29/12/2014: Some Tough Data from Moscow: Growth & Ruble

Couple of reminders that the Russian crisis is not over, yet.

November GDP figures show GDP down 0.5% y/y - the first month of decline since October 2009. In October 2014, growth was +0.5% and 0.1% m/m. November m/m posted a decline of 0.2%. All figures hereinafter are seasonally adjusted and working day adjusted.

Decline in November was driven by a broad range of sectors: industry, construction, private services, taxes on goods and import duties. Extraction sectors, electricity, water & gas, and retail sales posted positive growth.

Investment fell 1.9% m/m in November. This is before the December currency crisis and two massive interest rates hikes. So expect more red ink here when December figures come out.

January-November overall GDP growth is now down to 0.6%. Seasonally-adjusted construction sector activity was also revised - Q1 2014 posted a revised decline of 2.5% y/y against previous estimate of 2.3%, Q2 2014 posted a decline of 1.6% from an estimated decline of 0.7%, Q3 2014 decline was 0.4% from previously estimated rise of +0.1%. In October, construction sector posted revised m/m growth of 3.5% and in November the sector activity fell 1.5% m/m.

Industrial production posted another month of poor results. In September, industrial activity grew at 1.4% m/m, following by slower 0.2% growth in October, and a decline of -0.9% m/m in November.

Real personal disposable incomes fell 4.6% in Q1 2014, rose 3.3% in Q2 2014 and 1.7% in Q3 2014. In November, real disposable income fell 2.9% m/m, having posted growth of 2.4% m/m in October. We can certainly expect further and deeper declines in December on foot of massive increases in interest rates and a drop in Ruble valuations.

Retail sales rose 0.2% in November, after posting 0% growth in October.

Unemployment remains unchanged at 5.2% - the rate that has been steady for the last 6 months.

Exports of goods in November reached USD37.6 billion representing a decline of 19.7% y/y and 7.1% drop m/m. Imports of goods in November stood at USD23.2 billion, down 22.1% y/y and a decline of 13.5% m/m. So despite sharper decline in imports in percentage terms, trade balance deteriorated from USD17.0 billion in November 2013 to USD14.4 billion in November 2014.

Full year trade figures estimates are charted below:

As suggested on this blog, imports declines are expected to run deep: 8.4% y/y in 2014 against expected exports decline of 3.0%. The result is the forecast increase in trade surplus of USD11.5 billion or 7.0% y/y.

Largely unrelated to the above news, Ruble seems to have reversed some of the gains made last week and is down some 9.4% against USD and Euro on lower oil prices:

Credit: @Schuldensuehner:

Euro chart:

The point is - last week's measures are temporary in their nature:

• 17% interest rates cannot be sustained without completely demolishing banks balancesheets, companies and households;
• Convincing larger corporates to cut their forex deposits will have at most short-run effect, as demand for forex is likely to ramp up due to debt maturity in Q1 2015.
• Threats of investigations and pursuit of 'speculative transactions' will do preciously nothing as most of trade will be coming via ex-Russia intermediaries.
• Massive spike in interventions from the CBR are not sustainable, given the pressures on reserves from the banks, debt redemptions and corporates/investment.

Meanwhile, core weaknesses in the economy and oil price dynamics will remain. And with them, there will be continuous pressure on the Ruble.

28/12/2014: Oil Prices: USD70bbl in 2015?.. May be so...

Forecasting oil prices is a rather tough job, especially if we are witnessing a regime change, rather than a temporary glitch in the markets. Nonetheless, here is the set of forecasts from the markets (options), forecasters (consensus) and Goldman Sachs:

Noticeable features: all, but futures markets bets are starting to converge in H2 2015. End-of-2015 forecasts are pretty close for Goldman and Bloomberg survey.

A bit more detailed reporting on forecasts here: http://uk.businessinsider.com/r-oil-prices-likely-to-rebound-in-second-half-of-2015-reuters-poll-2014-12?r=US.

