Just a week after the European Central Bank (ECB) said it would implement unlimited bond buying to ameliorate the eurozone’s debt crisis, the US Federal Reserve announced on Thursday that it would launch a new round of bond buying at a pace of US$40 billion a month to prop up the economy in its own region. Most equities and commodities markets around the world moved higher on Friday amid the liquidity-driven euphoria, despite worries over a pickup in inflation expectations in the long haul.
The Fed’s timing on introducing the third round of quantitative easing (QE) was earlier than expected, although speculation about more easing measures had surfaced in recent months. The political factors associated with the upcoming US presidential election might have played an important role in pushing the Fed to make this decision sooner rather than later.
The Fed’s latest plan to purchase US$40 billion in mortgage-backed securities each month in an open-ended effort tied to what happens with the US job market is more flexible than the previous two rounds of QE. This unusual move underlines the grave concern that the US’ central bank has for the state of the US economy, but it also raises questions about the effectiveness of the measure, uncertainties over how long it could last and worries about how high the excess global liquidity triggered by this move could rise.
On the one hand, QE3 could have positive impacts on global stock markets, including Taiwan’s, in the near term. In the previous two rounds of QE, the TAIEX showed an average increase of 17.34 percent in the following six months. One could therefore expect QE3 to have the same positive impact on the local stock market, albeit with a smaller benefit this time because of weakening macro-fundamentals, including the still-weak performance in most European economies and the slowdown in China.
On the other hand, if the Fed sustains QE3 for as long as the US economy remains weak, it could put downward pressure on the US dollar, cause higher appreciation expectations on other currencies and lure potential capital inflows into their markets. The downward pressure on the greenback could also push commodities prices higher — in the previous two waves of QE the Reuters/CRB commodity index increased by 27.9 percent and 19.2 percent respectively, and consequently stoked the risk of global inflation.
In other words, concerns over higher inflation risks might put pressure on Taiwan’s central bank to exercise more credit control to prevent asset bubbles from forming. The nation’s consumer price index already expanded at its fastest pace in four years last month due to sudden rises in vegetable and fruit prices. If industrial product prices also climb higher because of rising commodities costs, Taiwan’s inflation might accelerate above the government’s target, which in turn could delay further relaxation of monetary policies to boost the nation’s weak exports.
Moreover, with the Fed’s QE3 now in place, one should look to see if policymakers in emerging economies adopt intervention measures to pre-empt the potential negative impacts from a surge in capital inflows and currency exchange rates. This means that a global devaluation race could reappear as countries act to protect the competitiveness of their export-oriented industries. However, because the latest QE is open-ended in nature, such currency wars would likely pose a longer-than-expected threat to the full recovery of the global economy.
For Taiwan, the massive bond-buying programs instigated by both the Fed and the ECB will have some impact on the NT dollar’s exchange rates and therefore the central bank is facing a challenge in which it must balance the need to allow the currency to depreciate further to help domestic exporters and maintaining the currency’s strength to be able to fight inflationary pressure.
In their recent op-ed “Trump Should Rein In Taiwan” in Foreign Policy magazine, Christopher Chivvis and Stephen Wertheim argued that the US should pressure President William Lai (賴清德) to “tone it down” to de-escalate tensions in the Taiwan Strait — as if Taiwan’s words are more of a threat to peace than Beijing’s actions. It is an old argument dressed up in new concern: that Washington must rein in Taipei to avoid war. However, this narrative gets it backward. Taiwan is not the problem; China is. Calls for a so-called “grand bargain” with Beijing — where the US pressures Taiwan into concessions
The term “assassin’s mace” originates from Chinese folklore, describing a concealed weapon used by a weaker hero to defeat a stronger adversary with an unexpected strike. In more general military parlance, the concept refers to an asymmetric capability that targets a critical vulnerability of an adversary. China has found its modern equivalent of the assassin’s mace with its high-altitude electromagnetic pulse (HEMP) weapons, which are nuclear warheads detonated at a high altitude, emitting intense electromagnetic radiation capable of disabling and destroying electronics. An assassin’s mace weapon possesses two essential characteristics: strategic surprise and the ability to neutralize a core dependency.
Chinese President and Chinese Communist Party (CCP) Chairman Xi Jinping (習近平) said in a politburo speech late last month that his party must protect the “bottom line” to prevent systemic threats. The tone of his address was grave, revealing deep anxieties about China’s current state of affairs. Essentially, what he worries most about is systemic threats to China’s normal development as a country. The US-China trade war has turned white hot: China’s export orders have plummeted, Chinese firms and enterprises are shutting up shop, and local debt risks are mounting daily, causing China’s economy to flag externally and hemorrhage internally. China’s
During the “426 rally” organized by the Chinese Nationalist Party (KMT) and the Taiwan People’s Party under the slogan “fight green communism, resist dictatorship,” leaders from the two opposition parties framed it as a battle against an allegedly authoritarian administration led by President William Lai (賴清德). While criticism of the government can be a healthy expression of a vibrant, pluralistic society, and protests are quite common in Taiwan, the discourse of the 426 rally nonetheless betrayed troubling signs of collective amnesia. Specifically, the KMT, which imposed 38 years of martial law in Taiwan from 1949 to 1987, has never fully faced its
RSS