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 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.