It has been more than 10 year after the collapse of 158 year old Lehman Brother. An economic crisis that has sparked Federal Reserve Bank of New York, acting as the agent for the U.S. Treasury, initiated its unprecedented and most controversial monetary policy unconventional Quantitative Easing. Quantitative Easing in a easy way to explain is printing money in electronically virtually in financial market. Like Pavlov’s dogs, stock market responded to the Quantitative Easing by the Federal Reserve by salivating over the juicy rewards ahead. The simple idea is : –
> During the 2007-2008 Economic Crisis, the interest rate is already at 0% so the central bank can’t lower the interest rate anymore ( standard monetary policy response)
> There is never been in any central bank action history to make negative interest rate to consumer. It is illogical to ask someone borrow your money and you are the one who pay interest for them.
>Thus, Quantitative Easing urge Federal Reserve to buy bond in US financial market and eventually injecting virtual electronic money in the economic system.
> But no all big banks and investors agree with formula. There is a big risk to buy bond in a country with zero interest rate and in severe economic crisis.
> So they investing in commodities like oil, soybean, and gold and buying stocks in emerging countries such as Brazil, Indonesia, Malaysia, India, Turkey and Argentina.
>Theoretically ,even with high interest rate of 5-10% in developing nation, the super high demand financial bond market buying in emerging markets had reduce percentage the yield and interest rate of the emerging countries.
The quantitative easing had truly produced an ease economy to developing nation worldwide. With the clashflow money enter the market with huge amount, the stock market trade is skyrocketing. The economy is booming at very fast pace. The greed capitalist investment bankers get their fat paycheck bonus monthly. The currency value of the emerging markets appreciating and profiteering in the investment on the bond and stock market. The economy is totally in healthy and happy moment.
In past few months, the boom seem turn into bust.Th Quantitative Easing is turning into Quantitative Tightening. The reversal process which can be explained as the Federal Reserve deleting all the electronic money (creation from the quantitative easing) in the computerised system of the financial market. Starting from September 2017, The Federal Reserve ‘deleting’ the money with 10 Billion USD every month and gradually until FED “‘deleting’ 50 Billion USD every month at the end of quarter 2018. This has caused massive outflow of cash from emerging markets moving towards back to US and other develop nation. The damage has caused bubble phenomena in stock market where the higher liquidity from foreign investor presence is slowing. All the bond hold buy foreign investor is being sold gradually. This massive outflow portfolio had pressure their own local currencies value against the US dollar. Currencies and asset prices have plunged, with Argentina and Turkey worst hit, but many other emerging economies are suffering collateral damage. Money flowed into their bonds and equities as large global funds sought yields that were extraordinarily low in the developed economies in the wake of the global financial crisis. Local Company who borrowing credit in foreign currency hit hard due to currency appreciation. The current situation now is more or less similar to the Asian Financial Crisis in 1997 where the hot money is flowing back to US and trade war barriers against Japanese product. Tit for tat Trade war between China and USA worsening the damage had been done by the Quantitative Easing now. So there is big question now. Does Emerging Market Financial Crisis is coming?