Korea & Iceland Kick off Rate-Hike Cycle in Developed Economies after Shock-and-Awe Rate Hikes in Russia, Brazil

Soaring home prices have become a thorny political issue for Korea’s government, facing a frustrated and angry middle class.

By Wolf Richter for WOLF STREET.

With its rate hike of 25 basis points today, to 0.75%, the Bank of Korea became the second central bank of a developed economy to hike its policy rate in this cycle. The first was Iceland, whose central bank hiked its policy rate on Wednesday by 25 basis points to 1.25%, after having already hiked it in May. These timid rate hikes follow the serial shock-and-awe rate hikes by the central banks in Russia and Brazil, among others, that started in the spring.

The statement and the comments by Bank of Korea governor Lee Ju-yeol had a hawkish bent, pointing at further rate hikes in the future, specifically to tamp down on financial imbalances, surging household debt, and soaring home prices.

The soaring home prices have become a thorny political issue for the government, facing a frustrated and angry middle class.

Despite the rate hike, financial conditions “remain accommodative,” the BoK governor said, with the policy rate being well below the rate of inflation.

“We are seeing some side effects from the unusually loose conditions of the past year-and-a-half, so we will normalize interest rates in accordance with the economic recovery,” he said.

“As for timing for the further hikes, we will consider how the COVID-19 situation plays out, and changes in the Fed’s policy stance, which would have an important impact for us, as well as how the financial imbalances play out,” he said.

The Reserve Bank of New Zealand, under pressure from the government to do something about the raging housing bubble, had already ended QE cold-turkey in July, and was also expected to hike its policy rate (currently 0.25%) at the August meeting. But on August 17, hours before the expected rate hike, the government imposed a snap lockdown due to some Covid infections. And the RBNZ decided to delay the rate hike.

A week later, RBNZ’s Assistant Governor Christian Hawkesby told Bloomberg that “a 50-basis point move was definitely on the table in terms of the options that we actively considered.” And he said that future policy decisions “aren’t going to be tightly linked to COVID and whether we’re in lockdown or not.” Expectations are now for a 50-basis point rate hike at the next meeting in October.

This drama over 25-basis point and 50-basis point rate hikes, or any rate hikes, in the developed economies comes after some shock-and-awe rate hikes in the emerging markets.

The Bank of Russia hiked its policy rate in series, from 4.25% in March to 6.5%, including a 100-basis point hike on July 23. The central bank of Brazil hiked its policy rate in four steps, starting in March from 2% to 5.25%, including a 100-basis point hike on August 4. The central bank of Turkey hiked its policy rate in massive leaps to 19% by March, upon which the governor of the central bank was sacked. But the policy rate has remained at 19%.

What these countries are facing is the same thing that the US economy is facing: large scale inflation that is threatening to come unhinged.

Central banks that are engaging in QE, such as the US, the ECB, the Bank of Japan, the Bank of England, the Bank of Canada, etc. will not hike rates until after they end their asset purchases. This has been spelled out many times, and that’s how it happened last time.

Asset purchases are designed to push down long-term rates, and rate hikes are designed to push up short term rates. By engaging in both simultaneously, a central bank would simultaneously stimulate with lower long-term yields and remove stimulus with higher short-term yields. In addition, pushing up short-term yields and pushing down long-term yields simultaneously would cause the yield curve to flatten and possibly invert.

In those countries, rate hikes have to wait until after QE has ended. There is now quite a bit of pressure in the US to end QE, and Fed governors are lining up behind it, and “sooner rather than later” is the new motto. The Bank of Canada has already trimmed its QE to near nothing, as has Japan.

The Bank of England announced in May that it would reduce its weekly bond purchases. The Riksbank of Sweden said in April that it would stick to its plan to end QE entirely by late 2021. The Reserve Bank of Australia announced in July that it also would reduce its weekly bond purchases. After the asset purchases have ended, the central banks can contemplate rate hikes.


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  88 comments for “Korea & Iceland Kick off Rate-Hike Cycle in Developed Economies after Shock-and-Awe Rate Hikes in Russia, Brazil

  1. Richard K says:

    I lived in a place in Seoul that I could have bought for around USD$500k in 2016. That same place is work about USD$1.1m now. In five years the price more than doubled.

    Median income in Seoul is probably around USD$30k.

    This is straight up class and intergenerational warfare.

    • gametv says:

      Home prices are a direct impact of the interest rate policy because real estate is the only highly leveraged investment you can make. If individual investors were allowed to use 9 to 1 leverage on equities, there would be even higher prices on stocks.

