When dealing with global liquidity, one must come to terms with global factors dealing with international banking systems interacting with sovereign emerging economies. The invisible hand may be based on currency appreciation that simply follows higher leveraging of the international banking sector. Excess liquidity in one financial sector will influence financial conditions elsewhere. Furthermore, excess liquidity in advanced economies will inadvertently produce excess liquidity in emerging economies.
This type of integration may not have the strength to weather global shocks. One must look at opportunities associated with capital flows that signal boom and bust cycles in emerging economies. If emerging countries are unable to realize expected growth then capital outflow will have serious consequences to their economies. This will undoubtedly create large financial imbalances within the international banking community.
If the global integration of the banking community relies on yield followed by large-scale capital flow into emerging markets, then one can also conclude that the capital outflow will be based on a lack of confidence in achieving the expected yield of the sovereign bondholders. Sure, the United States is the superpower of global borrowing, but this type of borrowing only increases unsustainable household indebtedness and leveraged capital in the stock market.
The international financial community is behaving with the same consequential traits as an individual investor seeking higher yield. Emerging markets raise funds abroad through bonds for capital expenditures such as infrastructure. Sometimes even the leveraged yield is acceptable to a sovereign nation as long as they get the money. This in turn creates public intervention, payment delays, and a higher risk of default.
The financial integrated economies seek out emerging economies that exhibit advanced inequality. Most of these emerging economies are sustained by government hacks and notoriously fraudulent individuals that reap the benefits rather than supplying sound infrastructure within their respective economies. This type of financial integration simply creates an inefficient equilibrium supply of government debt. The equilibrium is based not on the growth and well-being of their people, but on the financial system’s higher interest rates charged to the population.
The so-called stabilization funds including the World Bank and IMF are there to only reinforce inequality in emerging economies. Their sole aim is repayment by acknowledging their debt crisis and misuse of government funds. Many times these funds are used to enhance geopolitical interests rather than the country itself. It is a form of colonization that demands repayment with fiscal policy to insure bondholders and banks.
It’s not within the mind frame of emerging economies to coalesce their way of life and culture with the norms of the international community. Even though international banks diversify by lending to different emerging countries to mitigate risk, if one of these countries default, their cultural differences may give them less incentive to care for anyone else and fulfill their obligations.
The international banks are leveraging their balance sheets with these emerging countries. Their leverage is only sustained by the obligation of payment rather than funding real infrastructure to lift the population out of poverty. When leverage is high because of the ease of global liquidity, at the end it will rely on the Japanese or US government to get countries out of a malaise. If it’s a severe contagion then the cancer spreads not by the virtue of the World Bank and IMF, but by the backs of working Americans experiencing diminished economic expectations at the expense of gains in the shadow banking sector.
This is a revolving door of global liquidity. Oddly enough, the IMF has the audacity to tell the world that Panama’s bonds will provide the highest return in Latin America without real reason. They stress that the nation has proposed a canal expansion and metro line boost. But as we all know with infrastructure development, if the costs turn out to be $2 billion instead of $1 billion then the likelihood of funneling money to these projects will most likely fall in the hands of corrupt government officials and bankers.
Franco Uccelli, an emerging market analyst at JP Morgan indicated, “The real economic consequences of this fiasco are not going to be all that severe. Everything else that has been sustaining growth in the country is very much there, and is there to stay.” What Uccelli doesn’t understand is that if wages in the US remain stagnant then wages in emerging economies will also remain stagnant. Sustained growth is based on confidence. If there’s a large inequality within a country then the cancer moves in.
Janet Yellen behaves like Little Red Riding Hood; in the end the wolf will eat her.