Wednesday, March 7, 2012

161 Deflation & double-dip recession ahead; End of $ Hegemony as China issues Yuan Bonds

One despairs at Economists; they can't see things that are plain to ordinary people.

If you ship your factories to Asia, and let all those countries to manipulate currencies and buy your national assets (instead of importing), you're going to end up with Unemployment and Foreign Debt.

It's a recipe for Revolution.

(1) Deflation & double-dip recession as Euro & US credit shrink - Ambrose Evans-Pritchard
(2) Private credit is contracting; trouble ahead - Ambrose Evans-Pritchard
(3) US credit shrinks at Great Depression rate prompting fears of double-dip recession
(4) Spain tips into depression - Ambrose Evans-Pritchard
(5) End of $ Hegemony as China issues Yuan Bonds - Ambrose Evans-Pritchard
(6) Europe's industry federation demands that China let Yuan rise - Ambrose Evans-Pritchard
(7) Euro at $1.50 is 'disaster' for Europe, especially given Yuan-$ peg
(8) Central Banks raise Interest rates to halt Asset rally; yet Real Economy is depressed

(1) Deflation & double-dip recession as Euro & US credit shrink - Ambrose Evans-Pritchard

Deflation fears as Eurozone and US credit contracts

Bank lending to firms and households in the eurozone has fallen for the first time, raising fears of an economic relapse and a slide into deflation next year.

By Ambrose Evans-Pritchard

Published: 8:26PM GMT 27 Oct 2009

Data from the European Central Bank shows that the M3 broad money supply has contracted over the last six months, confounding expectations that ultra-low interest rates would soon boost monetary growth. Loans to the private sector fell 0.3pc from a year earlier, the first such decline since the data started in 1983.

The M3 figures include a wide range of bank accounts. They are watched closely by experts for early warnings about the economy a year or so ahead.

The picture is even starker in America where M3 has shrunk at an annual rate of 6.5pc over the last three months, a pace of contraction not seen since the 1930s. US bank loans have plummeted since May.

Michael Taylor from Lombard Street Research said the eurozone was "blundering towards deflation". Inflation was minus 0.3pc in September, but unevenly distributed. Prices fell 3pc in Ireland, 1.8pc in Portugal, and 1pc in Spain. "All the ingredients are there for deflation next year. At some stage this may start alarm bells ringing at the ECB," he said.

The credit data on both sides of the Atlantic are hard to square with market expectations of a "V-shaped" recovery. Experts at the ECB and the Federal Reserve view the loan contraction as a short-term anomaly caused by the distortions of the crisis, and some have begun to hint that emergency stimuli will be withdrawn soon.

However, an ominous pattern is emerging where excess liquidity from low rates and quantitative easing is flooding into the equity (QE) and bond markets without gaining full traction on the underlying economy. This threatens to become a central banker's nightmare.

Otmar Issing, the ECB's former chief economist, told an Open Europe forum in London that policymakers are entering treacherous waters. "Nobody can be sure that we have a self-sustaining recovery. The challenges facing the ECB are tremendous," he said.

"Money multipliers have collapsed everywhere. What M3 is telling us is that confidence is missing. I don't see any way to stabilise M3 in such circumstances," he said.

Professor Tim Congdon from International Monetary Research called on the ECB to buy state bonds in a blitz of QE to insure against a double-dip recession. He said: "2010 is going to be very difficult."

However, any move to purchase EMU state debt would erode ECB independence and be viewed in Berlin as a monetary bail-out of Club Med countries. "They would enter a political minefield," said Dr Issing.

So far the ECB has confined itself to purchasing €60bn (£54bn) of covered bonds, a pittance compared to the Fed's actions. The assumption is that aggressive QE is not needed because the credit bubble in core Europe was less extreme.

However, there is a heated debate over credit conditions in Germany. Mittelstand family firms complain that the window for fresh loans has slammed shut. Savings banks are tightening credit to meet capital rules agreed at the G20 summit.

A report by Germany's five institutes said it was a error to push banks into raising capital ratios before the recovery is secure. "Financial conditions are likely to worsen further. Banks are facing large write-offs on toxic debt and a rising toll of company insolvencies. There is a major danger that already tight financing conditions could lead to a credit crunch next year," they said.