      Debt makes sense for an asset like housing because it is an asset you use for multiple years, but honestly, we should limit all mortgages to 15 years. It would lower price inflation and would allow people to own their home outright much earlier, which would provide a better path to retirement for many Americans.

      This is the type of simple change that would have enormous impacts on creating more economic parity between classes.

      • georgist says:

        Trudeau wants to extend Canadian mortgages to 30 years.

        What a fool that man is.

      • Thomas Roberts says:

        Richard K,

        It’s important to note that the actual “president” of South Korea “Moon Jae-in” is a literal communist traitor. His party isn’t much better. There is a very unstable political situation in South Korea, it’s probably the worst, currently, among all developed countries.

        Like the rest of the developed countries, South Korea could easily thrive, but that older generation’s “I got mine” complacency, among certain other things, prevent that, for the time being.

        • Thomas Roberts says:

          I’m being serious about Moon, he is an actual communist traitor. No other developed country, currently, has a leader I could describe in this way.

          One of the things he is doing for instance, is that he is intentionally giving strategic plots of land over to CCP control, so that they can gain a foothold in South Korea. He in intentionally trying to give over control of South Korea, to the CCP.

        • General Strike says:

          Absurd analysis. President Moon is, for now, a puppet of the Western capitalists. Why else would he allow the continuing division of his country almost seventy years after the war ? Let us hope he is successful in reunification, the first step of which will be telling the USA to end their occupation of South Korea.

        • Thomas Roberts says:

          General Strike,

          You are the absurd one. The Korea’s cannot be reunited, until the North Korean Regime falls. Unless, you want them to both be communist, which it sounds like you do.

          Also, Moon isn’t single-handedly powerful enough to reunite the Korea’s. He is trying to give the CCP as much leverage as possible over South Korea, so that the CCP can control the Korea’s. That is a vastly worse situation, than America having troops there to prevent North from invading.

          America isn’t threatening to nuke South Korea, unlike the North and the CCP, and will leave after both are peacefully united into a democratic state, something, you are clearly opposed to.

          Presidents in South Korea are only allowed to run for a single 5 year term, so he will be out next year.

        • Auldyin says:

          The way I see it S Korea was tightly commercially integrated to the West, as one of the USA dependencies but, like so much of SE Asia over the last twenty years, it has become more and more commercially integrated towards China. It is currently the only one of the US allies to be showing some reluctance to join in the current South China Sea Nato belligerence. The Afghan experience might make some sense prevail hopefully.
          If I was a betting man, which I’m not, I would bet S.Korea will be the first ally to go over to the other side.

        • Thomas Roberts says:

          The issue with joining the Chinese side is very simple, they don’t have the money. They claim they do and make extravagant claims and promises, almost none of them materialize in the ways the other countries expected/were promised it would happen. The bulk of china’s 1.26B population is very poor.

          The west is the one designing everything and building all the supply chains. The CCP steps in and tries to subvert the supply chain to their advantage. Because right now, alot of supply chains end in China, the CCP seems to think it can cut the west out; that hasn’t worked for almost anything valuable. For all their claims, China cannot build a good car, jet engines, processors or many other things. Right now, China can build some advanced machinery, but that more often than not, depends on foreign machinery and parts. There is nothing the west needs that only China can make. China, because of the CCP’s greed, is also becoming increasingly more expensive to make stuff; the west will be able to beat China on price and quality, when they move their factories to other countries.

          The infrastructure built by China, is almost always a disaster in the making.

          The CCP only made it this far, because the west let them, after the pandemic the CCP caused ends, we’ll see more and more companies leave China. South Korea can flip sides, but when supply chains get redesigned, they could be left out. Japan definitely isn’t going to be joining the Chinese side, neither is Taiwan, Vietnam, India or many others.

          The dream of the Chinese market is only a dream. Many companies exaggerate the money they make from China, in order to boost their stock price, however, most make less or even lose money. Between the CCP subverting Hollywood, the bought and forced positive news coverage, and fake profits report; most think China is doing amazing, they really aren’t, and they also have the world’s largest RE bubble. Hollywood, for instance, boasts about their Chinese box office results, they don’t usually mention, they get a much smaller percentage of ticket sales in China, or how their movies are blocked in China or that the comprises made, hurts other more profitable markets. Most companies think that they already have as much of the wests marketshare as they can get and that if they just play by the CCP’S rules, they can make extra money in China, that doesn’t work out very well, that often. It simply cannot work, because there isn’t that much money and the CCP wants it all.

        • 91B20 1stCav (AUS) says:

          TR-always found it interesting that Kissinger/Nixon/U.S. Business interests seemed to be convinced that ‘going to China’ would result in an easy commercial rollover and dominance of a nation whose hubris is/was no less than ours.

