Apparently, the controversial decision to keep the Bush tax cuts and add a few other incentives for businesses has turned the mood around in the US, and the clouds are at long last dissipating. So when the very man who coined the acronym, BRIC, Jim O’Neill, the London-based chairman of Goldman Sachs Asset Management, is quoted as stating that the situation is “raising issues about the whole allocation of capital between so-called emerging markets and the U.S.,” you know you have a real head-turner on hand.
To cut to the chase, the article sums itself up thusly:
The bottom line: While the U.S. economy may prove surprisingly strong in 2011, the cost of that growth could be increased friction with other countries.
Brazil and China are two of the most heated economies where these frictions have already begun to arise.
On January 1, all eyes were on Dilma Rousseff’s inauguration as president of Brazil. Analysts have been fretting over Brazil’s “unsustainable” levels of public spending, the “most overvalued currency in the world according to Goldman Sachs Group Inc.”
and the increases in taxes on what President Rousseff called “the indiscriminate flow of speculative capital” in her inaugural speech. Their worries were not eased by Rousseff’s pledged to work to prevent the “plague” of inflation from eating away at her country’s economic growth, as her central bank president is expected to raise interest rates even higher to do so, while government spending is expected to remain high.
Other emerging economies are also struggling to balance floods of foreign capital with inflation and currency competitiveness. Their growth is fueling the rise in commodity prices and energy costs, which in turn, fuels their inflation. The currency war instigated by the US Fed’s policy of quantitative easing, which is supposed to help business in the US, but is also the source of the flood of foreign income seeking markets where the lowered value will reap profits, decreases the competitiveness of the other currencies against the dollar for exports on the global market, creating pressure to weaken the currency that can result in crippling cost increases for imports.
Some good news for China is that their tightening of monetary policy and closing of polluting and energy-wasting factories have slowed the pace manufacturing expansion, which should help reduce inflation pressures, to some degree.
While the US Fed has brushed off worries about inflation in its move to improve the economy of the United States, it is a real concern for most other nations in the world. According to the website, tradingeconomics.com, of the nations that they have information about, only Japan, Switzerland, Ireland, and the Nordic countries have inflation rates lower or equal to the US, while the Latin American region fares the worst and the sampling of nations in the Middle East have the next highest inflation rates.
Despite this inflation, some are forecasting that growing prosperity in the BRIC nations translate into great investment opportunities.
We shall see what the New Year brings.
To contact Julie regarding this article, email: julie@expatdailynews.com
Julie R Butler is a traveler, blogger, freelance writer, and editor who has authored several books, self-published as eBooks, including Nine Months in Uruguay and No Stranger to Strange Lands (click here for more info). Please contact Julie for writing or editing assignments at: julierbutler [at] yahoo.com
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