• by Yilmaz Akyuz
• Tuesday, August 02, 2011
• Inter Press Service

As in previous episodes, a key factor in the current boom in capital flows to developing and emerging economies (DEEs) is a sharp cut in interest rates and a rapid expansion of liquidity in the major advanced economies (AEs), notably the US, writes Ylmaz Akyuz, chief economist of the South Centre.

In this article, the author writes that this first occurred in a coordinated way after an agreement at the April 2009 G20 summit in London as a countercyclical response to the crisis. In the US, the strong growth of nearly 4 percent in the first quarter of 2010 slowed to less than 2 percent in the second quarter and the US Federal Reserve initiated another round of quantitative easing, purchasing long-term treasuries and other securities. Although the declared objective was to stimulate private spending by lowering long-term interest rates and raising asset values, this move has also been widely seen as an effort to weaken the dollar and stimulate exports.

However, the rapid expansion of liquidity has not translated into a significant increase in private lending and spending in the US because of problems on both the supply and demand sides of the credit market. As uncertainty about recovery and stability has continued unabated, banks have not been willing to lend to the private sector but have simply cashed in on the differentials between short- and long-term rates and looked for profit opportunities abroad. Excess liquidity has spilled over globally in a search of yields in DEEs, many of which have been put on the defensive in response to what is widely seen as a competitive devaluation by the US. These changes have important consequences for the vulnerability of DEEs to boom-bust cycles.

© Inter Press Service (2011) — All Rights Reserved. Original source: Inter Press Service

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