JP Morgan says European banks may have to raise $78bn (£48bn) in fresh equity over the next six months. BNP Paribas, Unicredit and others have already tapped the market, but some have dragged their feet – even clinging on to Icelandic bank debt at face value. Jürgen Fitschen of Deutsche Bank said lenders would face "major challenges" in the first half of 2010. "We are going to see some pain," he said.

Germany is competitive and will recover. The bigger danger lies in the South. Italy's public debt will reach 125pc of GDP next year. The country risks a compound interest trap. Nations can endure high debt, or deflation: both together are toxic.

(2) Private credit is contracting; trouble ahead - Ambrose Evans-Pritchard

Money figures show there's trouble ahead

Private credit is contracting on both sides of the Atlantic. The M3 money data is flashing early warning signals of a deflation crisis next year in nearly half the world economy. Emergency schemes that have propped up spending are being withdrawn, gently or otherwise.

By Ambrose Evans-Pritchard

Published: 8:48PM BST 26 Sep 2009

Unemployment benefits have masked social hardship unto now but these are starting to expire with cliff-edge effects.The jobless army in Spain will be reduced to €100 a week; in Estonia to €15.

Whoever wins today's elections in Germany will face the reckoning so deftly dodged before. Kurzarbeit, that subsidises firms not to fire workers, is running out. The cash-for-clunkers scheme ended this month. It certainly "worked".

Car sales were up 28pc in August, but only by stealing from the future. The Center for Automotive Research says sales will fall by a million next year: "It will be the largest downturn ever suffered by the German car industry."

Fiat's Sergio Marchionne warns of "disaster" for Italy unless Rome renews its car scrappage subsidies. Chrysler too will see some "harsh reality" following the expiry of America's scheme this month. Some expect US car sales to slump 40pc in September.

Weaker US data is starting to trickle in. Shipments of capital goods fell by 1.9pc in August. New house sales are stuck near 430,000 – down 70pc from their peak – despite an $8,000 tax credit for first-time buyers. It expires in November.

We are moving into a phase when most OECD states must retrench to head off debt-compound traps.

Britain faces the broad sword; Spain has told ministries to slash 8pc of discretionary spending; the IMF says Japan risks a funding crisis.

If you look at the sheer scale of global stimulus this year, what shocks is how little has been achieved. China's exports were down 23pc in August; Japan's were down 36pc; industrial production has dropped by 23pc in Japan, 18pc in Italy, 17pc in Germany, 13pc in France and Russia and 11pc in the US.

Call this a "V-shaped" recovery if you want. Markets are pricing in economic growth that is not occurring.

The overwhelming fact is that private spending has slumped in the deficit countries of the Anglosphere, Club Med, and East Europe but has not risen enough in the surplus countries (East Asia and Germany) to compensate. Excess capacity remains near post-war highs across the world.

Yet hawks are already stamping feet at key central banks.

Are they about to repeat the errors made in early 2007, and then again in the summer of 2008, when they tightened – or made hawkish noises – even as the underlying credit system fell apart?

Fed chairman Ben Bernanke spoke in April 2008 of "a return to growth in the second half of this year", and again in July 2008 that growth would "pick up gradually over the next two years".

He could only have thought such a thing if he was ignoring the money data. Key aggregates had been in free-fall for months.

I cited monetarists in July 2008 warning that the lifeblood of the Western credit was "draining away". For whatever reason (the lockhold of New Keynesian ideology?) the Fed missed the signal.

So did the European Central Bank when it raised rates weeks before the Lehman collapse, blathering about a "1970s inflation spiral."

Yes, the money entrails can mislead. The gurus squabble like Trotskyists. But you ignore the data at your peril.

Tim Congdon from International Monetary Research says that US bank loans have been falling at an annual pace of almost 14pc since early Summer: "There has been nothing like this in the USA since the 1930s."

M3 money has been falling at a 5pc rate; M2 fell by 12pc in August; the Commercial Paper market has shrunk from $1.6 trillion to $1.2 trillion since late May; the Monetary Multiplier at the St Louis Fed is below zero (0.925). In Europe, M3 money has been contracting at a 1pc rate since April.

