About Recent Financial Turbulence

by: Larry MacDonald

One trigger for the recent turbulence in stock markets was a stepping up of efforts to withdraw liquidity from the world economy. In the weeks and days leading up to the breakdown:

* The People’s Bank of China raised reserve ratios on financial institutions to 10%, the fifth hike since mid-2006
* The Reserve Bank of India raised reserve ratios by 0.5% to 6.0%, the second since December
* The Bank of Japan raised its central rate from 0.25% to 0.50%.

China and India are expected to continue tightening in response to inflationary pressures. Indeed, the China Economic Review says analysts expect reserve ratios in China to go as high as 11.5% in 2007. And analysts expect more hikes in India given domestic inflation of 6.5% and forecasted GDP growth of 9.2% (highest rate in 18 years).

Until the tightening process is finished, the next few months could be jittery times for investors in China, India, and other emerging markets. And through the "knock-on effect," the ride could get bumpy as well for most other equity investors around the world (U.S. also faces housing and mortgage-market risks).

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