ADB: Asia Faces Risk of Asset Bubbles from Capital Flows

Here is what I wrote last weekend

Unless external shocks—possibly such as the potential deterioration of geopolitical US-North Korea standoff into a full-scale military engagement—any slowdown for the Phisix will likely be limited and shallow, as the manic phase or the credit fuelled yield chasing process induced by domestic policies (artificially low interest rates and policy rates on special deposit accounts) will likely be compounded by capital flight from developed nations as Japan.

It seems that the ADB has partly picked up on my concerns.

From the Bloomberg,

Developing Asia’s growth recovery faces the risk of asset bubbles from rising capital inflows, the Asian Development Bank said…

Officials from South Korea to the Philippines have taken action, or are studying measures, to counter the inflow of capital to the region amid policy easing by some developed economies. The Bank of Japan said on April 4 it would double the monetary base by the end of 2014 in the nation’s biggest-ever round of asset purchases, joining the Federal Reserve and the European Central Bank in boosting stimulus to support growth.

“Advanced economies will likely continue their accommodative monetary stance, and authorities in developing Asia must safeguard the soundness of the finance sector to avoid the emergence of disruptive asset bubbles,” the ADB said. “Robust growth has largely eliminated slack productive capacity in many regional economies such that loose monetary policy risks reigniting inflation.”

As I pointed out, all bubbles are of domestic origin.

Capital flows or what truly has been about “capital flight” or of people’s attempt to protect their savings via foreign currency arbitrages from domestic inflationism and other financial repression measures only aggravates such conditions. They don’t cause them.

Political authorities have only made capital flows or "foreign/exogenous factors" a convenient scapegoat, or a misleading justification to the unwitting public, the expansion of government’s control or financial repression of the economy. Such will be channeled through the immoral assault on private property via capital or currency controls which is a path towards totalitarianism.

While I am pleased that the ADB has partly seen reality, they remain in steep denial over the real causes.

 

Nonetheless for as long as price inflation remains subdued, and for as long as government’s monetary policies remain tilted towards perpetuating permanent quasi booms, asset bubbles will keep inflating…until they fall under their own weight. I don’t think we have reached this critical inflection point yet.