          (Self-delusional underestimation, where is thy sting???).

          may we all find a better day.

        • Auldyin says:

          Getting messages that New Zealand is not showing enough ‘keenness’ to contain China. Personally I can’t see why Aus would want to bog off China. Where else can they sell all that coal and ore? We’ll take their wine in post-Brexit UK but that’s a fleabite. Maybe they’ll just carry on selling each other houses with printed money.

      • historicus says:

        add to that…..The Fed is lending to the mortgage pool cheap money by purchasing MBSs 2-3% below the inflation rate. Now add in your leveraging point.
        It seems one group of people, those loaded with stock and real estate are “pulling up the ladder” from the group below them that do not have any or enough stock, and are without a house. Also, the ability to SAVE is taken away…..punished in fact….by a promoted inflation coupled with zero interest rates. These people are left to fend for themselves. This, IMO, is very dangerous for a society.
        One group…”Honey, how much higher is the stock market today?”
        The other…..grinding it out and hoping to break even.

        • joe2 says:

          Yeah, you’re left to the ancient Chinese strategy – an all-in gamble either legally or illegally. And hope some oligarch’s kid doesn’t drive his Lambo through your front window.

        • Old School says:

          The vast majority of asset bubbles will burst and prices will reset to a lower level. If valuations returned to median price to sales metric in US it means a decline of 72%. If we overshoot the previous record to be taken out in US is a decline of 89% at the great depression.

          The saying goes that the real money is made at the purchase. Probably we will be able to purchase a $1 of value for a quarter if we can hang on long enough.

      • joe2 says:

        Unfortunately you never own your home “outright”. You rent it from the state. My property taxes have more than doubled and track housing inflation.

        But I agree best to get the bankers off your tail as soon as possible. A 15 year mortgage is best but at least pay your 30 year twice a month or kick in a little extra each month.

        In Hawaii I had the Bishop estate leasehold, the bank mortgage, and property taxes hanging over me. Don’t fool yourself – you don’t own anything and you shall be happy.

        • BatHelix says:

          Yeah, I have my house paid off as I wanted that first so that even if I have to go be a barista or uber driver I know that I still have my house … it really burns me though that I still have to keep paying to keep it. I think all taxes should be covered by income and sales tax and that’s it.

          I hate that everything is moving to subscription model, you can’t pay off and be done with anything any more. I just went to buy some software programs only to find out that now you can only buy the monthly version or a yearly pass. BS.

        • Old School says:

          If you live long enough your property taxes will be bigger than your initial house payment. My parents house payment on a 20 year mortgage was $44. The house has been long paid off but their current taxes are about two times that per month

        • Old School says:

          If you want to minimize property taxes it’s up to you to do research. In NC I think it’s pretty typical that about 70% of county budget is education and social services. If you are retired, it can be make sense to live in retirement counties where there is low services required for those two things.

    • MonkeyBusiness says:

      South Korea has no choice.

      “…Today, amid Korea’s snowballing household debt in fast-surging asset markets from housing to stock, critics have been ringing the alarm and suggesting Asia’s fourth-largest economy might be following in Japan’s footsteps. A bubble burst is imminent here, they say.”

      — From Korea Herald

      “South Korea’s youth debt binge shows no sign of slowing as rate hike looms.

      “A debt binge fuelled by young Koreans… desperate to invest is one of the trends worrying the country’s central bank, which could deliver its first interest rate rise in three years on Thursday… One particular concern for policymakers is the fact that recent curbs appear to have had little immediate impact on such borrowing.”

      — From Reuters.

      A repeat of 1998 is around the corner for South Korea. Happy times are here again.

      • Thomas Roberts says:

        South Korea’s problems are mostly the same as the rest of the developed countries, which aren’t as bad as vast majority of rest of the world. Going down the Japan route, is a choice. Right now, any developed country with the will to do so, could easily start to thrive again. There definitely could be a point where some developed countries, could make enough mistakes, that they could go very downhill. I don’t expect that to happen, the next big global shift should happen, before that. The global economy, will almost definitely go through a major shift, after the global everything bubble pops.

        As for what exactly happens during and after that, is impossible to know for sure. Depending on the choices, the developed countries make, parts of the developing world, could be screwed for awhile.

        The developed countries set the rules for global trade and much more, and if they were to cut out countries like India and Vietnam, those countries would have an almost impossible climb to develop, for some indeterminate time. The developed countries might do so as a side effect of re developing their respective manufacturing bases or to more strategically develop neighboring countries.