Private loans have fallen by €111bn since January. Whether you see a credit crunch in Euroland depends where you sit. It is already garrotting Spain. Germany's Mittelstand says it is "a reality", even if not for big companies that issue bonds. The Economy Ministry is drawing up plans for €250bn in state credit, knowing firms will be unable to roll over debts.

Bundesbank chief Axel Weber sees no crunch now, yet fears a second pulse of the crisis this winter. "We are threatened by stress from our domestic credit industry through the rise in the insolvency of firms and households," he says.

Draw your own conclusion. Western central banks will have to "monetize" deficits on a huge scale to stave off debt deflation. The longer they think otherwise, the worse it will be.

(3) US credit shrinks at Great Depression rate prompting fears of double-dip recession

Both bank credit and the M3 money supply in the United States have been contracting at rates comparable to the onset of the Great Depression since early summer, raising fears of a double-dip recession in 2010 and a slide into debt-deflation.

By Ambrose Evans-Pritchard, International Business Editor

14 Sep 2009

Professor Tim Congdon from International Monetary Research said US bank loans have fallen at an annual pace of almost 14pc in the three months to August (from $7,147bn to $6,886bn).

"There has been nothing like this in the USA since the 1930s," he said. "The rapid destruction of money balances is madness."

The M3 "broad" money supply, watched as an early warning signal for the economy a year or so later, has been falling at a 5pc annual rate.

Similar concerns have been raised by David Rosenberg, chief strategist at Gluskin Sheff, who said that over the four weeks up to August 24, bank credit shrank at an "epic" 9pc annual pace, the M2 money supply shrank at 12.2pc and M1 shrank at 6.5pc.

"For the first time in the post-WW2 [Second World War] era, we have deflation in credit, wages and rents and, from our lens, this is a toxic brew," he said.

It is unclear why the US Federal Reserve has allowed this to occur.

Chairman Ben Bernanke is an expert on the "credit channel" causes of depressions and has given eloquent speeches about the risks of deflation in the past.

He is not a monetary economist, however, and there are indications that the Fed has had to pare back its policy of quantitative easing (buying bonds) in order to reassure China and other foreign creditors that the US is not trying to devalue its debts by stealth monetisation.

Mr Congdon said a key reason for credit contraction is pressure on banks to raise their capital ratios. While this is well-advised in boom times, it makes matters worse in a downturn.

"The current drive to make banks less leveraged and safer is having the perverse consequence of destroying money balances," he said. "It strengthens the deflationary forces in the world economy. That increases the risks of a double-dip recession in 2010."

Referring to the debt-purge policy of US Treasury Secretary Andrew Mellon in the early 1930s, he added: "The pressure on banks to de-risk and to de-leverage is the modern version of liquidationism: it is potentially just as dangerous."

US banks are cutting lending by around 1pc a month. A similar process is occurring in the eurozone, where private sector credit has been contracting and M3 has been flat for almost a year.

Mr Congdon said IMF chief Dominique Strauss-Kahn is wrong to argue that the history of financial crises shows that "speedy recovery" depends on "cleansing banks' balance sheets of toxic assets". "The message of all financial crises is that policy-makers' priority must be to stop the quantity of money falling and, ideally, to get it rising again," he said.

He predicted that the Federal Reserve and other central banks will be forced to engage in outright monetisation of government debt by next year, whatever they say now.

(4) Spain tips into depression - Ambrose Evans-Pritchard

Spain tips into depression

Spain is sliding into a full-blown economic depression with unemployment approaching levels not seen since the Second Republic of the 1930s and little chance of recovery until well into the next decade, according to a clutch of reports over recent days.

By Ambrose Evans-Pritchard

Published: 10:28PM BST 24 Sep 2009

The Madrid research group RR de Acuña & Asociados said the collapse of Spain's building industry will cause the economy to contract for the next three years, with a peak to trough loss of over 11pc of GDP. The grim forecast is starkly at odds with claims by premier Jose Luis Zapatero, who still says Spain's recession will be milder than elsewhere in Europe.

RR de Acuña said the overhang of unsold properties on the market, or still being built, has reached 1,623,000 . This dwarfs annual demand of 218,000, and will take six or seven years to clear. The group said Spain's unemployment will peak at around 25pc, comparable to the worst chapter of the Great Depression.

