Daily Archives: November 2, 2009

Krishna Guha

What do you do if you are an emerging market facing massive capital inflows that risk inflating the next round of bubbles? Brazil’s decision to impose a 2 per cent tax on short-term flows has been widely criticised and with good reason. Companies and investors will structure transactions that bypass the tax. The 2 per cent surcharge is anyway small relative, for instance, to the volatility in Brazil’s Real and may not provide much of a deterrence to a perceived one-way bet.

The problem is that while I think the inflow tax will not work, I struggle to see what the alternatives are. One way to prevent a domestic asset price bubble is to allow the currency to rise sharply, making domestic assets more expensive to foreigners and creating two-way currency risk in future. But this is very hard to do when other big emerging market exporters such as China are keeping their exchange rates pegged to the dollar. 

The credit crisis discredited – if not disproved – the efficient market hypothesis, which states that all relevant and available information is represented in market prices. George Soros has proposed an alternative theory which has two attributes to recommend it: it both predicted the crisis and preceded it 

Ralph Atkins

French consumer spending is helping the country gain an edge over eurozone rivals, writes Ralph Atkins in a Financial Times blog 

Economics headlines from around the web 

Japan prepares to unwind part of its stimulus package as the IMF warns the country’s debt path is out of control, raising a “real risk” that the country could end up in default. Further echoes of the start of the crisis, as CIT files for bankruptcy, an analyst cautions of further Citi write-downs, and concerns about commercial real estate spread across the Atlantic