Sunday, December 15, 2013

Irrational Exuberance in Asia - Ghosts of Greenspan in India and China

William Pesek writes an interesting column about easy monetary policies (relatively) in Asia. The central point in the article is that there is a distinct need for reform in Asia; the reform is structural - fiscal and political in nature; the reform is ignored and monetary policy is being used to boost "sentiment"; this cannot last.

I agree with the undertone of the article though there are few distinctions I would draw:

  1. The outline of reform in Asia Ex-Japan is well known. 
    1. It is a well-trodden path by the developed economies. 
    2. What is lacking is either the political will or weaker systems that need reform.
    3. For political will there has to be some margin in growth. This margin was afforded by a developed country demand for developing country goods.
  2. The other reason Central bankers of developing countries are a bit easy with the punch-bowl refills is because the principle strategy for growth is by tagging on to the developed country band-wagon and compete on differentials. 
    1. This strategy requires competitive exchange rate mechanisms while maintaining investment-ability in countries assets.
    2. The so-called monetary tightness / monetary reform have been triggered by either of these two requirements.
    3. Thus, central bankers must keep relative position with developed country monetary policy and amongst each other. Thus if one developing country does QE then it becomes imperative for others to follow in order to maintain export competitiveness.
    4. Changing track from this strategy is difficult during good times and becomes almost impossible when the developed markets are going through a weak economic growth phase.
    5. Even Japan is attached to this strategy.
Thus the irrational exuberance carries forward from US monetary policy. It cannot be attributed to developing countries. What can be blamed on developing countries is their lack of will to develop an alternative model that can sustain the dreams and aspirations of their peoples.