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Quantitative chaos

Money | The Fed’s bond-buying program is causing global currency gyrations

Issue: "50 years after the bomb," Sept. 21, 2013

One of the unintended consequences of the U.S. Federal Reserve’s $85 billion a month bond-buying program called Quantitative Easing has been the havoc it has created in the international currency markets, especially in emerging countries.

On Aug. 19, for example, Brazil’s real hit a new low of 2.4 to the dollar. That’s a drop of nearly 25 percent in the past six months. On Aug. 22, the Indian rupee was 65.56 to the dollar, down 17 percent this year. In heavily Hindu India, some are looking for supernatural explanations and saying the currency’s new symbol launched on an “inauspicious day.”

But the fault in these currencies is not in the stars but in the U.S. Federal Reserve Bank. “The Fed’s actions are the prime driver” of the currency fluctuations in emerging markets, said Steve Oliner, a resident scholar at the American Enterprise Institute. Artificially low interest rates pushed investors into emerging markets to get the rates of return they were used to. But now that interest rates are rising again, “you can get higher yields in the U.S. without the credit risk,” Oliner said. The result has been a dramatic sell-off of emerging market currencies in favor of the U.S. dollar. Funds that buy Brazilian bonds have seen an outflow of nearly $1 billion since May, according to data provider EPFR Global.

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And these gyrations affect more than currency speculators. They have a disproportionate impact on the poor. “When emerging market economies slow down, the poor in those countries suffer most,” Oliner said. “They do not have the financial reserves to buffer changes in the standard of living.”

Brazil’s central bank has raised interest rates three times in the past year to fight the outflow. So far, the effect has been minimal, except to raise the cost of capital for Brazilians. The U.S. Fed’s actions have essentially trumped all efforts of Brazilians to control their own currency.

The Fed has not said when it will start tapering its $85 billion per month bond-buying program. “Expect next year to be volatile in the financial markets,” Oliner said. “After all, we’re seeing all this and the Fed hasn’t actually done anything yet.”

S car goes

Handout

In June, automaker Tesla Motors outsold other luxury brands in its native California with only one model: the all-electric Model S.

Based on registrations, Tesla outsold Buick, Lincoln, Porsche, Volvo, Jaguar, Land Rover, and Cadillac. And this wasn’t a one-month anomaly. In the first half of 2013, Tesla sold more vehicles in California than Land Rover, Jaguar, Lincoln, Volvo, or Porsche.

This story is significant even for those who can’t afford to spend $109,000 on a car, the sticker price of the basic Model S. The rich people buying these Teslas—“affluent thought leaders,” as Tesla calls them—are financing the development of electric cars with minimal government funding. (In 2009, Tesla did get a $465 million loan from the Department of Energy from a fund designed to accelerate electric car research. It has since repaid the loan.) Tesla’s battery pack, which analysts consider a breakthrough technology because it charges more quickly and holds a charge longer than previous technologies, is already being used in Daimler’s new two-passenger “smart car” as well as Freightliner Trucks’ electric vans.

That’s not to say that Tesla doesn’t still have a long way to go. It will likely sell only 20,000 cars nationwide, barely one-half of 1 percent of the car market. Still, sales were enough to allow the company to post a first-quarter profit this year and continue development of lower-priced models, the first of which it plans to roll out in 2014.

Warren Cole Smith
Warren Cole Smith

Warren, who lives in Charlotte, N.C., is vice president of WORLD News Group and the host of the radio program Listening In. Follow Warren on Twitter @WarrenColeSmith.

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