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Now, as US and China go for tapering, new economic equations and abbreviations would be written.

13 Feb 2014

Commodity Online
When the Quantitative Easing began with the advent of the financial crisis of 2008, little did someone think that it would have in store yet another round of financial issues.

Yes, coupled with easing which saw a deluge of Dollars hitting the markets, the banks in US and Europe brought down the interest rates to the position that it was in effect made to be practically irrelevant. The term, ‘near-zero interest rates’ represented the situation with absolute authenticity.

But after six years of a roller coaster ride, US began to see the return of growth. Easing was tapered and it currently stands at a monthly purchasing of $65 billion in bonds and mortgage backed securities by Fed.

But with the tapering on, financial markets began to look at another possibility, the hiking of interest rates. Till the taper was announced, there was enough scope for sourcing cheap dollar and doing with it, whatever feasible to be done. Now, that age of luxury could soon be over and that made markets to scramble for their money.

Thus all these cheap money invested in stocks and commodities were easily pulled out. Bingo! The year 2014 saw $3 trillion getting wiped away from the global equity markets. Commodities too dropped.

Now, if interest rates are raised, how will those entities that have heavily invested in the physical extraction of commodities be affected? They have already locked their money in various physical assets and goods, like new machines and new mines. Now, with the boom in commodity coming to an end, at least for now, how would those business concerns work the math out?

Some of them may have envisaging an eternal boom, had borrowed heavily. But with China looking like it is on a deliberate path to slowdown, commodities could possibly lose one its great patrons; so could be those businesses that are heavily invested in commodities.

Hence it would send a shudder down the spine when none other than Jim O’Neill, former Goldman Sachs Asset Management chair who coined the term BRICS in 2001 say this, “China is changing; the winners and losers of the new China will be different than before, with commodity producers generally the losers.” 

He believes that Brazil and South Africa would be vulnerable to the rebalancing of Chinese economic manoeuvres. It is because, commodities account for at least 30% of South Africa’s total exports and Brazil’s 45% of exports.

This is adjacent to his statement that, “many [emerging markets] are doing just fine, especially China, Mexico and large swathes of Africa.”

May be Mexico and swathes of Africa would add new alphabets to new terms denoting growth markets.

If US was staging a monetary QE, China through its hoarding mechanism of commodities was carrying out something like a commodity QE! US pumped in Dollars to invigorate growth and China pumped in commodities to accelerate advancement. Now as both of them go for tapering, new economic equations and abbreviations would be written.

A phrase from O’Neill on global economy however is thus a source of little comfort:

“I don’t think there is a crisis.”

(Story image courtesy of digitalart/ freedigitalphotos.net)


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