Impact of US economy on emerging markets


Very recently the U.S.Federal Reserve quietly stopped publishing of the quantum of broad money referred to as M3 in the economy. It means he Central bank will not reveal the amount of currency it pumps into the system each year. In other words it will be impossible to distinguish the dollar inflows into the economy and new Currency that the Fed would print.

So, the Fed, fear analysts, could covertly fund its near $800 billion budget deficit and $700 billion BoP deficit, which are more than India’s GDP. These fears have prompted the dollar to plummet to multi-month lows against the euro and yen and could seriously impact confidence in the world’s favorite currency.

A European think-tank has likened the cessation of M3 publication to the President’s unilateral decision to suspend the convertibility of the dollar into gold in 1971.

In 1971, the dollar became a currency solely based on the rest of the world’s confidence. But this confidence mostly relied on the general feeling that US economy and its currency were managed transparently. With the end of M3 publication, this transparency disappears. This US now wants the world to trust its word, even in the field of its currency’s value. In a world where the confidence in the US has never been so low since 1945, the dollar is thus turned into the central player of the beginning global systemic crisis.

The dollar’s fall will be disastrous for the world economy. A falling dollar is the greatest threat to the world economy. Commented an expert who heads private equity firm in Asia . He, however, said the possibility of the US slipping into a recession was unlikely.

Experts in the US have started voicing concern about the economy in spite of robust growth figures in the first quarter. A US media report on Monday suggested that the biggest unknown about American’s next economic meltdown is not ‘if’ but ‘when’ it will come. Economists are pessimistic and their view point is that it is a housing bubble threatening to explode.

This is not good news for emerging markets such as India, which has America as its biggest trade partner. The dollar’s status as a safe-haven currency has been a matter of comfort for many global investors when foraying into new territories as they could rush back to the greenback if anything went wrong. If that confidence is lost many investors would think twice before buying assets in risky emerging markets. Such a situation could also dent the Indian equity markets which rewrote records when the ‘sensex’ climbed a 1000points in 19 days or an unbelievable return on investment of 10% in just over a fortnight. The situation now is nobody wants to depend on the dollar any more and that is why fund managers are moving to commodities such as gold and silver, even oil believe a few experts and advisors in the funds investment field..

Fed chairman Ben Bernanke favors a lower interest rate regime. However, runaway inflation and ballooning debt have forced the Fed to increase interest rates 15 times since June 2004 with another expected this June.