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IMF puts more pressure on the Fed

Published Wednesday, September 30th, 2015

You do not have to dig very deep to find reasons to be concerned about the health of the global economy. Just ask the IMF and they will hand over a bagful of reasons on a plate. They were at it again yesterday in their twice yearly financial stability report. Anyone buying into their gloom would take all their money off the table, leave it in cash and be satisfied that £100 is worth £99 in one year’s time assuming inflation of 1% or even worth £101 if the items you are inclined to buy fall in price.

In fact if the latest German inflation data is typical of Europe as a whole simply holding cash and doing nothing will see your purchasing power increase with no prospect of capital loss. Where you face the prospect of a huge loss is in emerging markets according to the IMF. Emerging market corporate debt has quadrupled to $18 trillion since 2004 and the IMF warns that “as advanced economies normalise monetary policy, emerging markets should prepare for an increase in corporate failures”.

Defaults, say the IMF, will create a banking crisis and any financial panic will be worsened by a sudden loss of market liquidity creating a steep fall in prices. Liquidity gapping the IMF says has been brought by regulation leading to market making being concentrated in fewer institutions and by the rise in automated trading (see below). The message to the Fed is that a rate increase risks precipitating an emerging-market financial crisis.

to read the rest of the report, please click here

Posted by David Hufton