All in, it does appear that USD70 bbl average price for 2015 is not out of line with market consensus, albeit it is not consistent with futures markets contracts.

28/12/2014: Health Impact of Self-Employment

A recent paper by Zhang, Ting and Carr, Dawn, titled "Does Working for Oneself, Not Others, Improve Older Adults' Health? An Investigation on Health Impact of Self-Employment" (American Journal of Entrepreneurship, Volume 7(1), pp. 142-180, 2014. http://ssrn.com/abstract=2512600) "examines the health impact of being self-employed versus working for others among older adults (aged 50 ) and its implications".

Economic reasoning behind the study is straightforward:

1. As authors note, "facing an aging workforce, self-employment at older ages may provide an economic benefit via an alternative to retirement.
2. As authors do not note, self-employment is generally associated with higher levels of stress, induced by income uncertainty, volatility, lack of proper scheduling of vacations and breaks, tax-induced anxiety and other factors that can potentially adversely impact self-employed.
3. Self-employment in older age is becoming increasingly the likeliest prospect for future employment for many workers, especially as economies gear toward services sectors with fast depreciation of skills and increased specialisation.

Despite all of the above, as stated in the paper, "little research has examined the health effects of self-employment in later life."  Zhang and Carr study "comprehensively examines health using a 29-item index to measure the impact of self-employment status on changes in older adults' overall health." The authors provide control for "potential endogeneity and simultaneity issues."

The study finds that "self-employment compared to wage-and-salary jobs result in better health, controlling for job stress and work intensity, cognitive performance, prior health conditions, socioeconomic and demographic factors. This positive self-employment impact stands out in knowledge-based industry sectors. In labor intensive industry sectors such as Durable Goods Manufacturing, self-employed older adults' more gradual retirement seems to result in a health advantage over wage-and-salary employees."

These results are quite interesting from both microeconomic and macroeconomic perspective. Self-employment as opposed to full retirement secures more significant pensions cover in older age, coincident with poorer health and greater demand for healthcare. It is also, it seems, reduces cost of healthcare in the first years of retirement. In addition, self-employment of older workers suggests that ageing demographics impact on aggregate growth and productivity growth can be mitigated in the Western societies, if there is an improved system of incentives for older workers to transition into retirement more gradually, over longer time.

28/12/2014: Unhappy Cities

According to a new paper published by NBER, "there are persistent differences in self-reported subjective well-being across U.S. metropolitan areas, and residents of declining cities appear less happy than other Americans. Newer residents of these cities appear to be as unhappy as longer term residents, and yet some people continue to move to these areas." The question is why?

"While the historical data on happiness are limited, the available facts suggest that cities that are now declining were also unhappy in their more prosperous past. One interpretation of these facts is that individuals do not aim to maximize self-reported well-being, or happiness, as measured in surveys, and they willingly endure less happiness in exchange for higher incomes or lower housing costs. In this view, subjective well-being is better viewed as one of many arguments of the utility function, rather than the utility function itself, and individuals make trade-offs among competing objectives, including but not limited to happiness."

While this sounds very plausible, an interesting follow up question is: what happens to new movers when they get better offers elsewhere or once they retire or their employment terminates? Do these newcomers leave? Do they attempt to secure new employment in the area? Do they engage in entrepreneurship whilst in their employment or after?

The reason why these questions are pivotal is that human capital is like other forms of capital: once it is mobile, it moves to higher returns on investment, but it also is footloose. Since investment in human capital does not end with current stage employment, loss of past human human via exit from the area is also a loss of future human capital increases. Securing human capital is about as important as attracting it.

For the paper quoted, see: Glaeser, Edward L. and Gottlieb, Joshua D. and Ziv, Oren, Unhappy Cities (July 2014). NBER Working Paper No. w20291. http://ssrn.com/abstract=2471184

27/12/2014: Are Graduate Students Rational?

