The Real News Network has the interview Tapering of Quantitative Easing Is Throwing Emerging Markets into Chaos – And Big Banks Are Getting Richer.
The interview was going along very well, until Jan D’Arista said the following:
But as in every other case, the Asian crisis, etc., and the one that we’re facing today, there’s a tipping point, the tipping point when the exchange rate becomes overvalued. And that means that while imports are cheaper, exports become more expensive, and you develop a current account deficit, meaning the difference between what the country imports and exports widens and it’s exporting less. And, therefore, to make up that difference it has to start using its foreign exchange reserves.
When Jane D’Arista said “And, therefore, to make up that difference it has to start using its foreign exchange reserves” about the trade deficit of the emerging countries, she left an awful lot of the explanation to our imaginations. The main reason why this situation might cause a loss of foreign reserves would be that the countries had pegged the value of their currencies to some external factor like another country’s currency. If the emerging market economies had floating rates, then this would not be so big a problem.
But at the beginning of the paragraph she said “But as in every other case, the Asian crisis, etc., and the one that we’re facing today, there’s a tipping point, the tipping point when the exchange rate becomes overvalued.” That implies that these countries had floating exchange rates. That is also why they had a trade deficit; because their currencies became overvalued.
So why exactly do these countries have to make up for the loss of foreign reserves? Did they start borrowing denominated in foreign currencies? This would be a very dangerous thing to do, but countries or citizens of those countries do seem to do this.
Perhaps the inflow of foreign capital buying up local debt instruments led to an excess of foreign reserves which the countries hated to see diminish when it started flowing out so they thought they had to replace the diminishing foreign reserves?
In any case, it would be nice if the interviewer had caught this, and had asked her to explain.
Maybe one of you astute readers can figure out what she was trying to say.