I have been saying that one of the key approach by emerging market policymakers in dealing with the return of the bond vigilantes will be to tap foreign currency reserves as shield.
Here is what I wrote last Sunday
a sustained rise in international bond yields, which reduces interest rate arbitrages or carry trades, may exacerbate foreign fund outflows. Such would prompt domestic central banks of emerging market economies, such as the Philippines, to use foreign currency reserves or Gross International Reserves (GIR) to defend their respective currencies; in the case of Philippines, the Peso.‘Record’ surpluses may be headed for zero bound or even become a deficit depending on the speed, degree and intensity of the unfolding volatilities in the global bond markets.
It appears that aside from Indonesia we have another example: Turkey
From Reuters.com
Turkey's Central Bank auctioned a record $1.5 billion in foreign exchange on Monday, tightening policy to defend a lira that had hit all-time lows against the dollar.The lira has lost as much as 6 percent of its value against the dollar since late May, when unprecedented protests broke out against Prime Minister Tayyip Erdogan. Demonstrations centred on the commercial capital Istanbul compounded investor concerns about the U.S. Federal Reserve scaling back stimulus measures.On Monday, the lira touched a new all-time low of 1.9737 against the U.S. currency. It rebounded to 1.9480 by 7.51 a.m. EDT after the bank held five forex-selling auctions.The total volume of $1.5 billion was the highest amount the bank has ever sold via forex auctions in a day, sending a strong signal to the market. The previous high was $750 million in 2011. The bank sold $350 million in six auctions on June 20.
Record low 10 year Turkish Bond yields precipitately made a U-turn (the following charts from tradingeconomics.com) as US treasuries recently spiked...
Higher yields has put increasing pressure on the lira which has been aggravated by huge current account deficits and swelling external debt
Nevertheless the Turkish central bank will attempt to temper the steep volatility from the resurfacing of the bond vigilantes by using her record stockpile of US dollar reserves.
The article's pronouncement that central bank actions have been "sending a strong signal to the markets" will hardly wish away economic truism that had been shaped by reckless monetary policies. If the bond market volatility continues, then the surplus reserves will easily be siphoned away.
Yet a noteworthy comment from Turkey’s central bank governor Erdem Basci: from the same article. (bold mine)
At a meeting with economists on Monday, Basci gave the message that its additional tightening steps were aimed more at limiting loan growth than supporting the lira, bankers at the meeting told Reuters.The governor also said that a change in the bank's interest rate corridor would only be implemented if the liquidity tightening fails to prevent excessive loan growth, bankers said.In a written overview of its presentation to economists, the bank said this will not only contain rapid credit growth through the liquidity channel but also will support the value of the lira.Growth slowed sharply to 2.2 percent last year and the central bank has been trying to spur the economy since mid-2012 with a series of rate cuts.
Monetary tightening via higher bond yields will not only expose on the frontloading of expenditures to artificial pump up statistical growth via credit expansion, importantly they amplify the risks of a recession from the unwinding of malinvestments.
Well, Basci’s comment resonates on the admonition of the great Austrian economist Ludwig von Mises:
But the boom cannot continue indefinitely. There are two alternatives. Either the banks continue the credit expansion without restriction and thus cause constantly mounting price increases and an ever-growing orgy of speculation, which, as in all other cases of unlimited inflation, ends in a “crack-up boom” and in a collapse of the money and credit system. Or the banks stop before this point is reached, voluntarily renounce further credit expansion and thus bring about the crisis. The depression follows in both instances.
Policies that promote quasi-permanent booms eventually morphs into economic and financial bust: Turkey appears to be undergoing such a transition.
Excellent article!
ReplyDeleteYou provide the quote "the credit expansion ... ends in a “crack-up boom” and in a collapse of the money and credit system".
The collapse began with the jump on the Interest Rate on the US Ten Year Note, ^TNX, to 2.01% on May 24, 2013, which constituted an “extinction event”, that is a cataclysm, which literally destroyed the investment choice offered by bankers as the way of life, and terminated the paradigm of Liberalism.
The fiat money system has died, as evidenced by Major World Currencies, DBV, and Emerging Market Currencies, CEW, trading lower, and the US Dollar, $USD, UUP, rising strongly higher.
The credit system has collapsed, as evidenced by Aggregate Credit, AGG, falling sharply lower.
The diktat money system is rising to replace the fiat money system.
And debt servitude is rising to replace credit.
There will be no debt jubilee, under Authoritarianism, the debts of Liberalism will be applied to every man, woman, and child on planet earth, as the Banker Regime, is replaced by the Beast Regime of Revelation 13:1-4, and its leader The Sovereign, Revelation 13:5-10, and its Prophet, the Seignior, Revelation 13:11-18.
The emerging market policymakers tapping of foreign currency reserves as a means of stopping the bond vigilantes attack on their Treasury Debt, BWX, and EMB, can only last so long.
Jesus Christ is operating at the helm of the Economy of God, Ephesians 1:10, and has pivoting the world into the paradigm of Authoritarianism, where the diktat of nannycrats is the now the way of life. Fiat money died, and diktat money has been coming to life.
The “extinction event” of the rise in the Interest Rate on the US Ten Year Note, ^TNX, terminated all of the authority of Liberalism’s policies and schemes, thereby ending Liberalism’s life experience.
Now, Authoritarianism’s policies and schemes, have authority, and ever increasing power, providing monetary and political life experience.
Yes, new policies and new schemes for the new age of Authoritarianism. These be policies of diktat and schemes of debt servitude schemes, such as, regional framework agreements, bank deposits bailins, new taxes, privatizations, capital controls, and austerity measures.