Over the past 10 years Chinese consumption has declined, investment increased and real interest rates have declined. And interest rate increases have pushed inflation inflation higher.
by Guest Author: James D. Hamilton
The Federal Reserve announced on Wednesday (, ) that it will sell some of its shorter-term assets in order to buy more longer-term assets. Here I assess some of the possible consequences of this move.
The modest effects that one could reasonably anticipate for a measure like operation twist are easily swamped by other developments, and even a sizable effect on 30-year Treasury yields would not in my mind provide a major stimulus. I think the correct interpretation is that the Fed would like to bring some more stimulus, this was something they could do in that direction, so they did it.
But if you were about to drown, I wouldn’t want to count on operation twist as your lifeline to safety.
The tightening of monetary policy over the last year by China, India, and Brazil will cause their domestic economies to slow. Coupled with the slowdown in developed countries, global growth is set to slow for the rest of 2011 and early 2012. The European debt crisis is going to get worse, and it also will have a negative effect on global growth.
The Reserve Bank should consider holding back further rate increases for at least next three months and closely study price behavior lest it has to backpedal later (as it had to do quite embarrassingly in late 2008).
China continues with interest rate hikes to fight inflation but they will be reversed quickly when growth slows. FDI ($105 billion in 2010) is likely partly disguised domestic hot money flows.