Spanish workers typically receive 50pc to 60pc of their former pay for eighteen months after losing their job. Then the guillotine falls. Spain's parliament has rushed through a law guaranteeing €420 a month for long-term unemployed, but this will not prevent a social crisis if the slump drags on.

Separately, UBS said unemployment will reach 4.8m and may go as high as 5.4m if the job purge in the service sector gathers pace. There is the growing risk of a "Lost Decade" akin to Japan's malaise after the Nikkei bubble.

Roberto Ruiz, the bank's Spain strategist, said salaries must fall by 10pc in real terms to regain lost competitiveness, replicating the sort of wage squeeze seen in Germany after reunification.

There is no sign yet that either Spanish trade unions or the Zapatero government are ready for such draconian measures. Talks between the unions and Spain's industry federation (CEOE) broke down in acrimony in July.

Mr Ruiz said the construction sector will shrink from 18pc of GDP at the peak of the boom to around 5pc, making it unlikely that there will be any significant recovery before 2012. Even then growth will be "slow, weak, and fragile".

The Spanish government can do little to cushion the downturn. "The room for manouvre in fiscal policy has been exhausted," said Mr Ruiz.

The rocketing cost of jobless benefits has added 3pc of GDP to the budget deficit. Mr Zapatero has ordered all ministries to cut 8pc of discretionary spending to help plug the gap left by collapsing tax revenues. The axe is likely to fall on research and big projects such as high-speed railways. ...

(5) End of $ Hegemony as China issues Yuan Bonds - Ambrose Evans-Pritchard

China calls time on dollar hegemony

You can date the end of dollar hegemony from China's decision last month to sell its first batch of sovereign bonds in Chinese yuan to foreigners.

By Ambrose Evans-Pritchard
Published: 7:33PM BST 06 Oct 2009

Beijing does not need to raise money abroad since it has $2 trillion (£1.26 trillion) in reserves. The sole purpose is to prepare the way for the emergence of the yuan as a full-fledged global currency.

"It's the tolling of the bell," said Michael Power from Investec Asset Management. "We are only beginning to grasp the enormity and historical significance of what has happened."

It is this shift in China and other parts of rising Asia and Latin America that threatens dollar domination, not the pricing of oil contracts. The markets were rattled yesterday by reports – since denied – that China, France, Japan, Russia, and Gulf states were plotting to replace the Greenback as the currency for commodity sales, but it makes little difference whether crude is sold in dollars, euros, or Venetian Ducats.

What matters is where OPEC oil producers and rising export powers choose to invest their surpluses. If they cease to rotate this wealth into US Treasuries, mortgage bonds, and other US assets, the dollar must weaken over time.

"Everybody in the world is massively overweight the US dollar," said David Bloom, currency chief at HSBC. "As they invest a little here and little there in other currencies, or gold, it slowly erodes the dollar. It is like sterling after World War One. Everybody can see it's happening."

"In the US they have near zero rates, external deficits, and public debt sky-rocketing to 100pc of GDP, and on top of that they are printing money. It is the perfect storm for the dollar," he said.

"The dollar rallied last year because we had a global liquidity crisis, but we think the rules have changed and that it will be very different this time [if there is another market sell-off]" he said.

The self-correcting mechanism in the global currency system has been jammed until now because China and other Asian powers have been holding down their currencies to promote exports. The Gulf oil states are mostly pegged to the dollar, for different reasons.

This strategy has become untenable. It is causing them to import a US monetary policy that is too loose for their economies and likely to fuel unstable bubbles as the global economy recovers.

Lorenzo Bini Smaghi, a board member of the European Central Bank, said China for one needs to bite bullet. "I think the best way is that China starts adopting its own monetary policy and detach itself from the Fed's policy."

Beijing has been schizophrenic, grumbling about the eroding value of its estimated $1.6 trillion of reserves held in dollar assets while at the same time perpetuating the structure that causes them to accumulate US assets in the first place – that is to say, by refusing to let the yuan rise at any more than a glacial pace.

For all its talk, China bought a further $25bn of US Treasuries in June and $25bn in July. The weak yuan has helped to keep China's factories open – and to preserve social order – during the economic crisis, though exports were still down 23pc in August. But this policy is on borrowed time. Reformers in Beijing are already orchestrating a profound shift in China's economy from export reliance (38pc of GDP) to domestic demand, and they know that keeping the dollar peg too long will ultimately cause them to lose export edge anyway – via the more damaging route of inflation.

