Hot Money Flows, Commodity Price Cycles and Financial Repression in the USA and China: The Consequences of Near‐zero US Interest Rates

Abstract

AbstractUnder near‐zero US interest rates, the international dollar standard malfunctions. Emerging markets with naturally higher interest rates are swamped with hot money inflows. Emerging market central banks intervene to prevent their currencies from rising precipitately. They lose monetary control and domestic prices begin inflating. Primary commodity prices rise worldwide unless interrupted by an international banking crisis. This cyclical inflation on the dollar's periphery only registers in the US core consumer price index with a long lag. The zero interest rate policy also fails to stimulate the US economy as domestic financial intermediation by banks and money market mutual funds is repressed. Because China is forced to keep its interest rates below market‐clearing levels, it also suffers from financial repression, although in a form differing from that in the USA.