Perhaps being deprived of incoming data has set my mind too far toward conspiratorial, but there were a few developments in the global finance realm that piqued my interest.
First, the head of the World Bank basically warned emerging market economies to get their act together in the next few months.
“We think that now emerging market economies have maybe a two- or three-month window and the message we want to send to everybody is now is the time to make the reforms that you need to make.”
It was not an idle assessment, as it was directly linked to the “weaknesses” exposed by dollar tightening over the summer. In other words, since taper is on hold, but only for a few months in the World Bank estimation, the time should be used wisely with a view to future dollar tightness. Not only does that statement expect the Fed to taper, it also expects, absent concrete measures to address structural monetary imbalances, renewed currency crisis (or at least potential for flare-ups).
At the very same global finance meeting, the head of the IMF coincidentally announced approval to use gold “profits” to fund “help” for “low-income nations.” That was a pretty bland and ambiguous statement, but fortunately we have direct historical experience to draw on.
In August 1975, the IMF announced intentions to auction its gold holdings to establish a fund for collapsing currencies in “low income” countries. The first auction took place in June 1976, during the severe 50% price correction in gold. At that time, the IMF was engaging in a humiliating bailout of the UK, initiating dollar swap lines with the Bank of England. That left few dollars available to emerging market nations that were just beginning to suffer under the new debt/swap standard created in the post-gold exchange period.
Maybe it is just coincidence that the World Bank is warning emerging nations, “low income” or not, to get their act together at the same time the IMF has just happened to create a funded mechanism. Then again, as history suggests, maybe it’s not.
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