A fascinating study into expectations formation mechanism for career outlooks by entering doctoral students in the US. Authored by Blume-Kohout, Margaret and Clack, John, titled "Are Graduate Students Rational? Evidence from the Market for Biomedical Scientists" (PLoS ONE 8(12): e82759, December 2013, http://ssrn.com/abstract=2506810) the paper looks into whether entering graduate students make rational choices in selecting specific fields of study, given information available in the jobs markets.

The authors use increases in the U.S. National Institutes of Health (NIH) budget from 1998 through 2003 that in turn also "increased demand for biomedical research, raising relative wages and total employment in the market for biomedical scientists." This should send a signal to incoming students that biomedical research careers prospects have been expanding. This signal is not the same as a signal of what one can expect of the biomedical careers prospects in the future for a number of reasons. Crucially, if at early stages of funding expansion wages and career promotions for those already in biomedical profession were rising fast, any future increase in supply of biomedical professions will reduce earnings and career prospects for future entrants into profession. In other words, current conditions are not identical to future conditions.

This is especially salient in professional fields where studying and research required for qualifying into profession requires a long period of time, such as biomedical field. where "research doctorates in biomedical sciences can often take six years or more to complete."

Hence, in biomedical field, "the full labor supply response to such changes in market conditions is not immediate, but rather is observed over a period of several years."

If prospective students considering entering doctoral studies were rational (in economic sense), they should not tai current conditions in the filed for granted and should instead "anticipate these future changes, and also that students take into account the opportunity costs of their pursuing graduate training."

As authors note, "prior empirical research on student enrollment and degree completions in science and engineering (S&E) fields indicates that “cobweb” expectations prevail: that is, at least in theory, prospective graduate students respond to contemporaneous changes in market wages and employment, but do not forecast further changes that will arise by the time they complete their degrees and enter the labor market."

The Blume-Kohout and Clak analysed "time-series data on wages and employment of biomedical scientists versus alternative careers, on completions of S&E bachelor's degrees and biomedical sciences PhDs, and on research expenditures funded both by NIH and by biopharmaceutical firms, to examine the responsiveness of the biomedical sciences labor supply to changes in market conditions."

They find evidence rejecting rational expectations model of students' decision making: "Consistent with previous studies, we find that enrollments and completions in biomedical sciences PhD programs are responsive to market conditions at the time of students' enrollment. More striking, however, is the close correspondence between graduate student enrollments and completions, and changes in availability of NIH-funded traineeships, fellowships, and research assistantships."

In other words, state-funded research can contribute to over-production of future doctoral graduates later in the period of increased funding, exacerbating future wages downturns for later stage doctoral graduates, and at the same time fuel increased inflows of new entrants into profession.

27/12/2014: Geography of the Euro Area Debt Flows

The debate about who was rescued in the euro area 'peripheral' economies banking crisis will be raging on for years to come. One interesting paper by Hale, Galina and Obstfeld, Maurice, titled "The Euro and the Geography of International Debt Flows" (NBER Working Paper No. w20033, see http://www.nber.org/papers/w20033.pdf) puts some facts behind the arguments.

Per authors, "greater financial integration between core and peripheral EMU members had an effect on both sets of countries. Lower interest rates allowed peripheral countries to run bigger deficits, which inflated their economies by allowing credit booms. Core EMU countries took on extra foreign leverage to expose themselves to the peripherals. The result has been asset-price bubbles and collapses in some of the peripheral countries, area-wide banking crisis, and sovereign debt problems."

The causes explained, the paper maps out "the geography of international debt flows using multiple data sources and provide evidence that after the euro’s introduction, Core EMU countries increased their borrowing from outside of EMU and their lending to the EMU periphery."

So braodly-speaking, core euro area economies funded excesses. Hence, in any post-crisis rescue, they were the beneficiaries of transfers from the 'peripheral' economies and taxpayers.

Some details.

