The US banks drive the developing world to a catastrophe

Michel Barnier, Member of the European Commission in charge of Internal Market and Services (on the left), went to Washington where he met with Ben Bernanke, Chairman of the Board of Governors of the US Federal Reserve (FED). (EC Audiovisual Services 11/05/2010).

Michel Barnier, Member of the European Commission in charge of Internal Market and Services (on the right), went to Washington where he met with Ben Bernanke, Chairman of the Board of Governors of the US Federal Reserve (FED). (EC Audiovisual Services 11/05/2010).

How is it possible that the good news of the growth of the American economy which has raised its gear, also brings forth crisis and possibly destruction in developing countries? Yet this is exactly what is already happening in our brave new world. The good news is that the US economy now grows at a 3.2% annualised rate, considered as a solid resumption of economic activities in the largest economy of the world. The bad news is that now the major American banking groups are abandoning the developing countries and bringing back trillions of dollars to the US, in the prospect of higher interest dollar rates and a secure economic environment.

Nobody in New York or in Washington cares about what is going to happen to countries like Turkey, South Africa, Argentina, Indonesia or India after the abrupt outflow of capital from those countries. Already the Turkish lira, the Argentinian peso, the South African rand and the Indian rupee pay the price with important losses of their foreign value. Unfortunately, this is just the beginning. Turkey yesterday decided to double its interest rates in order to arrest the fall of the lira, but within 32 hours the Turkish currency continued it’s fast downwards course. It was as if an unprecedented interest rate increase from 4.5% to 10% meant nothing at all. It was a clear message from the major western lenders that the decision is taken to let Turkey, and not only, to rot.

The banks gain the people lose

As it has become quite clear by now, the US Federal Reserve, the American central bank, the Fed, will continue and probably escalate the tempo of its policy U-turn and call back the trillions it printed and handed out to the American banks at zero interest rate cost. Ostensibly the idea was to help the American economy resume its activities, after the 2008 financial meltdown, by pumping into the market cheap and abundant money. To this effect, the Fed offered the US banks as many freshly printed dollar trillions as they wanted. Of course everybody knew that the money won’t be lent to the American real economy to help the country recover. The bulk of it found its way to the developing countries and helped them grow, but at interest rates around 8%, that nobody was ready to pay in the US.

In this way every year the American banks gained at least 8% on what they received for free from the Fed. They invested in Turkish, Indonesian, South African or Indian bonds or even stocks. The massive inflow of capital to those developing economies, at cheap interest rates for their local standards, supported a consumption led growth. Riding on such a money bonanza from 2009 onwards the developing world, from Russia to South America and from Indonesia and India to South Africa, reached some growth rates unseen before.

This arrangement also helped the developed world and the western banks to recover from the credit crunch of 2008 and the Eurozone crisis of 2010. Mature economies enjoyed a strong demand for their products coming from all over the developing world. As for the American banks, they kept gaining at least a net 8% on the trillions they received for free from the Fed. That’s why the major New York banks managed to quickly recapitalise themselves within a few years and by the end of 2012 they were in better shape than in 2008. All that thanks to the generosity of the Fed that is the American people and the developing world.

Back to reality

The problem is that now all this crazy money the Fed has spread all over the world, through the New York banks, must be called in. The reason is that with the first signs of resumption of economic activities in the US proper and an increase in the demand for loans at higher interest rates in the real economy, these trillions could return to the US. The result would be an unpredictable conjuncture, with additional trillions been available, which could lead the country to a new strong inflation period and a selloff of American bonds and other dollar values. In any case the Fed has now embarked in a reverse policy in view of the tangible resumption of economic activities in the US, and gradually cuts down the delivery of free money.

As expected, the American banks have no remorse over the catastrophe they may cause to the developing countries, by massively abandoning them. By the same token, the Fed is equally unconcerned and pays no attention at all to the cries from the developing countries, to stop the tapering or reduce its rate. The result will be that the developing countries would face a fast devaluation of their currencies, a galloping inflation and a deep shock to their real economy. But who cares.

‘Greek cure’

The European Sting writer Dennis Kefalakos on 9 October reported: “IMF Economic counsellor and director of the Research Department, Olivier Blanchard…concluded, “emerging market economies facing the dual challenges of slowing growth and tighter global financial conditions”. This quote appeared on the last issue of IMF’s World Economic Outlook, published ahead of the 2013 World Bank-IMF Annual Meetings, set to take place this weekend in Washington D.C.. Christine Lagarde, IMF’s managing director, also contributed her own personal touch to the cloudy horizons. Last week she delivered a speech in Washington entitled “New Global Transitions Need New Global Agenda”. The conclusion was that, “The immediate priority for emerging markets is to ride out the turbulence as smoothly as possible”. Of course this is easier said than done”.

