For the record we are in the "The Fed will raise rates just to see what happens" camp. If that was your idea I apologize for the lack of a cite but will correct the oversight if I can remember.
From Dizzynomics, Dec. 17:
I’ve been off grid working on a small visual project (amongst other things) so I’ve missed out on a lot of the recent market action.
Generally speaking, however, I can’t say I’m surprised by anything that’s happened since it all falls in line with the views I’ve been expressing for a while. Especially regarding Nigeria, Russia and dollar liquidity outside of the US.
But the thrust of my analysis is that tightening in the US (and the Fed has been experimenting with all sorts of tightening methodologies behind the scenes) has made it harder for foreign entities to service the dollar liabilities they took on in the easy money days. This has reduced their capacity to buy resources in dollars, leading to a collapse in demand, which can only be mitigated by a dollar repricing. The Fed would have anticipated this as well as the dollar strength side effects of its actions.
These countries have, in other words, become dependent on the proverbial $200 to pass Go of liquidity that QE has been effectively dishing out (albeit by proxy).
The key points to remember as a result:
1) this has happened despite the Fed not even raising rates yet.
2) it is not clear if the fed will feel inclined to defend the assets that have been created by the shadow/international banking sector this time around.
3) the reason why these countries depend on Eurodollar flows is because settlement in their own currencies is still not trusted. QE thus amounted to a form of foreign aid which started incentivizing the wrong sort of growth in such countries....MORE