For the time being, Europe is bearing the full brunt of Asia's currency policy. The dollar peg has caused the yuan to slide against the euro, even as China's trade surplus with the EU grows. It reached €169bn (£156bn) last year. This is starting to provoke protectionist rumblings in Europe, where unemployment is nearing double digits.

ECB governor Guy Quaden said patience is running thin. "The problem is not the exchange rate of the dollar against the euro, but rather the relationship between the dollar and certain Asian currencies, to mention one, the Chinese Yuan. I say no more."

France's finance minister Christine Lagarde said at the G7 meeting that the euro had been pushed too high. "We need a rebalancing so that one currency doesn't take the flak for the others."

Clearly this is more than a dollar problem. It is a mismatch between the old guard – US, Europe, Japan – and the new powers that require stronger currencies to reflect their dynamism and growing wealth. The longer this goes on, the more havoc it will cause to the global economy.

The new order may look like the 1920s, with four or five global currencies as regional anchors – the yuan, rupee, euro, real – and the dollar first among equals but not hegemon. The US will be better for it.

(6) Europe's industry federation demands that China let Yuan rise - Ambrose Evans-Pritchard

Europe's industry slams China over currency

Europe's industry federation has called for urgent measures to cap the surging euro after it blasted through $1.50 against the US dollar and 10.25 against China's yuan on unexpectedly strong data from Germany.

By Ambrose Evans-Pritchard

Published: 7:25PM GMT 09 Nov 2009

"I am deeply concerned about recent exchange rate developments," said Jurgen Thumann, president of Business Europe, the pan-EU lobby.

"An overvalued euro is not good news for growth and is inconsistent with the commitments of the G20 countries for an orderly resolution of global imbalances. We must insist that our partners honour their commitments."

He was addressing his words directly to top officials from the European Central Bank and the Eurogroup in Brussels.

China has held the yuan fixed to the dollar despite its huge trade surplus through vast purchases of foreign bonds. This has allowed it to flood Europe with cheap exports, gaining market share on the coat-tails of dollar devaluation.

Mr Thumann called on EU leaders to "push the message" in Beijing that China must let the yuan rise.

There is growing irritation over the apparent insouciance of EU officials in the face of the euro's 24pc rise against the dollar/yuan since March.

China's central bank governor, Zhou Xiaochuan, let slip at the G20 summit that global pressure for yuan appreciation "is not that big".

Germany has so far seemed able to shrug off the currency effects. Exports jumped 3.8pc in September from a month earlier.

However, a study by Ansgar Belke from Duisburg University found that even Germany has clear limits. Berlin's pleasure in the muscular performance of the euro is likely to prove "nasty, brutish, and short", he said.

"Firms with standard products exposed to the biting winds of international competition have a huge problem with a strong euro," he said. Germany's small and medium-sized family firms produce locally and cannot switch plant abroad. Currency hedging is complex and costly.

Mr Belke said the "pain threshold" varies by sector but overall demand for German goods will "fall dramatically" if the euro goes above $1.55 for long. Furthermore, it will do lasting damage as firms lose their global foothold. Many will struggle to re-enter these markets even if the euro falls again. Currency effects are slow but powerful.

Professor Willem Buiter from the London School of Economics said the ECB has made an error by pushing the euro too high through tight-money policies. "The German export industry has learned to cope by wage restraint and productivity gains. This is not something that other countries can emulate easily," he said. "There is going to be some egregious suffering."

IMF data shows that Spain and Italy are over-valued by more than 30pc.

Germany's car scrappage scheme and a rebound in inventories have lifted the country out of recession but from a very low base. Exports are still down 19pc from a year ago. The Bundesbank says the economy may not regain its former output until 2014.

Recovery is not secure in any case. Private credit in the eurozone contracted for the first time in September.

Germany's Bank Federation has given warning of a "generalized credit crunch" next year due to the delayed effect of rising defaults and G20 pressure for higher capital ratios. Business Europe called on regulators to move carefully as they clamp down on banks. "We have absolutely no idea of the overall impact on our economy," it said.

European firms raise two thirds of their debt from banks, compared with one third in the US. "Company investment in machinery and equipment is already down more than 20pc since last year. We need to reverse this trend rapidly, otherwise we will never get back on our former growth track," it said.

