Gresham's Law

Here are the updated charts of real interbank rates in Latin America & The Middle East:

 

LATIN AMERICA:

 

Although real rates in Latin America aren’t quite as bearish as those in Asia, Eastern Europe and the Developed World; they nevertheless remain relatively low. Brazil is arguably in better shape, however real rates are downward sloping (and that chart is only updated until Dec-10).

 

THE MIDDLE EAST:

SOUTH AFRICA:

 

The Middle East & Africa generally exhibit bearish dynamics in real interbank rates. Israel and Turkey have real rates that are negative and headed downwards. Whereas South Africa’s real rates are positive but headed downwards.

 

The key thing to note is this:

 

The emerging markets have been the outlet for western capital over the past two years. Since real rates in the west have been undesirably negative, we have sought to own deposits abroad. This has encouraged EM fractional-reserve institutions to lend, and has thus spurred ‘economic growth’. The implication has been generally favorable business conditions in EM countries (as all businessmen are – in a sense – ‘long things’ and ‘short money’). Now that real rates in the Emerging World are broadly negative, the profit-motive that sent western capital abroad has gone. Thus, we should be fearful of a desperate effort to repatriate that capital. If all of those trades are reversed at once, funding currencies could appreciate violently.

 

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