Hot Money Flows, Commodity Price Cycles, and Financial Repression in the U.S. and China: The Consequences of Near Zero U.S. Interest Rates

Under near zero U.S. interest rates, the international dollar standard malfunctions. Emerging markets (EM) with naturally higher interest rates are a swamped with hot money inflows. EM central banks intervene to prevent their currencies from rising precipitately. They lose monetary control and 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 U.S. core CPI 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 U.S.