Why Bernanke makes us cringe

One man is rocking the world economy and markets – and, in a bigger way, the Indian economy stock and bond markets.

And how! His words and actions can add trillions to market valuation across the globe or squash it all down. His talk of tapering quantitative easing has wiped out large sums of money from bond and equity markets all over the world, roiled global markets and sent bond markets in India crashing.

At last month's (June) conference when he suggested his tentative position on quantitative easing (maybe I will taper by December, maybe not), he pulled the rug out from under global markets. Having been fed on a continuous diet of free money, that was a wake-up call. Bonds were thrashed and suffered their worst losses in a decade in US and across the globe, and stock markets crashed too. There was crimson everywhere.

Ever since the Lehman crisis, Bernanke has sloshed the US with lots of money. About $3 trillion until now. This money has to go somewhere; some of it has been consumed by the US government; some of it goes into assets like real estate and gold; and some flows into India.

For a capital-starved country like India that depends hugely on foreign flows, even a little of that money can be a godsend. It can spur investments and boost capital expenditure plans if it’s invested well by the government or the private sector. Or it can boost the stock and the bond markets. For a while it did, up until now.

Now, when India has seen a massive pullout of this hot and speculative money, totalling about $19 billion (both equity and debt) till June this year, the Indian economy has received its worst-ever jolt. Interest rates in India have shot up from 7.2 to 8.05 (10-year benchmark) in a month. Foreign investors pulled out $6.6 billion in the last two months from India's debt market alone, while they invested only $4.1 billion in the preceeding four months.

Now as the central bank tries to stem the rupee's fall as a result of the massive pullout, over night money markets are in a tizzy. Bond funds needed a special window to address their liquidity problems. And interest rates are on a tear, and will get reflected in corporate profit and loss accounts sooner or later.

The wobbling economy might wobble even more unless we see some long-term foreign investments come in. The government has raised FDI limits in many sectors, but those routes will take time to see big foreign inflows. India has only seven months of cover for imports. We need more dollars and more productive and well-invested spending. None of that is happening. The country is in a tight spot.

So is Bernanke. His little talk about an exit strategy to easing had cataclysmic effects on the global economy and markets. He fed the world with a stimulus that the world does not wish to see ending. We have seen the tip of the iceberg of what could happen if quantitative easing indeed ends.

Let alone whether he can actually off load the $3 trillion worth of bonds accumulated in the Fed's balance sheet on the US (or global) economy. That could send bond yields rocketing, and the recovery careening.

Then there's the other side. Bernanke can't keep pumping up and injecting more free money into the US (or the world) economy. That would eventually cause inflation to rise and hyperinflation to set in. In short, Bernanke can't stop printing, nor continue his quantitative easing for too long.

His current iffy stance on whether to continue or taper quantitative reflects this predicament. This is not doing anybody, in the long run, any good.

Whichever way you look at it, it's going to make the world, and us Indians cringe - a lot.