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Fighting QE
Nov. 17th, 2010 01:20 pmNice to see in today's FT two articles, next to each other on page six of the main section, covering what I think over the next few months will be an ever-increasing topic of conversation and debate – fighting the unwanted effects of QE.
As I wrote yesterday, "unwanted" is a subjective term. Many of the effects unwanted by the "defending" countries are precisely the "wanted" effects on the QE2 unwritten agenda.
South Korea has taken the route I mentioned yesterday. It has raised interest rates and will implement rules on capital inflows to stop the attractive rate of 2.5% (starange times indeed!) – which is still a negative real interest rate of 1.6% – pulling in carry trade money and pushing up the Korean Won. More interestingly, there's talk of South Korea reintroducing its 14% withholding tax on foreign earnings from Korean sovereign debt.
This last point is fascinating because it would indicate a complete flipping of priorities. A decade ago it was all about getting into the World Trade Organization, giving countries such as South Korea and China access to world markets. South Korea is not listed on the World Government Bond Index – a listing needed if you want to attract the institutional pension investors from most first-world countries. And reintroducing this tax,which was abolished so that South Korea could get onto that index, would kybosh any chances of South Korea joining that index in the near term. But the point is, it doesn't really want to be there at the moment. Huge capital inflows boosted by the world-wide ripple of QE2 cash looking for an interest-earning home. "Globalization", as it might be called, has been thrown out of the window, not by the introduction of tariffs, but simply by having a withholding tax.
On the same page we see that China has rather reverted to type in its plan to stop inflation in basic commodity prices from bringing about a revolution. It intends to introduce price restrictions. Food prices rose at an annualised rate of 10.1% last month, by the way -- and October is not a month noted for rapid increases in the price of food. 18 staple vegetables in the south-west had gone up by 62% year on year, according to a report from Xinhua. Ouch.
The problem is that China, good though its population is at grasping the realities of economics, still has some leaders who think that you canfight the market by threatening to shoot anyone who prices things too highly. The evidence of history shows that (a) price caps don't work and (b) price subsidies do work, but they are a devilishly difficult thing to unwind.
With reference to Aardvark's post below, the worrying thing about Chinese inflation is that it might not be because of QE2 at all — China, indeed, might be having its own QE2 at work, with domestic monetary policy causing its own asset bubbles, a bit like the US in 2003-2010.
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As I wrote yesterday, "unwanted" is a subjective term. Many of the effects unwanted by the "defending" countries are precisely the "wanted" effects on the QE2 unwritten agenda.
South Korea has taken the route I mentioned yesterday. It has raised interest rates and will implement rules on capital inflows to stop the attractive rate of 2.5% (starange times indeed!) – which is still a negative real interest rate of 1.6% – pulling in carry trade money and pushing up the Korean Won. More interestingly, there's talk of South Korea reintroducing its 14% withholding tax on foreign earnings from Korean sovereign debt.
This last point is fascinating because it would indicate a complete flipping of priorities. A decade ago it was all about getting into the World Trade Organization, giving countries such as South Korea and China access to world markets. South Korea is not listed on the World Government Bond Index – a listing needed if you want to attract the institutional pension investors from most first-world countries. And reintroducing this tax,which was abolished so that South Korea could get onto that index, would kybosh any chances of South Korea joining that index in the near term. But the point is, it doesn't really want to be there at the moment. Huge capital inflows boosted by the world-wide ripple of QE2 cash looking for an interest-earning home. "Globalization", as it might be called, has been thrown out of the window, not by the introduction of tariffs, but simply by having a withholding tax.
On the same page we see that China has rather reverted to type in its plan to stop inflation in basic commodity prices from bringing about a revolution. It intends to introduce price restrictions. Food prices rose at an annualised rate of 10.1% last month, by the way -- and October is not a month noted for rapid increases in the price of food. 18 staple vegetables in the south-west had gone up by 62% year on year, according to a report from Xinhua. Ouch.
The problem is that China, good though its population is at grasping the realities of economics, still has some leaders who think that you canfight the market by threatening to shoot anyone who prices things too highly. The evidence of history shows that (a) price caps don't work and (b) price subsidies do work, but they are a devilishly difficult thing to unwind.
With reference to Aardvark's post below, the worrying thing about Chinese inflation is that it might not be because of QE2 at all — China, indeed, might be having its own QE2 at work, with domestic monetary policy causing its own asset bubbles, a bit like the US in 2003-2010.
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