Sunday, January 26, 2014

Policy Contagion

Shake my fist
Knock on wood
I've got it bad
And I've got it good
--Robert Palmer

Cracks are forming. From the US perspective, these cracks are primarily appearing offshore--in foreign markets and economies. China, Japan, Argentina, Greece. Various instruments reflect the stress. Currencies, bonds, derivatives, equities.

Whether these are THE cracks that precede a correlated event remains to be seen.

Prof John Taylor suggests that correlated disturbances that do occur from here should be viewed as contagions of policy--and primarily of central bank policy initiated by the Federal Reserve. Easy money policies here encouraged easy money policies elsewhere.

Now, unwinding such policies here, even on a miniscule scale such as the $10 billion monthly taper enacted by the Fed, encourage reactionary unwinds elsewhere that, because of their correlated nature, amplify effects on world markets.

A cold in the US infects a plague on the globe.

1 comment:

dgeorge12358 said...

The Argentine government oversaw an 18 per cent drop in the currency this week, the biggest sell-off since the country’s almost $100bn sovereign default 12 years ago.

Foreign reserves have fallen more than $1bn a month over the past year to reach a seven-year low this week of $29bn.