Micro-decoupling factors in a macro-coupling world

During early part of the recent financial crisis, decoupling concept started popping out in financial markets, that certain part of the world is not dependent on the rest of the world. But as crisis deepened, people started realising that in the present globalised world, it’s very difficult say that we are no longer dependent on others!

But there are certain factors, which are very micro, country specifics and are decoupled in macro-coupling economic world. To begin with end, I am still saying global world is a coupled one and no country or state can say that they are fully immune from the rest of the world. Nobody can say that, they are growing only because of domestic reasons.

But below mentioned micro economic factors, which are country specific, are giving signals that they are decoupled in nature in short to medium term.

Inflation

As all of us know inflation, change in the price levels of essential goods and services in a country, plays important role in the country’s economic policy making. I am not such a big fan of Milton Friedman’s proposal of inflation: Inflation is always and everywhere a monetary phenomenon.

I think inflation can also be because of fiscal expansion, like government spending more but without actually increasing output of the country, leading to bigger amount of money chasing same goods and services, which in turn creating demand-supply mismatch in an economy. Also there can be various other causes like, monetary policy cycle, demographics of the country, savings and expenditure pattern and currency fluctuation.

Keeping aside these causes, Inflation in countries like India, Indonesia and Venezuela is beyond central bankers’ comfort zones whereas in certain parts like Japan, Euro-zone and U.S. it is much below their central bankers’ targeted levels. These developed countries' central bankers are trying pump up the inflation or trying to avoid the deflation whereas developing countries central bankers are trying to minimise the inflation and inflation expectations. Reasons for both the cases vary from country to country, but in above mentioned each part, central bankers are struggling to anchor the inflation in different directions! 

Interest rates

Central bankers of each country (or zone) will be having different mandate/s like growth and/or inflation or only price (inflation) stability or currency stability. Depending on these mandates central bankers decide their course of action in deciding the interest rates and also cycle (upward or downward trend).

Now without getting into each central banker’s mandate, it is easy to say from currently available picture that each country’s interest rate is decoupled from rest of the world. For example India, Brazil, Indonesia are following contractionary monetary policy whereas U.S., Euro-zone, Japan are following ultra-expansionary monetary policy because of the issues these countries (zones) facing are different for different parts of the world.

Current account

In layman terminology, current account is nothing but difference between imports and exports. Depending on the difference between exports and imports, countries will be bifurcated as current account surplus and deficit countries. I believe global trade is a zero-sum as ones loss is others gain, so always there will be current account surplus and deficit countries as long as trade is global and liberal.

Countries like Germany, China and Saudi Arabia are current account surplus ones whereas U.S.,  India and peripheral countries of Euro-zone likes of Greece, Portugal and Spain are current account deficit ones.

Reasons may vary from efficient productivity, economies of scale, natural resources and others but countries are clearly decoupled in this context way above margin!

Equity markets

I would like to cast equity markets in a coupled-macroeconomic section as free capital (hot money) flow in a globalised world is not a country specific phenomenon. Easy money strategy followed by developed world like QE (1, 2, 3 and operation twist) of U.S., low interest rates and LTROs from Euro-zone, Abenomics in Japan is not only pumping their domestic equity markets to new (or regaining historical) levels, but also other countries’ equity markets are also trading at record levels.

Dow Jones and S&P 500 (@highest levels), NASDAQ (@13 year high) of U.S. and Dax of Germany are trading at historical levels. Japan’s Nikkei 225 is at almost 6 years high, India’s Nifty and Sensex are trading either highest level or around historical high levels.