According to Hale and Obstfeld, "one mechanism generating the big current account deficits of the European periphery could be summarized as follows: after EMU (and even in the immediately preceding years), compression of bond spreads in the euro area periphery encouraged excessive borrowing by these countries, domestic lending booms, and asset price inflation. We further argue that a substantial portion of the financial capital flowing into the European periphery was intermediated by the countries in the center (core) of the euro area, inflating both sides of the balance sheet of the large financial institutions in the euro area core."

So, intuitively, lenders/funders of the asset bubbles should be bearing some liability. And it would have been the case were the funds transmitted via equity or direct asset purchases (investment from the Core to the 'periphery' in form of buying shares or actual real estate assets). Alas they were not. "These gross positions largely took the form of debt instruments, often issued and held by banks. Thus, EMU contributed not only to the big net deficits of the peripheral countries, but to inflated gross foreign debt liability and asset positions for nonperipheral countries such as Belgium, France, Germany, and the Netherlands – countries that all experienced systemic banking crises after 2007."

Debt, as we know it now, has precedence over equity when it comes to taking a hit in a crisis, and debt is treated on par with deposits. Hence, "the tendency for systemically important banks to increase leverage in line with balance sheet size …implied a substantial increase in financial fragility for these countries’ financial sectors."

In the short run, prior to the crisis, leveraging up from the Core into the 'periphery' had a stimulative effect on asset bubbles. "Four main factors contributed to the suppression of bond yields in the European periphery after the introduction of the euro.
- First, the risk of investing in the European periphery declined with the advent of the euro due to investor assumptions (perhaps erroneous) about future political risks, including the possibility of official bailouts.
- Second, transaction costs declined and currency risk disappeared for euro area investors investing in the periphery countries.
- Third, the ECB’s policy of applying an identical collateral haircut to all euro area sovereigns, notwithstanding their varied credit ratings, encouraged additional demand for periphery sovereign debt by euro area financial institutions, which, moreover, were able to apply zero risk weights to
these assets for computing regulatory capital. The EU’s recent fourth Capital Requirements
Directive continues to allow zero risk weights for euro area sovereign debts, even though the borrowing countries cannot print currency to pay their debts.
- Fourth, financial regulations in the EU were harmonized and the euro infrastructure implied a more efficient payment system though its TARGET settlement mechanism."

Crucially, all four factors combined to reinforce each other giving "…core euro area financial institutions a perceived comparative advantage in terms of lending to the periphery, and this would also likely have affected financial flows from outside to both regions of the euro area.

In line with the above, the authors find:
- "...strong evidence of the increase in the financial flows, both through debt markets and
through bank lending, from core EMU countries to the EMU periphery."
- "… that financial flows from financial centers to core EMU countries increased, but predominantly due to increased bank lending and not portfolio debt flows.
- "In addition, …evidence from the syndicated loan market that is broadly consistent with the core EMU lenders having a comparative advantage in lending to the GIIPS."

Net conclusion: "The concentration of peripheral risks on core EMU lenders’ balance sheets helped to set the stage for the diabolical loop between banks and sovereigns that has been at the heart of the euro crisis."

Authors quote other sources on similar: “German banks could get money at the lower rates in the euro zone and invest it for a decade in higher yielding assets: for much of the 2000s, those were not only American toxic assets but the sovereign bonds of Greece, Ireland, Portugal, Spain, and Italy. For ten years this German version of the carry trade brought substantial profits to the German banks — on the order of hundreds of billions of euros ... The German advantage, relative to all other countries in terms of cost of funding, has developed into an exorbitant privilege. French banks exploited a similar advantage, given their major role as financial intermediaries between AAA-rated countries and higher yielding debtors in the euro area.” (From Carlo Bastasin, Saving Europe: How National Politics Nearly Destroyed the Euro, Washington, D.C.: Brookings, 2012, page 10.)

