Where Is QE Heading Out Of The World Economy?

The exit of QE and the normalization of monetary policy have three major impacts.

First, the US dollar will strengthen in the medium and long term.

After the financial crisis, the United States began to firmly leverage, manufacturing reflux to form an external rebalance, and a strong economic recovery.

The growth of emerging markets slowed down and geopolitical risks intensified.

QE withdrawing will make the dollar stronger.

Second, gold enters bear market.

Last year's sharp fall in international gold prices could be regarded as the starting point of the medium and long term bear market for gold.

The most important reason for the fall of gold at that time was that the Federal Reserve contracted money and the dollar was stronger.

QE exit will extend the gold bear market.

Finally, commodity prices will continue to slump.

Despite the impact of geopolitics, commodities will rebound intermittently, but with the global demand weakening and the strength of the US dollar going strong, prices will hardly go up.

The impact of the Fed's withdrawal from QE on emerging economies is much greater than that in developed economies.

In the short term, the stronger dollar will cause the relative depreciation of the currencies of emerging market countries and form the trend of US dollar reflux.

Emerging economies with insufficient balance of payments may break out.

The reason why these countries are so fragile is mainly due to their special balance of payments status:

First of all, from the perspective of capital and financial accounts, total foreign debt and short-term foreign debt have a relatively high scale of foreign exchange reserves and are more prone to capital flight.

These countries have attracted a large number of international capital in the global expansion of liquidity in the past ten years, and a large part of them are inflow in the form of foreign debt.

Because of the current account deficit and the relatively flexible exchange rate system, the growth of foreign exchange reserves is relatively slow, which leads to the general external debt generally larger than foreign exchange reserves.

Especially in Indonesia, South Africa, Mexico and other countries, the ratio of short-term external debt is relatively high. If the currency depreciates sharply in the short term, it will easily lead to currency crisis.

Secondly, from the current account, most countries maintain a long-term deficit, and the ratio of deficit to GDP is relatively high, and the buffer capacity for capital flight is limited.

Although the export dependence of these countries is relatively high, because of the lagging industrial level and the low level of energy independence, their import scale is larger, resulting in most of the current account deficit.

In the context of the current shrinking global demand, these countries' export demand based on commodities and processing trade products has suffered a greater impact, resulting in a further deterioration of the current account deficit.

Finally, capital account control is relatively loose, which is not conducive to the prevention and control of capital outflow.

Some people believe that the key moment can increase interest rates or strengthen capital controls, but it is proved that once capital flight happens, raising interest rates and strengthening capital controls will not only alleviate the capital outflow, but also make the market more skepticism about the host country's international payment capability, and become a catalyst to aggravate the market panic.

In the long run, most emerging economies are unable to escape the chronic crisis brought by QE withdrawal and global currency rebalancing.

QE's exit is only global.

As a prelude to normalization, when the Central Bank of the developed countries, represented by the Fed, begins to turn to ultra-low interest rates and turn to raise interest rates, the impact of global liquidity tightening will really be reflected.

In short, if the QE exit signifies that the global liquidity expansion is slowing down, the rate hike really means that liquidity will shift from expansion to deflation, which will have a structural impact on the whole emerging market through capital and trade channels.

From the perspective of capital channels, long-term capital inflows in emerging markets will slow down, and emerging economies will face challenges in the past.

In the first 10 years of twenty-first Century, from the low interest rate and quantitative easing policy of the global central bank, private capital attracted by emerging markets surged from around 200 billion US dollars in 2000 to US $1 trillion and 100 billion in 2012, and a large part of it was FDI.

FDI not only provides a capital base for the industrialization and urbanization of emerging economies, but also brings rich technology and management experience to emerging markets through a large number of foreign-funded enterprises.

As global liquidity expands from deflation to austerity, this momentum will gradually diminish.

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Global demand expansion is likely to slow down significantly, and emerging economies' growth models that relied on external demand are also unsustainable.

After the first wave of banking crisis and the second wave of sovereign debt crisis, the global economy has entered a long cycle of simultaneous deleveraging between the private sector and the public sector.

But in recent years, it has benefited from the unprecedented loose monetary policy of the central state bank, and the demand atrophy caused by deleveraging has been hedged to a certain extent.

With monetary and fiscal policies entering the tightening cycle successively, the recovery of central countries may be reversed.

After that, the developed countries generally entered the deleveraging stage, increasing savings, reducing consumption and recovering endogenous economy.

Developed economies are usually capital exporting countries, and their QE withdrawal and US dollar trend return are relatively weak.

As gold prices and commodity prices continue to fall, the cost of imports from developed economies will help to accelerate their endogenous recovery.

The withdrawal of QE and normalization of monetary policy will make emerging economies more differentiated from developed economies.

The growth of emerging economies is sluggish, while developed economies are picking up on the east side of the decline in commodities and gold prices.

Emerging economies should speed up the adjustment of their economic structure and enhance their ability to resist risks, and rely on external forces to turn to internal forces to drive growth.