IMF to Asia: Put a Brake on Credit Bubbles!

Interesting developments. 

Asia has to put a brake from her asset bubble blowing policies, this has been the latest prescription by the IMF who joins the World Bank in the call to curtail asset bubbles

First the implicit advice as reported by the Bloomberg:

Asian policy makers must be ready to respond “early and decisively” to overheating risks in their economies stemming from rapid credit growth and rising asset prices, the International Monetary Fund said.

Growth is set to pick up gradually during the year and inflation is expected to stay within central banks’ comfort zones, the Washington-based lender said in a report today. Greater exchange-rate flexibility in the region would play a “useful role” in curbing overheating pressures and coping with speculative capital inflows.

Asian economic growth that the IMF estimates will be almost five times faster than advanced nations this year, and increasing investor appetite for risk have spurred capital inflows into the region. The Bank of Japan this month joined counterparts in the U.S. and Europe in unleashing monetary stimulus, which may fuel further currency gains in developing markets such as the Philippines, where policy makers have stepped up efforts to cool appreciation.

As a reminder all bubbles are homegrown or have domestic origins. The mainstream’s popular strawman or scapegoat, capital flows, which usually gets blamed for bubbles, may or may not add to the bubbles in progress. While many crises indeed involved capital flow dynamics, correlation is not causation.

Now the kicker:

Financial imbalances and rising asset prices, fueled by strong credit growth and easy financing conditions, are building in several Asian economies,” the IMF said. “Policy makers in the region face a delicate balancing act in the near term: guarding against the potential buildup of financial imbalances while delivering appropriate support for growth.

Translating the economic gibberish to the layman: Bubbles have become widespread "in several Asian economies", and could morph into a clear and present danger "face a delicate balancing act"!

Well readers here would be familiar with my constant admonitions on these. Now many, including multilateral institutions, appear to be recognizing on such developing risks. So I am no longer a “lone nut”.

But the IMF or the World Bank seem clueless on what appears as a good counsel of curbing bubbles. They ignore the economic and political implications of their “delicate balancing act” recommendations.

Since all the cumulative  “strong credit growth” have been a consequence of “easy financing conditions”, then “early and decisively” policy restraints would represent as financial losses on the manifold entities or borrowers (private, public, or hybrids e.g. PPPs) that contracted them with their corresponding creditor/s.  Remember all these  “strong credit growth” had been consummated based on expectations of a sustained or prolonged “easy financing conditions”. Now the IMF (and the World Bank) wants to reverse them.

This also means that if “strong credit growth” has metastasized into a systemic debt issue then policy tightening would translate into a sharp slowdown in economic growth (best case scenario), if not a recession or a crisis (worst case scenario).

Thus the “delicate balancing act” reveals that the IMF doesn’t seem to have a good grasp on such ramifications, or most possibly, refuses to candidly divulge of the true nature of their risks expressed via evasive opaque statements.

Moreover credit rating upgrades will whet the appetite for more debt which has been the case for the Philippines, aside from adding to the veneration of political ascendancy from current policies that undergirds today's manic phase

This means that putting a brake or policy tightening would also expose on the mirage brought about by statistical growth pillared from "strong credit growth". Doing so would effectively takes away the foundations of the “defied” status from which the political class and central bankers have been piggybacking on. 

In short, reversing the “easy financing conditions” would go against the political and personal interests of those involved, particularly the political class and their cronies, and therefore will most likely be rejected or dismissed or ignored. 

Easy money conditions will likely be pushed to the limits until the markets expose on them.

World Bank: Developing Asia Should Put a Brake on Easing Policies

Interesting call from the World Bank. 

From the Jakarta Globe:

The World Bank is urging developing economies in East Asia and Pacific, including Indonesia, to put a brake on monetary and fiscal policies that boost consumer demand, arguing that such actions would add to inflationary pressures as the global economy gradually recovers.

“Most countries in developing East Asia are well prepared to absorb external shocks, but continued demand-boosting measures may now be counterproductive, as it could add to inflationary pressures,” said World Bank East Asia and Pacific chief economist Bert Hofman in a report on Monday.

“A strong rebound in capital inflows to the region induced by protracted rounds of quantitative easing in the US, EU and Japan, may amplify credit and asset price risks,” he added.
 

Developing East Asia and Pacific include China, Indonesia, the Philippines, Thailand, Vietnam, Cambodia, Malaysia, Laos, Mongolia, Myanmar, East Timor, Fiji, Papua New Guinea, Solomon Islands and other smaller island economies in the Pacific.

So the World Bank finally admits or acknowledges of the existence of the Asian-ASEAN bubbles which they couch in technical gobbledygook as “demand-boosting measures may now be counterproductive”. 

“Counterproductive” is really about capital consumption from malinvestments that will be unraveled by inflationary pressures. Mainstream terminology for this is "overheating".

This has been a dynamic I have been pointing out since last year.

The World Bank also puts into proper context  the role of capital inflows as “may amplify credit and asset price risks”. Yes this is an acknowledgement of my assertion that all bubbles are inherently domestic.

Glad to hear some forthrightness from a taxpayer funded multilateral agency.

Yet, be careful of what you wish for.

If the boom in ASEAN economies has mainly been derived from counterproductive “demand boosting measures”, then a policy brake (tightening) would translate to a reversal of such speculative, unproductive, wealth consuming activities: particularly such will likely be ventilated through economic recession, crashing markets and possibly a financial/banking crisis.

A “brake” in easing policies, for instance, will essentially expose on the underlying reality behind the supposed Philippine economic miracle labeled as “Aquinomics” along with political façade from other ASEAN nations whose economic growth has been cosmetically boosted by credit expansion.

Thus, will ASEAN politicians acquiesce to a virtual exposé of their pretentious policies that risks undermining their political privileges and of their supposed popular moral standings? 

I doubt so.

Yet more institutions appear to recognize implicitly, slowly but surely, my concerns of a coming crisis from today’s bubble policies.

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.