Tuesday, October 6, 2009

The Debts of the Lenders: South Korea Eyes Interest Rate Raise

Australia was the first G20 state to raise interest rates. It was also the first developed nation to do so. Now, South Korean officials are hinting at a possible rate hike as well . . . by as early as November if possible. The reason?

A booming property market that officials noted,
"'In contrast to advanced countries where real estate prices have collapsed, South Korea's real estate prices have been rising since April, even after undergoing only a small correction."


'We are closely watching details on loans by non-bank financial companies. If their lending is found to reduce the effect of recent measures on banks as concerned, we are preparing more steps.'


So, what does this mean for the US, UK, and other Western nations?

1) Inflation fears are more prevalent among emerging markets than the West. (Australia, despite being classified as a Western nation, has closer proximity to the dynamic economies of East Asia and as such is exposed to the same potential strengths and weaknesses that confront other policymakers there).

2) Commodities as well as emerging market valuations for stocks and bonds are rallying the hardest ahead of similarly placed Western institutions.

Bailout Ben is facing pressure to raise rates too. But such talk is very premature for the US.

To put this into context:

Let’s put this into perspective.

The US savings rate 1 year ago was -1 to -.5% Now it is 5 to 5.5% (depending on who you ask).

That is an increase of over 1000%.

At least 10 years of Greenspan’s monetary excesses need to be worked out. More if you take a longer term view to include the de-linking of gold from the dollar under Nixon.

We have all the necessary tools for inflation (e.g. increase in monetary reserves). But until that money is lent out to the greater economy, then there will be little or no inflation.

The rise in equities, credit, and bond valuations is more a function of institutional fund flows reacting to 9 months of 0% Fed Funds rate and Eurodollar futures >97.

You can read an interesting exchange on the inflation-deflation take here: http://www.nakedcapitalism.com/2009/10/marc-faber-taking-the-inflationista-view-of-macro-events.html#comments

Even though I don't necessarily agree w/the poster, I believe it is important that readers have exposure to all viewpoints.

Keep in mind that most Asian states have a savings SURPLUS - not a deficit. Their problem is excess savings, not consumption. Here in the USA the opposite is true.
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