rate cycle (and consequent stronger USD) may
adversely impact exports and earnings of many large US corporations. It may
also adversely impact housing market as the mortgage rate rise. This would all
be temporary and manageable damage. However, it will inflict a material
disaster on the competitors like Russia, China, and Arabs and at the same point
cushion US against the contagion reaching her shores.
In simple terms, the rate hike is not about monetary policy alone.
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