Capital Inflow & Outflow – Taper Tantrum

Cash inflow & outflow is a strong medium to affect Global Economy. US Federal Reserve decided to hike its benchmark rates by 25 basis points. Several economists seem concerned that this could make capital too expensive for the global economy especially struggling emerging markets.  The question is -  will even small interest rate hikes by the U.S Fed make global capital expensive over the next year .

This activity project Capital inflow and Outflow in Global economy. it is a concern which country or emerging markets take hand in hand.

We can see China’s domestic investment rate declined from 47% of GDP in 2011 to 44.3% in 2015 (IMF estimate).  It is reasonable to expect economies like Japan, rate to low 35% over the next year.  Its seems saving rate will not go down quickly.  We have already seen China saving rate falling from 48.8% to 47.4% between 2011 to 2015. In other words rising consumption will not fully compensate slowing investment. The important perspective is that gap between China’s savings and investment will generate excess savings that will show up as a large current account surpluses. Indeed the surplus has already jumped from 136 billion in 2011 to an estimated 348 billion in 2015. In turn, the surplus will flood the world as capital outflow.

The pipeline of cheap capital from China is potentially so large and persistent that it could hold down the cost of long term global capital even if the US Fed keeps tightening, As the world economy is a closed system, someone will have to run a deficit in order to absorb the excess savings being generated by China. The emerging economies just do not have the capacity. Europe has but does not have to position to spend. This brings back to US world largest economy but remain Political Hurdle.

In other words, The Cost of long term global capital will only rise if the US absorbs most of excess savings emanating from China.

We have seen situation of global economy in period of 2007 to 2009 when financial crisis.

Over all every country monetary policy collectively impact the global economy, exchange rate of currency. Export - Import balance, domestic economy.  It is also decide Capital inflow and Outflow in Global Village.  Here the Question is what about least emerging markets.

 Can emerging markets or small country which economy is struggling to find place in global village?

What about exchange rate of currency of struggling emerging markets?

Developed Countries are making selfish monetary policy. It is ignoring condition of struggling markets. So, it could be that it is a step to demolish the small markets.

What is the role of IMF at this situation?

Capital outflow from large economy of world , can accept by Struggling emerging  markets ?

 At this time it is chaos in global economy, Seems currency war in global village. Need to take collective responsibility by developed countries as well as global financial institution like IMF and world bank .