Game changing in foreign currency markets

Emerging markets figure out the currency game.

As recently as last month, governments of emerging economies from South Africa to Brazil warned that competitive devaluations might be needed to keep their strengthening currencies from stifling economic growth.

Now, talk of currency controls is being abandoned and interest rates are rising as record food prices and oil at $100 a barrel make inflation the bigger threat. That means developing nations will keep outperforming in the foreign-exchange market, according to Morgan Stanley.

They have discovered that American finance goes to their markets because they have the growth, we don't. So what does this mean for Sumner and his NGDP growth theoory? That if he wants near term accuracy, then his macro model better include more emerging markets and less domestic American markets.

It also means that America had better adapt products to emerging markets, not domestic markets. M1V will be dropping faster as we downgrade our consumer sector. It also means that foreign markets will build up their entitlement systems and quit loaning money to us.

Sure enough, in the next Bloomberg article. 

Consumer spending in the U.S. probably rose at a slower pace in January as food and fuel prices climbed, economists said before a report today.

Americans’ purchases, which account for about 70 percent of the economy, rose 0.4 percent after a 0.7 percent gain in December, according to the median estimate of 59 economists surveyed by Bloomberg News. Other figures may show manufacturing continued to expand and home sales dropped.

I have been noting for some time that M1V has been on a downward trajectory for some time. Heterskedactic effects make is unobservable in macro summations, but not any more.