(7) Euro at $1.50 is 'disaster' for Europe, especially given Yuan-$ peg

Euro at $1.50 is 'disaster' for Europe

France has given its clearest indication to date that the surging euro is a threat to Europe's fragile recovery and will not be tolerated for much longer.

By Ambrose Evans-Pritchard

Published: 8:20PM BST 20 Oct 2009

"The euro at $1.50 is a disaster for the European economy and industry," said Henri Guaino, right-hand man of President Nicolas Sarkozy.

The currency has risen 15pc in trade-weighted terms since March, equivalent to six quarter of a percentage-point rises in interest rates. It briefly flirted with $1.50 against the dollar on Tuesday before falling back on intervention fears.

What concerns European policymakers most is the lockstep rise against China's yuan. Beijing has clamped the yuan firmly to the weak dollar for over a year, quietly benefiting from the export advantages. It accumulated $68bn (£41bn) in reserves in September alone as a side-effect of holding down the currency. Fresh reserves are mostly being invested in eurozone bonds, pushing the euro higher.

French finance minister Christine Lagarde said it was intolerable that Europe should "pay the price" for a dysfunctional link between the US and China. "We want a strong dollar, and we have reiterated it again in the strongest manner," she said after this week's Eurogroup meeting. China's trade surplus with the EU reached €169bn (£154bn) last year.

Europe and Japan are now the last two blocs standing as everybody else lets their currencies fall, or takes active measures to hold down the exchange rate -- with "beggar-thy-neighbour" echoes of the 1930s.

Brazil has become the latest country to intervene, resorting to controls to cap the real after its 42pc rise against the dollar since March. It is imposing a 2pc tax on flows into bond and equity markets. Finance minister Guido Mantega said the move was to head off an asset bubble. Critics called it a "desperate move" that would distort markets.

Hans Redeker, currency chief at BNP Paribas, said the strong real is "eating away" at Brazil's manufacturing base. "They are not willing to take any more of the adjustment burden as long as China and other surplus countries do nothing," he said.

Switzerland is openly intervening to hold down the franc in order to stave off deflation. Canada and New Zealand have talked down their currencies. Britain and Sweden have opted for stealth devaluations.

Korea, Thailand, Taiwan, the Philippines, Indonesia and Russia have all been buying dollars to stem their currencies' rises. The effect is to perpetuate the imbalances that led to the credit bubble from 2004-2007 and ultimately caused the financial crisis. Reserve accumulation fuels asset booms because it creates a wash of liquidity and drives down global bond yields. Asia clearly needs to sharply revalue against the West to right the system.

Professor Michel Aglietta from Paris University says the euro is 40pc above its purchasing parity of level $1.07 (a low estimate), citing it as the reason why Peugeot and Renault have shifted annual production of one million cars to Eastern Europe since 2004.

Airbus is moving plants offshore, building A320 jets in China. It is relying heavily on US contractors for its A350 jet. Fabrice Bregier, Airbus chief financial officer, said the current exchange rate is "becoming very difficult for all industrial companies which have their costs in euros. We can only appeal to monetary authorities to see to it that there is stability in exchange rates."

The European Central Bank could take some of the steam out of the euro by signalling a less hawkish policy. It may be pressured into doing so. EU ministers have the final say on exchange rate under Maastricht, though they have never used this power – publicly.

What is missing is a unified front of EU governments. Italy has been remarkably quiescent, given its export slide. Germany has a higher pain threshold for a strong currency after gaining competitiveness by squeezing wages. But there are limits even in Berlin. The IWK institute says the danger point for German exporters is $1.45.

Jean-Claude Trichet, ECB president, has stepped up his rhetoric against "disorderly" currency moves, warning that authorities on "both sides of the Atlantic" were monitoring the markets. He made an unscheduled appearance on Monday to drive home the point. The body language is changing.

(8) Central Banks raise Interest rates to halt Asset rally; yet Real Economy is depressed

Central banks chill asset rally

The liquidity tide is turning. Authorities across large parts of the world have either begun to tighten the spigot or are taking steps to wean their economies off emergency stimulus. This is a treacherous moment for markets.