In short, what the Fed now does is tantamount to “Preparing for developing countries the ‘Greek cure’”. This was the title of the above mentioned 9 October Sting article. As in the case of Greece, the major international lenders flood a market with other people’s money and when they have gained enough for their own coffers, they massively abandon it, without the slightest remorse, of what will happen there afterwards. Countries like China and Russia though will not suffer, at least not directly, because they have retained draconian controls of capital flows in and out their economies and have also managed to accumulate reserves. Of course the entire world economy will be hurt, after the hardest hit developing countries stop growing.

Advertising

Advertising

Advertising

Advertising

Featured Stings

Stopping antimicrobial resistance would cost just USD 2 per person a year

EU’s guidelines on net neutrality see the light although grey areas do remain

Britain, EU take edgy steps to unlock Brexit talks as the war of words rages

Sweden well ahead in digital transformation yet has more to do

A day in the life of a refugee: We should be someone who helps

EntEx Organises 5 Summer Schools for Young Entrepreneurs across Europe in June/July 2014

Sustainable Infrastructure and Connectivity in the Belt and Road Initiative (BRI): a stimulating China-EU dialogue at European Business Summit 2018

Sanctions on Russia to be the biggest unity test at this European Council

Parliament sets conditions on EU-China investment deal

Medicine and mental health: relax, the doctor is a lifelong learner

‘More time’ agreed for buffer zone, to spare three million Syrian civilians in Idlib

EU confronts environmental threats as global leaders attempt to revive the global sentiment at NYC climate week

COP21 Breaking News_05 December: Children Will Bear the Brunt of Climate Change: UNICEF

Appreciation of euro to continue

COP21 Breaking News_08 December: Global Business Community Comes to Paris with Solutions for Taking On the Climate Challenge Across the Board

EU: All economic indicators in free fall

EU-US relations on the dawn of the Trump era

Trump to run America to the tune of his business affairs

A jingoistic Spanish ‘war’ from the past

SoftLayer, an IBM company, @ TheNextWeb 2014: Masters of Failure and Change

China will be the world’s top tourist destination by 2030

The future of energy in Puerto Rico is renewable

Preparing the future today: World Health Organisation and young doctors

How can we measure real progress on the Sustainable Development Goals?

China is the first non-EU country to invest in Europe’s €315 billion Plan

Draghi proposes timeframe for full Banking Union in five years

The quality of health education around the globe

Intel, Almunia and 1 billion euros for unfair potatoes

Is Eurozone heading towards a long stagnation?

Paris agreed with Berlin over a loose and ineffective banking union

Irish Presidency: Not a euro more for EU budgets

5 amazing schools that will make you wish you were young again

ECB with an iron hand disciplines the smaller Eurozone member states; latest victim: Greece

How this one change can help people fight poverty

Brussels waits for the Germans to arrive

Medicine in the 4th Industrial Revolution: the third entity of the new doctor-patient relationship

Why social working cultures are happier and more productive

Apple’s tax avoidance scheme remains as creative as their new iPhone

Violence will not deter Somali people in their pursuit of peace, says UN chief, in wake of lethal attacks

Africa Forum aims to boost business, reduce costs, help countries trade out of poverty

1 million citizens try to create a new EU institution

European Accessibility Act: Parliament and Council negotiators strike a deal

5 ways to net a sustainable future for aquaculture

Worldwide consumer confidence has shot up to its highest level for four years according to a survey of 130 Global Retail leaders

Junior Enterprises as a solution for Youth Entrepreneurship

EU to negotiate an FTA with Japan

100 years after Polish independence, 5 reasons to be cheerful for the future

The migration crisis is slowly melting the entire EU edifice

GSMA Announces Latest Event Updates for 2018 “Mobile World Congress Americas, in Partnership with CTIA”

‘Jerusalem is not for sale’ Palestinian President Abbas tells world leaders at UN Assembly

We know ethics should inform AI. But which ethics?

PM May fosters chauvinism, declares trade war on Europe

The EU sides with China against the US; but has Germany capitulated to America?

More taxpayers’ money for the banks

Legal Manager – 2050

Trump questions US – Europe kinship, approaches Russia

Ecocraft: take gaming to another level by greening Minecraft

Replacement for United States on Human Rights Council to be elected ‘as soon as possible’

MWC 2016 LIVE: The top 5 themes of this year’s Mobile World Congress

Could robot leaders do better than our current politicians?

Britain’s May won the first round on the Brexit agreement with the EU

More Stings?

Speak your Mind Here

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 )

Google+ photo

You are commenting using your Google+ 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 )

Connecting to %s