Easy Money Is Anything but Easy

Easy money has unintended consequences.

Bank of New York Mellon, the world's largest custody bank, announced that it will begin charging clients for cash balances above $50 million in early August 2011 to cover the cost of surging US dollar deposits. This case is not unique by any means. Deposits at US domestically chartered commercial banks climbed 16% in the 31 months prior to August 2011, while loans fell 6.4% (BW 8/15/2011).

Meanwhile, capital inflow into Brazil has fueled serious inflation and currency appreciation. The rapidly rising and arguably the most over-valued Brazilian Real is hurting the competitive position of local industry in the world market. Office space in Sao Paulo is suddenly more expensive than Manhattan and its bankers and analysts command higher pay than their counterparts in New York (WSJ 9/13/2011).

South Africa, Indonesia, and South Korea are other emerging economies that are facing the onslaught of capital inflows. They must deal with the resulting currency appreciation and asset bubbles (WSJ 10/8/2011).

The thread that links these seemingly disparate events is the easy money policies in the developed countries desperately trying to revive their recession economies. The trouble is that the easy money seems to have landed in the wrong places for the right reason. In the US, the low interest rate that goes with easy money takes away the interest income of savers who could otherwise afford to spend. The US short-term interest rate is now close to zero (BW 8/15/2011). Bankers are reluctant to lend at such low interest rate in an uncertain environment. Cash-rich companies are reluctant to invest when consumers are unwilling to spend.

So the surplus capital is looking for destinations where the interest rates are much higher. Ironically, their higher interest rates are intended to curb inflation, but instead have attracted yield-hungry speculative investors armed with easy money from the developed economies. Even after slashing the interest rate by half a percentage point to stamp its currency appreciation, Brazil's interest rate still stands at 12% (WSJ 9/13/2011).