The Global Credit Crisis of 2008 sent a systemic shock through the global economy. It has been more than two years since the initial explosion of the Sub-Prime property bubble, and developed nations are still floundering as they each fight to see a self-sustaining recovery take hold. The Crisis of ’08 was followed up by the sovereign debt crisis in Europe, deflation in the United States, and weak economic conditions throughout most developed nations.
This harrowing economic picture of the last two years has forced developed nations such as the United States, England, and the EuroZone to leave short term interest rates at historically low levels. These historically low interest rates have forced investors to look elsewhere for yield and growth. Fortunately, investors have not had to look too long or too hard.
Emerging market economies weathered the financial and economic storm of the last two years much better than developed nations. Most emerging markets were not heavily exposed to Sub-Prime Mortgages, so they did not experience the same level of economic contraction that developed nations did. Furthermore, these emerging markets were still able to keep interest rates at relatively high levels, and when the global economy rebounded in the spring of 2009, emerging markets were at the head of the pack.
Where Does All the Liquidity Go?
During the last year especially, investors have shifted capital out of developed nations in favor of emerging markets. There has been an enormous influx of cash into leading emerging market economies such as China, Brazil, India, and Russia. And these countries are not so happy about it. Brazil has gone so far as to increase a tax on all foreign purchasers of Brazilian bonds in an attempt to discourage speculative activity in its bond markets. The reason is simple.
When all that cash flows into Brazil, or any emerging market, it does two things. First of all, it drives up the currency exchange rate. Second of all, it can lead to strong inflation. Both of these outcomes are unfavorable to the Brazilian economy. Most emerging markets are heavily dependent on their exports and when their currency rates rise aggressively, the prices of their goods and services suddenly become much less competitive in the global market. These currency rates can be seen on a forex trading platform.
Currency War Tensions
Emerging markets have been very outspoken in their distaste for developed nation monetary policy decisions. Furthermore, China, Brazil and other nations have specifically targeted the United States. When the U.S. moved forward with quantitative easing round 2 in November 2010, it caused a complete uproar in the global financial community. Chinese and Brazilian officials decried the Fed’s move, calling it currency manipulation.
Consequently, many emerging market economies began, and some have continued, to intervene in the foreign exchange market in an attempt to drive down currency values. This type of intervention is seen as extremely dangerous by most economists and it could lead to severe instability in the global forex trading market.
As long as the United States keeps a low-interest policy intact and continues to move forward with stimulus measures, the heated tensions between developed nations and emerging markets will most likely not subside. However, emerging markets continue to remain strong and their economies continue to prove buoyant amidst uncertainty in the global economy.
This is a guest post from Cesar Zambrano of forextraders.com. Please thank Cesar for this article by visiting his site!