Capital control, anyone? Emerging markets are taking action to curb currency appreciation. Brazil – whose economy is recovering well – introduced a 2% tax on foreign capital inflows last month, and has just announced a further measure, effective today: there will be a tax on American depositary receipts, which allow foreigners to invest easily in Brazilian stocks. Meanwhile Indonesia has announced possible capital controls, sending its currency sharply lower.
The flight to gold continues, from central bankers and individuals alike. Hedge fund manager John Paulson is to launch a gold fund, investing $250m of his own money. One market strategist suggests India’s recent purchase of 200 tonnes of the precious metal could start a gold run akin to that of the 1970s. During that time, gold prices were so high they almost fully backed the dollar: the same event now would see gold rising to $6,300 a troy ounce. Others scorn the rise of gold, which seems muted when viewed in non-dollar terms. They suggest looking to palladium, platinum or silver (see chart).
As the dollar has fallen, poor returns for non-American investors have been worsened by the exchange rate. Pity the European investor. So continued strength of demand for dollar-denominated bonds is impressive. Debt issued in some other currencies is not faring so well: on Tuesday the Philippine government failed – for the third time this quarter – to raise debt through the sale of local-currency bonds.
US housing starts dropped 10.6% in October. The measure of new houses being built is a good proxy for the quarterly residential investment data, itself the best leading indicator of recovery. Homebuilders are likely selling more homes than they are building, which is saying something: purchase applications are at a 12-year low.
Conflicting data from the UK. Public debt rose by £11.4bn in October, and latest figures show bank lending continued to fall across all major sectors in September (chart). In spite of this, minutes from the Bank of England have revealed they are expecting the highest growth in the UK for 12 years – 2.2% for 2010 and 4.1% for 2011. Furthermore, two of the nine-strong MPC panel did not vote to increase QE, suggesting the panel is relatively optimistic about the economy.
The United States seems less optimistic. Barack Obama has warned of a double-dip recession if public debt is not reined in, just as unemployment payments will need to be extended. Various new bills aimed at limiting the concentration of risk are being considered (bank break-ups; forex central clearing). And California – the state that has been issuing IOUs – is facing a $21bn shortfall before the next fiscal year begins in July 2010 – that’s about the GDP of Iceland.
And the Economist asks – though does not answer – “What will the world look like without the consumption-mad American?” The standard assumption that Chinese consumption will step up to fill the gap is implied by this (excellent) graphic comparing China and the US. But why would the American model continue, long after it had ceased to be of use to America? Surely it is more pertinent to ask what the world will look like without consumption-powered growth.