        It’s hard to say where in between countries like Brazil will land, Brazil is partially developed and does have resources, and isn’t crazy overpopulated, like India.

        All we can do is sit back, study the madness, prepare ourselves as best as we can, and see what happens.

        • MonkeyBusiness says:

          Choice? LOL. Cheap energy is almost gone. Pretty soon, it’s going to go downhill for everyone.

        • Thomas Roberts says:

          Seriously? There is an abundance of energy. New oil sources are popping up everywhere. Under a small area of the Rockies in America alone, there is an estimated 1 trillion barrels of oil.
          (yes, that’s a trillion barrels). Venezuela is almost untapped.

          As for the other types of energy, there is enough coal to last hundreds of years, that is far more than enough, to last until safe nuclear is developed. Nuclear power with the facilities to recycle the fuel can provide enough energy to last the entire world’s energy demands for billions of years. That already exists. The only thing is to find a way to shrink the reactors to make them created with a manufacturing process, that will also make them far safer and easier to control.

          There is also the strong possibility of eventually, being able to drill deep holes to create geothermal energy in more places. There is the ability to heat houses and eventually factories, with wood pelt stoves and future systems based on them. Various ways to reduce energy consumption. All the other renewable sources of energy and much more.

          There are many potential ways to power cars, busses, and trucks.

          There is plenty of energy.

        • Auldyin says:

          You talk total reality about energy abundance but that’s the problem, reality is ‘fake news’ in this world. I attended a conference in 1970 where speaker after speaker said we would definitely run out of oil by 2000, I even sold my big 3litre straight six for a little tin eco-box. Big joke, the world is run by comedians.
          Every energy source you mention is opposed by one political faction or another, so there is every possibility that Western nations will be left with only solar,wind,hydro,or tide to survive on, with all the implications of that for industrial society as we know it.

        • Augustus Frost says:

          The US and much of the developed world has been living beyond it’s means for decades and collectively (along with China) created the biggest financial bubble in world history.

          Most people in these countries are destined to become poorer or a lot poorer than they are now, when this ends “eventually”. It’s not going to be some minor bump in the road either.

          The economic center of gravity is shifting away from the West and the bubble collapse could accelerate it too. For the US and UK in particular which produce a lot fewer physical goods versus the past which people actually need, both currencies are destined to depreciate noticeably. There is no getting around that because the rest of the world isn’t going to give it’s production away effectively for free in exchange for grossly inflated financial assets (including treasury debt) forever. Once the exports to one or both countries decline to a low enough percentage, the markets will be a lot less important.

          The US’s belligerent sanctions policy and extraterritorial application of it’s laws is also going to result in a decline in the USD’s global role. A lot of people have had enough of that.

        • Thomas Roberts says:

          Augustus Frost,

          There’s an even more massive bubble in China though, regardless of whether the world doesn’t like the western order, what’s their better alternative?

          All the Asian countries don’t trust each other. What supposed alliance, can arise to challenge the western order?

    • raxadian says:

      This is way way way more common that people thinks.

      Is a rhing called inflation abd has been something happening since money was a thing.

      Ever heard of that King that depreciated the price of gold in Africa a very long time ago?

      • Old School says:

        Yep. All governments go down that path. I was born in 1956 and it is amazing how far the government has gone on my lifetime. It seems strange even to me that I could give the barber four quarters of 100% silver and get a haircut. It was real value that was handed over not a paper promise like today.

  2. SOL says:

    Is there a shortage of housing in Russia, or are their investors just buying USA properties?

  3. Nick Kelly says:

    Citi says two more hikes likely in SK in 21.

    It really is irrelevant to the G 7 economies what Russia and especially Turkey do. Their currencies are always on the verge of crisis. One difference is that Putin, although unable to manage an economy, is smart enough to know not to fire his central banker, who is widely considered to play her lousy cards well. or put another way. ‘a good lawyer with a bad brief’ ( client)

    • Thomas Roberts says:

      Nick Kelly,

      Once again, on the anti-Russia bandwagon. Russia is PPP wise, still vying for 5th place. It should eventually, reach 4th place, surpassed only by the 3 most populated countries in the world; India, China, and America. Russia is an unusual economy that should be growing faster, but corruption and nonsensical attacks by other countries slow it down. Also it is hard to grow, when almost no one else is growing.

      Turkey doesn’t matter.

      PS. To fend off trolls, China is in second place, but has stopped growing and it’s economy (probably nominally under 10T) and population (real approx. is 1.26B) is smaller than claimed.

