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Currency turmoil signals new phase of global economic crisis

1 February 2014

Whatever the immediate outcome of the turbulence sweeping through the financial systems of so-called “emerging market” economies, it represents a turning point in the global economy as a whole. The roots of the crisis lie in policies of “quantitative easing”—the pumping of trillions of dollars into the world financial system by the US Federal Reserve and other central banks—initiated in response to the 2008 breakdown that was sparked by the collapse of US investment bank Lehman Brothers.Much of this money flowed into “emerging markets,” seeking higher profits as share prices in these countries boomed and the rates of return on other financial assets rose. But now the bubble has started to deflate and volatile capital is rushing for the exits, sending currency exchange rates plunging.A series of central banks, including in South Africa, India, Brazil and Turkey, have raised interest rates significantly. But these actions have so far failed to stem the outflow. As Neil Shearing, the chief emerging markets economist at Capital Economics, told the Financial Times: “The fact that currencies have continued to weaken even in countries that have started to raise interest rates raises the prospect of a new, and potentially more worrying phase of the recent turmoil in EM financial markets, in which beleaguered policy makers find themselves unable to defend their currencies.”The first signs of a potential crisis appeared last May and June after Chairman Ben Bernanke indicated that the Fed would soon begin to “taper” its $85 billion per month purchases of mortgage-backed securities and US Treasury bonds. His comments sent a shiver through “emerging markets” and capital flowed out.Stability returned when the Fed pulled back from the “taper” in September. But with the decision to cut purchases by $10 billion in each of the past two months, the outward flow has resumed.Seeking to put the best face on a bad situation, some commentators have tried to maintain that the financial turmoil reflects country-specific problems and has no global implications. According to US Treasury Secretary Jack Lew, the main problem is bad policy in a number of countries. “I will say that we’re seeing a lot of differentiation in the marketplace and we’re seeing the countries that have taken tough actions and managed well are having a different experience.”His remarks recall those of former Fed chairman Alan Greenspan during the Asian financial meltdown of 1997–98, when he insisted that the crisis did not stem from the operations of the capitalist “free market” itself, but was the outcome of [. . .]

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via Currency turmoil signals new phase of global economic crisis – World Socialist Web Site.