Charts below summarise flows from Core markets to 'peripheral' markets

CPIS is stock of portfolio debt claims from CPIS data in real USD:

BISC is stock of total international bank claims from consolidated BIS data in real USD:

BISL Flow is valuation-adjusted flows of total cross-border bank claims from locational BIS data in real USD:

And conclusions: "Not only did peripheral countries borrow more after EMU; in addition, financial institutions in the core of the euro area expanded their balance sheets to facilitate peripheral deficits, thereby increasing their own fragility. This pattern set the stage for the diabolical feedback loop between banks and sovereigns that has been such a powerful driver of the euro area's recent crisis."

So next time someone says that 'periphery' is to be blamed for the causes of the crisis, send them here. for in finance, like in dating, it takes two to tango…

26/12/2014: Household Leveraging and Deleveraging in the U.S.

Household debt deleveraging is one of the key forces currently still working through the Western economies, suppressing investment and spending, and supporting precautionary savings. The U.S., having entered the Great Recession ahead of many other economies, armed with stronger consumer-centric systems of insolvency and personal bankruptcy, and having exited the Great Recession with more robust rates of economic growth than other advanced economies, presents a good example or a case study for this process.

One recent paper, by Justiniano, Alejandro and Primiceri, Giorgio E. and Tambalotti, Andrea, titled "Household Leveraging and Deleveraging" (see FRB of New York Staff Report No. 602: http://ssrn.com/abstract=2229366) does exactly that.

Per authors, "U.S. households' debt skyrocketed between 2000 and 2007, but has since been falling. This leveraging and deleveraging cycle cannot be accounted for by the liberalization and subsequent tightening of mortgage credit standards that occurred during the period." Quite strikingly, the authors show that financial liberalisation does not fully explain the cycle.

Instead, "…the credit cycle is more likely due to factors that impacted house prices more directly, thus affecting the availability of credit through a collateral channel. In either case, the macroeconomic consequences of leveraging and deleveraging are relatively minor because the responses of borrowers and lenders roughly wash out in the aggregate."

Of course, the only reasons for this conclusion are the factors mentioned above: the U.S. personal insolvency and debt resolution regimes are far more benign, allowing for a more orderly and less disruptive 'washing out' of adverse effects of household debt overhang.

26/12/2014: "Iceland: How Could this Happen?"

Always interesting and never ending debate about Iceland v Ireland can only be aided by the following recent paper by Gylfason, Thorvaldur, titled "Iceland: How Could this Happen? (see CESifo Working Paper Series No. 4605: http://ssrn.com/abstract=2398265).

The author "reviews economic developments in Iceland following its financial collapse in 2008, focusing on causes and consequences of the crash. The review is presented in the context of the Nordic region, with broad comparisons also with developments elsewhere on the periphery of Europe, in Greece, Ireland, and Portugal. In some ways, however, Iceland resembles Italy, Japan, and Russia more than it resembles its Nordic neighbors or even Ireland. The paper also considers the uncertain prospects for reforms and restoration as well as the possible effects of the crash on social, human, and real capital and on long-run economic growth."

To add, two charts of my own, really self-explanatory:

26/12/2014: Advanced Economies: Public Debt Explosion 2008-2014

Some interesting insight into the legacy of the Great Recession that we are carrying over into 2015. From the start of 2008 through 2014:

• Average increase in gross debt of all advanced economies was 27.2 percentage points of GDP, with a range from a decrease of 21 percentage points for Norway and an increase of 88.5 percentage points for Ireland. Thus, the average annualised rate of increase in government debt over the period was around 3.47 percentage points of GDP with a range of -2.76 percentage points annualised decline for Norway and a 9.48 percentage points annualised increase in Ireland.
• Average change in the gross government debt of the group of countries where debt declined over the crisis was -12.0 percentage points of GDP. There were only 3 countries in this group.
• Average increase in gross government debt of the group of countries with benign levels of increase (levels of increase consistent roughly with offsetting GDP contraction over the crisis period) was 4.8 percentage points of GDP. There were only 5 countries in this group and only two of these were in Europe, with none (at the time of the crisis onset) being members of the euro area.
• Average increase in gross government debt within the group of countries where debt rises were moderately in excess of contraction in the economy was 16.4 percentage points of GDP.
• Average increase in gross government debt within the group of countries with debt increases significantly in excess of economic contraction was 26.6 percent of GDP.
• Average increase in the government debt within the group of countries with severe debt overhang was 60.4 percentage points of GDP, with a range of increases in this group between 41.6% for the U.S. at the lower end and 88.5% of GDP for Ireland at a higher end.

