by Andy Xie/ Morgan Stanley
The global financial system is running the global economy. First, it is maximizing global growth by pushing up the currencies of high-inflation economies to contain their interest rates, which results in credit growth in a lower inflation and lower interest rate environment. Speculative capital funds the resulting current account deficit.
Second, it is keeping down the currencies of low inflation economies, pushing up their asset prices (mainly property and equity) to boost credit demand. Their current account surpluses are tending to shrink.
Third, it is pushing up commodity prices to give developing economies more consumption power. Their current account surpluses are tending to rise. They usually have resource stabilization funds and are the most effective in recycling money back into the deficit economies.
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