By Ambrose Evans-Pritchard

Published: 5:33PM GMT 29 Oct 2009

Oil-rich Norway raised rates a quarter point to 1.5pc on Wednesday, the first European country to move since the crisis. Governor Svein Gjedrem said asset prices have "risen sharply and probably excessively". The Norges Bank is taking pre-emptive action to choke off a property bubble, though manufacturing remains sluggish. The era of "asset targeting" has begun.

Australia took the plunge earlier this month. It dodged recession over the winter and has since been lifted by China's torrid demand for commodities. Israel kicked off in August.

Teun Draaisma, Morgan Stanley's equity strategist, said investors should move with care as central banks awaken. A study of 19 "bear market" rallies over recent decades shows that bourses tend to tip over as the US Federal Reserve starts tightening. Equities fall back 25pc over the next 13 months on average. It is unlikely to be better this time.

"Given the amount of leverage in the economy, little changes in rates can have a disproportionate impact. The poor state of government finances, the high supply of bonds, and the fear of inflation could further exaggerate a bond market sell-off once tightening starts," he said.

Timing is tricky. Stock markets began to fall four months before the first rate US rise in 2004, but they did not tip over until the tightening started in 1994.

Japan's Nikkei index in the 1990s slumped each time Tokyo drained fiscal stimulus, most notoriously by raising VAT from 5pc to 9pc in 1997 - a warning for Britain as the VAT cut expires in January.

Mr Draaisma thinks global bourses may rise further before peaking, though asks whether it is worth trying to squeeze the last drops of profit from an aging rally. "We expect the sweet spot to last a bit longer. Sentiment is not ultra-bullish yet," he said.

Even so, markets are skittish. Fears of "shock therapy" from the Fed are rising after a string of comments by Fed hawks (not Ben Bernanke) hinting that rates may come sooner and harder than expected. There is little doubt that the spike in yields on 10-year US Treasuries above 3.5pc on Monday - rasing the benchmark cost of money for the global system - was a trigger for Wall Street's sell-off this week.

Funds are fretting as the Fed winds down its programme to cap bond rates through "credit easing". The $300bn (£181bn) blitz on Treasury debt ended yesterday: the $1.25bn purchase of mortgage debt expires in March.

Rob Carnell from ING said the Fed risks a serious error if it backs away from its pledge to keep rates ultra-low for an "extended period", as rumoured. "The phrase is dynamite. It should be handled with extreme caution," he said.

John Higgins from Capital Economics said the Fed soaked up 39pc of the total $719bn in net debt raised by Washington between April and September. "With vast quantities of issuance still required for financing the budget deficit, investors are nervous," he said. The hope is that commercial banks will fill the Fed's shoes.

Chartists had their own reasons for taking profits. The S&P 500 index of stocks has hit resistance after regaining half the losses of the bear market, a key technical barrier. A dive in the US Conference Board's confidence index and a relapse in US homes sales did the rest.

Meanwhile, Asia is preparing a cool douche for markets. In a sense, this as a sign of strength. The lost output of the crisis has been recouped in the region (bar Japan). China and Korea are on fire.

But it poses a risk to speculative plays. India's central bank has ordered lenders to boost reserves to choke off liquidity, a precursor to rate rises. Singapore, Korea, Hong Kong, and Taiwan have begun to rein in property booms.

China's bank regulator curbed consumer loans this week. Qin Xao, head of China Merchants Bank, said the country's property and stock markets are in danger of spiralling out of control after loan growth of $1.27 trillion over the last nine months. "It is urgent that China shifts from a loose monetary policy stance to a neutral one," he said.

The core problem is that near-zero rates in the West are too low for the catch-up economies of the Pacific region, Mid-East, and Latin America. Dollar liquidity is sloshing through the emerging world. This is what happened in the early 1990s when Fed stimulus caused Mexico and others with dollar pegs to overheat, leading to the tequila crisis two years later. The scale is greater this time.

Beijing may soon find that the advantages of holding down the yuan to gain export share - "stealing jobs", says Nobel economist Paul Krugman - is outweighed by loss of control over prices. Variants of this story are occurring in over 40 countries linked to the dollar.

There was a time when it was enough to watch the Fed and Europe's central banks for clues on the global credit cycle. Now we must pay close attention to Asian and Latin tigers as well. They are already growling.

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