Chart above summarises these facts and also highlights the extent to which Ireland's government debt increases were out of line with experience in all other countries, including Greece and all other 'peripheral' economies.

The average rise in gross government debt across all peripheral economies 2008-2014 was 56.5 percentage points of GDP (excluding Ireland), which is more than 1/3 lower than that for Ireland. Our closest competitor to the dubious title of worst performing sovereign in terms of debt accumulation is Greece, which experienced a debt/GDP ratio increase almost 1/4 lower than Ireland.

And in case you wonder, our Government's net debt position is not much better:

26/12/2014: The Empirical Evidence on Globalisation

Much has been written around the alternative, and even mainstream media about the perils of globalisation. Not to discount these arguments without a serious treatment, economics mainstream tends, on the other hand, view globalisation as a net positive force for betterment of the economy. Of course, there non-linear transmissions from economics to the broader society, and there are non-linear effects of globalisation on various social and economic agents: there are winners and losers in the process.

Here is an interesting paper that looks at the core macroeconomic consequences of globalisation. Potrafke, Niklas' study "The Evidence on Globalization" (see: CESifo Working Paper Series No. 4708: http://ssrn.com/abstract=2425513) surveys the empirical literature on globalisation focusing on the KOF indices of globalisation "…that have been used in more than 100 studies. Early studies using the KOF index reported correlations between globalization and several outcome variables. Studies published more recently identify causal effects."

The evidence shows that "globalization has spurred economic growth, promoted gender equality, and improved human rights. Moreover, globalization did not erode welfare state activities, did not have any significant effect on labor market interaction and hardly influenced market deregulation. It increased however within-country income inequality."

Worth a read. 

25/12/2014: Skilled Immigration and Employment in the U.S.

There is a persistent debate in economics about the effects of migration of the highly-skilled workers on employment prospects and careers of the natives. Here is one interesting study looking at such effects within the context of the targeted immigration programme based on skills within the particular set of sectors - the STEM, or more commonly, Science and Technology.

Kerr, Sari Pekkala and Kerr, William R. and Lincoln, William Fabius, Skilled Immigration and the Employment Structures of U.S. Firms (see arvard Business School Entrepreneurial Management Working Paper No. 14-040: http://ssrn.com/abstract=2354963) "study the impact of skilled immigrants on the employment structures of U.S. firms … [accounting for] the fact that many skilled immigrant admissions are driven by firms themselves (e.g., the H-1B visa)." The authors "find rising overall employment of skilled workers with increased skilled immigrant employment by firm. Employment expansion is greater for younger natives than their older counterparts, and departure rates for older workers appear higher for those in STEM occupations compared to younger worker."

From the point of view of countries, like Ireland, relatively open to immigration of skilled workers, but without a specific skills-based 'filter' (Irish system is open to migrants on the basis of nationality, rather than skills, but has strong selection biases into skills-based immigration due to lack of jobs creation outside the STEM categories of jobs), the above suggests that skills depreciation in the STEM sector can be a problem for the natives. As supply of younger STEM employees from abroad rises, there can be a tendency for displacement of older workers, premature termination or flattening out of careers and, subsequently, lower supply of pensions and income provisions in later years of life.

