The
minutes of the Fed has been issued. How should we look at them? When we go back
to the 90s, we can see that the minutes of the Fed are not issued quite often.
So, what happened and why are these minutes issued following the global
financial crisis? As the transparency decreases and the problems get worse, some
persons have started to issue different minutes. What is the purpose of it? The
situation is critical; the interventions need to be diversified, the verbal
intervention alternatives need to be enriched, one must also see it in this
context. Something is happening and the markets are going to exaggerate them.
Consequently, the expectations are being managed. But what are the most
worthwhile things present in the minutes?
There is
no mention of a modification in the calendar of the monetary expansion
reduction. Instead, they are complaining about the market’s optimism and are
very disturbed. They are trying to say that we did not learn our lesson. Obviously
they imply that the message has not been delivered clearly, that the expected
behaviors did not materialize, there’s an abnormal effort to deliver optimism
due to the low volatility and this makes it difficult for the monetary
authority to perform its duties. In the resulting summary, the central banks
are as optimistic as the markets are. We should determine what is optimistic;
you could say that we are pessimistic if we are outside the normal. If you draw
an optimistic picture which is outside the normal, it is called optimistic. And
this has its categories. But what you call the reality, must be accepted as the
normal. Currently, the world has lost so much its direction that they the
normal as pessimistic, they accept as normal a certain dose of optimism; what
they call currently the optimism is to live in a world of dreams. One should
define the Fed’s minutes in this context.
The
markets are so plunged to live in a dream that they are unable to escape from
it. Some institutions are trying to wake them up but they insist in not waking
up. Normally there various activities in the economy and one can also have
casinos in the economy. But not a single state would not want its citizens to
gamble carelessly because it will reduce its future income and thus create
social problems. But today, due to the needs, the world has become the greatest
casino in history and the central banks are at the point of being a part of it.
The central banks are trying to escape from it and issuing some messages but
the markets are not listening to them. As fa as the expectations are concerned,
the verbal intervention is important but they cannot collide nor can they find
the right solution. Those who are in the top decision-making status are aware
of everything but are very helpless in the events before them. Other speakers in
the lower echelon are not in the position of making a decision; their mission
is to believe in what is said and to market it. And there is a question mark on
how much they are aware of this despair. And they insist in continuing to
gamble…
The one
subject that has been persisted upon very often is the wish for the data to
come out very poor from the West. That is, in order to have the interest rates
to remain low for a long time and to have high liquidity, one has hoped that
the figures coming from the developed countries would always be poor. This way,
the money would continue to come and thus permitting this Ponzi scheme to
continue. Despite the occasional poor data coming in, the attitude of the
United States is clear: she doesn't to see the bubble to get bigger and,
consequently, doesn't want the damage to be greater in the future. Currently
they are not at the point of thinking about the functionality of the global
functioning of the world. They are obliged to think for themselves first in
which case, the emerging countries come after. The emerging countries are
forced to fend for themselves. But to lure them into this position will leave
helpless the foreign funds that are coming into these countries, their
governments and their banking systems. But this is not just a problem of the
emerging countries; this is a global problem. A loss of performance in the
emerging countries can shake the world financial system, and this in turn will
affect adversely everyone, developed countries included. The preservation of
today’s standards in the emerging countries may not be possible in the
developed countries too.
The
emerging countries were expecting that the monetary expansion would not be
curtailed, the balance sheet downsizing would be constantly postponed, and the
period of the rise in the interest rates would be set further in time and would
not function as an impairing factor upon the short-term expectations. The only
thing that they wanted to see here was that the economic data of the United
States would not show any sign of recovery or would remain well below the
expectations and thus the Fed would not undertake the aforementioned things and
thus the money would continue to flow into their economy and the corruption and
saving the day would carry on for some time. This wish stems from the fear of
going under in case the developed countries were to stop the monetary
expansion. Of course, there is a group that has taken excessive risks; the
rulers of the country, large groups, in short the system who have constituted
this economic equilibrium based upon excessive risk-taking is very desperate.
We all
have seen what the ECB has done; it undertook repo auctions and monetary
expansion, and provided huge liquidity in order to avoid the further
deterioration of the banking system. Compared to the previous year, we can see
that the government bonds of Italy and Spain that fell to the status of junk
bond have seen a process of appreciation unseen in history; even Portugal and
Greece have profited from this. If these banks (Spain and Portugal) are unable
to pay the bonds despite this favorable environment, then the situation is very
critical. And if these bonds were in the valuation of the previous year, what
would have happened? In this case, the EU joint banking regulations would have
created a bid, serious and very costly distrust. For instance, if the banks in
Spain and Portugal were to face such a situation, then larger sums of money
would be lost in Eastern Europe, mainly in Hungary. This would put the Western
banking system into a more difficult position due to the chain reaction. The
situation is much worse the current one and its costs is substantial. Would
Germany want to assume this cost? Would it be possible to preserve the EU? When
wants to scratch the surface of the affair, the story starts to take different
directions.
How will
this affect the emerging countries? If there is a tendency of a reduction in
the risk-taking towards the emerging countries, the possible consequences of
such an action would be the rise in the exchange rate and the interest rates,
the depreciation of the assets and the beginning of the wearing of the balance
sheets. This is a state of uncertainty and it feeds automatically the risk
aversion. In this case, everyone will exhibit conditioned reflexes and the
price volatility in the market will increase. Since the beginning of this year,
there is a decrease in the capital inflow to emerging countries and this feeds
the risk aversion. We shall start to see this in the coming fall…
