Tyndall Monthly Commentary

Following the economically traumatic events of 2008-9, many governments around the world reacted by easing both their fiscal and monetary policies. In terms of their effects, the easing of fiscal policy in the West clearly provided a temporary but, unfortunately, only one-time boost to economic growth in the developed world and it is now also clear that the primary impact of the easier monetary policies in the West was merely to create a revival in asset prices (as investors sought better returns away from the collapsing interest rates offered on bank deposits) and an explosion in capital flows to the emerging markets.

These quite unprecedented (in sheer scale) capital flows to the emerging world were ultimately recycled by the local banking systems into new and, initially at least, economically expansionary credit booms in the developing world. Unfortunately, two years later, it is clear that these credit booms have simply proved to be "inflationary" and distorting for the economies concerned, with the result that many of the emerging market capital flow boom recipients are now significantly overheated and, as a result of their now weaker underlying trade account positions, they have become dependent on continued capital inflows from the West at a time in which the West's ability to provide these capital flows has been diminished by the Euro crisis. For example, Brazil's economy (despite its commodity wealth) is now running a significant current account deficit as a result of the surge in imports that was occasioned by the credit boom that itself resulted from the initial surge in capital inflows. The existence of this deficit implies that Brazil must now "borrow" or source foreign savings to finance its negative trade gap, thereby implying that it has gone from being a simple recipient of capital flows to a country that is dependent on them, a situation that it must now address if it is to improve its long-term economic prospects and move its economy onto a more sustainable path.

Meanwhile, in the Western economies, it is also clear that the huge stimulus that was provided to the domestic economies by the equally unprecedented coordinated fiscal easing of 2009 has not only ceased, it has begun to reverse as austerity has become the new buzzword in policy circles. Many governments now fear that they could become the "next Greece" if they do not control their levels of government borrowing and, particularly in the other members of the Eurozone, this has led to an acute and again unprecedented coordinated tightening of fiscal policy, even as many of the OECD's household sectors have continued to wrestle with their own balance sheet problems.