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The following article was published in our article directory on November 8, 2010.
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Emerging Economies Will Begin to Resist the Flood of Liquidity

Article Category: Business

Author Name: xia zihui

Fed expanded the scale of the quantitative easing policy has left a problem in emerging economies, and that is the face of global economic slowdown and liquidity situation of how to deal with flooding?

Last week the Fed expanded the scale of quantitative easing monetary policy of 6000 billion U.S. dollars, and this may not be the end. Some investors may be puzzled by the current market, the Fed faces an uncertain future because of economic growth had to take such aggressive monetary policy, why the stock market still so good?

Who is wrong? No one may be wrong. Harbor such doubts of investors believe that the stock market will inevitably associated with the overall state of the economy, this view a little too absolute. If the market value is the discounted future cash flows, then the most recent period of rising stock market not because of the expected future cash flows will increase, but the discount rate may be significantly reduced.

Over the years the market for reasonably priced stocks argue, if the end of the century appears on the "Fed pricing model" (ie, the stock market value and ten-year bond yields related), lower long-term bond yields could raise the valuation of the stock market. According to this theory, the stock market can rise in times of economic difficulties, as long as investors expect long-term low interest rates and a large supply of liquidity.

Another problem is the huge supply of liquidity can boost economic growth? Answer this question first to make clear whether growth prospects due to lack of liquidity, from the U.S. point of view, is not so. The U.S. listed companies have the cash than any time in history more than the stock is still rising, interest rates at historic lows, even in this environment, companies are still reluctant to carry out large-scale investment. The job market as American consumers and the already depressed high household debt, and no ability to mass consumption.

Downturn in economic prospects and prosperity of the past deformity correction, and not because there is not enough liquidity. America is the so-called liquidity trap that even the massive injection of funds the Central Bank, for the benefits of economic growth will be very limited.

If the real economy can not effectively digest such a huge liquidity, it will only bring a massive injection of funds results, that is, the overall rise in asset prices. And this effect in emerging market economies and the performance of commodity markets will be more apparent.

For emerging markets, this is a very dangerous situation. Japan's experience tells us that once the asset price bubble burst, the economic damage will likely be fatal. This may be the bursting of asset prices from the sudden tightening of liquidity (increase in inflationary pressures forced the developed countries), or simply inflated asset prices, the spontaneous transition of the amendment.

For concerns about asset price bubbles, and finally we might see such a situation, it is busy release on the Federal Reserve, while emerging economies are busy building dams against floods since.

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