Wednesday, 22 February 2012

The Implications of Global Central Banks' Quantitative Easing

JP Morgan's recent submission gives us cause to think about the COST of bailing out the world's financial system from the spillover effects of the economic crisis of 2007-2008. Below is a chart released by a JP Morgan commodity analyst showing the assets on the balance sheet of the G-4 central banks as a percentage of their national economic output. This "G-4" includes the Federal Reserve of the United States, the Peoples' Bank of China, the European Central Bank and the Bank of Japan. The co-ordination among the central banks has been remarkable.  

  1. We can expect the spot price of gold and more importantly gold futures to hit records highs as investors and speculative players hedge against inflationary tendencies going from 2012 to 2013. Gold ETFs will experience substantial volatility this year too. 
  2. Apart from the recent Galleon case (and on a lighter note MF Global), no major bank chief has been indicted for directly playing a role in engendering the recent crisis. And so the central banks continue to fan the embers of the MORAL HAZARD problem. To avoid a crisis of confidence and more importantly a re-enactment of the bank run that characterized the GREAT DEPRESSION, these reserve banks may have acted rightly, but its been four years since the recession. On the flip side, in managing the crisis in the Nigerian context, the Central Bank of Nigeria set up a "bad bank" to purchase the toxic assets of the banks and went further to take punitive steps to hold the bank chiefs responsible for their actions.
  3. Energy costs are going to increase going forward as the action of the central banks of "flooding the world with cheap money" combine with the system-wide reinforcing effect of geopolitical conflict in some oil-producing states. The oil producers, in a bid to shore up their purchasing power against the volatility of the US Dollar, will, without doubt, hike energy prices. The positive feedback effect will only serve to make the entire financial system even more volatile. 
  4. Net oil-importers such as Kenya and Uganda will most likely have a painful period ahead. Last year, the value of the Kenyan shilling fell more than 20%. Kenya has made efforts to secure a $143 million loan from the International Monetary Fund to hedge against this threat. They can only go so far. 
  5. Net oil-exporters such as Nigeria, in the absence of a resurgence of Niger Delta violence, might see a surplus in revenues from oil this year given that the National Assembly is adjusting the 2012 budget oil price benchmark to $75 - way below the volatility range shared generally by commodity analysts. However, the windfall may be of little effect if the upsurge in food imports (growing at 11% annually) is not pared.  
  6. The global equities market has had a generally good start this year - one of the best in years. No thanks to global Quantitative Easing. But as interest rates remain high in emerging and frontier markets, the bond market might have the upper hand this year, trumping the equities markets again. In my native Nigeria, the efforts of the management of the Nigerian Stock Exchange (NSE) to boost the stock market capitalization to pre-crisis levels may not come to fruition this year. Sadly. 
  7. Following from the widening interest rate differential between the developed and emerging/frontier markets, the pace of carry trade will accelerate even further this year, in the absence of substantial fluctuations in exchange rates. As speculative capital continues to besiege the shores of emerging markets such as China for example, any effort by the financial authorities to reduce the surplus external position (comprising the current and capital accounts) by increasing imports may not yield the necessary results.  
As for Greece, I assume they have already defaulted and the market discounting mechanism has factored that in as usual. Who will argue that a debtor has not defaulted on a debt commitment if he's asking for some haircut from his creditors? 

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