25/12/2014: Unwinding Western Excesses, Squeezing Emerging Markets

Just in case you need a scary story for the holidays seasons, here's one from economics. Some time ago, we've learned that zero bound (extremely low) interest rates in the advanced economies spell quite a disaster for the emerging markets, where the economies are now suffering from triple pressures: declining commodities prices (on which many emerging markets economies often rely for exports, declining demand for their exports of goods, and declining investment inflows from the advanced economies.

But that's just the beginning. It seems that any unwinding of the QE deployed in the West is likely to hammer the emerging markets more.

Here's a World Bank paper from earlier this year on the topic: Burns, Andrew and Kida, Mizuho and Lim, Jamus Jerome and Mohapatra, Sanket and Stocker, Marc, Unconventional Monetary Policy Normalization in High-Income Countries: Implications for Emerging Market Capital Flows and Crisis Risks (April 1, 2014). World Bank Policy Research Working Paper No. 6830: http://ssrn.com/abstract=2419786

What the authors found is that as "the recovery in high-income countries firms amid a gradual withdrawal of extraordinary monetary stimulus, developing countries can expect stronger demand for their exports as global trade regains momentum, but also rising interest rates and potentially weaker capital inflows. …In the most likely scenario, a relatively orderly process of normalization would imply a slowdown in capital inflows amounting to 0.6 percent of developing-country GDP between 2013 and 2016, driven in particular by weaker portfolio investments. However, …abrupt changes in market expectations, resulting in global bond yields increasing by 100 to 200 basis points within a couple of quarters, could lead to a sharp reduction in capital inflows to developing countries by between 50 and 80 percent for several months."

Wait, we are witnessing this already, in part, as bond prices in a number of emerging economies are following oil prices down. And worse, if the above applies to corporate yields, the same will apply to government yields. Thus, 'normalisation' in the West can yield double shock to debt markets in the emerging economies.

World Bank paper has more on the subject: "Evidence from past banking crises suggests that countries having seen a substantial expansion of domestic credit over the past five years, deteriorating current account balances, high levels of foreign and short-term debt, and over-valued exchange rates could be more at risk in current circumstances. Countries with adequate policy buffers and investor confidence may be able to rely on market mechanisms and countercyclical macroeconomic and prudential policies to deal with a retrenchment of foreign capital. In other cases, where the scope for maneuver is more limited, countries may be forced to tighten fiscal and monetary policy to reduce financing needs and attract additional inflows."

So the best case scenario, sovereign wealth reserves (if any) will be exhausted on 'normalising' the US, UK, Euro Area and Japan, while if none are present, tough luck - the emerging economies are into a tailspin. They'll have to relieve the path of austerity-driven internal devaluations. Just because the West has ramped printing presses up so much, any 'normalisation' is going to be a disaster. If that is not a case of beggar thy poorer neighbour by enriching thy stock markets strategy, then do tell me what is?

And in another paper, "Tinker, Taper, QE, Bye? The Effect of Quantitative Easing on Financial Flows to Developing Countries" the same authors looked at gross financial inflows to developing countries over 2000-2013 (see: World Bank Policy Research Working Paper No. 6820: http://ssrn.com/abstract=2417518).

As above, authors found evidence "for potential transmission of quantitative easing along observable liquidity, portfolio balancing, and confidence channels. Moreover, quantitative easing had an additional effect over and above these observable channels, which the paper argues cannot be attributed to either market expectations or changes in the structural relationships between inflows and observable fundamentals. The baseline estimates place the lower bound of the effect of quantitative easing at around 5 percent of gross inflows (for the average developing economy), which suggests that of the 62 percent increase in inflows during 2009-13 related to changing global monetary conditions, at least 13 percent of this was attributable to quantitative easing. The paper also finds evidence of heterogeneity among different types of flows; portfolio (especially bond) flows tend to be more sensitive than foreign direct investment to our measured effects from quantitative easing."

So broadly-speaking, QE is impacting bond/debt flows and unwinding QE can be a costly proposition for the emerging markets.