The Global Economy in Turbulent Times

CHAPTER 118 QE3 Exit and Asia’s Trilemma¹

We are on the threshold of possibly another crisis in 2013. An impression is already being created in Chapter 41, “An Inconvenient Truth: QE Withdrawal Syndrome,” that financial and currency markets in emerging nations (ENs) have started to feel the full force of US Fed’s moment of reckoning (initial phase of quantitative easing [QE] tapering). Indeed, these markets have begun to react to expectations of reduced money creation (at best “lite tapering”) and eventual significant interest rate increases. No decoupling has taken place—if anything, there is now talk of recoupling.

Since May 2013, emerging markets (EMs) from India to Turkey to Brazil have been the focus of sell-downs, triggered by events half a world away. In recent weeks, kept buoyant by (and now reliant on) foreign capital inflows (following the massive injection of QE3 monies), EMs have exhibited more violent price amplifications to adjustments in US macroeconomic policies than the US itself. True, US Treasury yields have spiked and Wall Street has been wobbly, but it’s nothing like what’s happening in EMs following capital flows out of Asia in particular.

Policy Trilemma

As global investors adjusted to a world eventually without ultra-cheap money, currencies and shares tumbled. EMs’ shift to become involuntary capital donors has left policymakers with what some analysts call a trilemma: three unpalatable policy choices: (1) higher interest rates, which run the risk ...