      • Xavier Caveat says:

        Around the turn of the century the taxi fare from the airport to Istanbul was 25 million Turkish lira, or about $30.

        I think they did away with 4 zeroes on the new and improved lira since.

      • Citizen says:

        Russia has a tiny, irrelevant economy and is basically just a bunch of organized crime and a huge gas operation. It’s sad as they could be so much more. If we would only move to clean energy we could bankrupt them and all the others we don’t like while getting rich selling the tech to the world and creating manufacturing and other jobs here.

        • Thomas Roberts says:

          Russia has a very large trade surplus, subtracting all the energy exports, will still leave them with a better trade balance than most developed countries. And over time, they are working on making their country more self sufficient. The problem of why Russia has so much corruption is down to certain counties and “people” preventing them from becoming just another member of the EU and NATO. If they, like every other country in Europe (many of which started out in far worse shape) were given the same opportunities, Russia would cement the status of NATO and have very friendly relations with the rest of Europe and America. Unfortunately, the western Europe “”leaders””, don’t like competition and there are enough “people” who feel smug looking down on them to prevent that, which creates tensions and ridiculous allegations.

        • Old School says:

          Real lasting wealth creation in a country is kind of a secret sauce. It takes a society with a work ethic, property rights, a government that is not corrupt and democratic representation.

        • Auldyin says:

          With you on Russia but you’ll never beat the MSM “we need an enemy” propaganda, although they are gradually pivoting to China like Obama and his 400 bases did.
          The Russian corruption stuff is complex but basically Clinton got Zeltsin drunk on vodka and he privatised any asset worth taking after the wall came down. Al Capone and his gangsters moved in and robbed everything blind. Vlad has been cleaning up the mess and trying to put as many crooks in jail as possible, that’s a large part of why the people love him and western financial interests hate him.
          If only we could get Lavrov running diplomacy what a huge difference it would make to the world, he’s already central to establishing order in Afghanistan but the MSM won’t tell you that.
          The central banker is legendary for her competence. I must declare an interest, I’ve got money in Russia, thinking of adding more.

        • Thomas Roberts says:


          Yeah, Russia is the supposed boogieman. But, like everything else, we’ll see what happens. Bringing Russia into western order, would solve alot of problems. When the everything bubble collapses, we’ll have to see how that effects the world.

        • Auldyin says:

          Thanks for neatly listing all the parties who constructed and maintain the Western anti- Russia narrative which goes back to the cold war. They have no vested interest what so ever, of course, in maintaining NATO and massive arms mis-production in the West.
          Russia tried to be friends with the west for years but these warmongers stopped them.
          Now they don’t care, they’ve got China and half the free (of western hegemony) world to work with.
          Another massive c**k-up by our glorious leaders.

      • Nick Kelly says:

        You are making progress. You have mastered the concept of PPP or total size of the ‘pie’ by which measure Russia with 145 million people, comes in 4 or 5 th with an economy roughly the size of Canada’s.

        We must now introduce a more difficult concept: that of PPP PER CAPITA, or how much ‘pie’ each of the 145 million Russians receives.
        Here the Russian standing is not 4 or 5. It is in spot number 57, or at the very bottom of developed countries. It is edged out by Poland, 46. Hungary 49, Greece 51, Turkey 53 and even, incredibly, Romania at 54.

        It gets worse. Note that neither PPP or PPP per capita say anything about the distribution of the pie. The first stat takes the total, the second divides by population. The second stat would be the same if everyone got the same amount, or if one person got it all.

        According to Credit Suisse (one source of many) Russian inequality is so extreme it belongs in a class of its own. In other words, the AVERAGE person is better of in countries ranking far below Russia’s abysmal 57.

        Suggested Readings: Russians by Gregory Feifer, 2014

        Putin’s People by Catherine Belton, 2020

        The second is a 500 page highly detailed account of how the KGB took over the economy, and became royalty, with Putin as king. The infighting became so bloody that at one point Putin sent his daughters to Germany. The Aluminum Wars were especially strewn with bodies.

        Belton makes an unusual point: after ‘legally’ extending his rule by swapping jobs with his Prime Minister and then coming back as President for a second term, even Putin had to alter the Russian Constitution to extend his reign again. Belton thinks he can’t retire. It would be as dangerous as retiring from the mafia.

        • Nick Kelly says:

          PS: the good news re: Russia, it’s ahead of India that although in the top 5 or so using the PPP of over a billion people, is 155 in PPP per capita.

        • Thomas Roberts says:

          Thinking with the small thinking cap, I can see. First of all, corruption is bad, but not worse than America or places like the UK. America benefited from growing quickly, before the current massive wave of corruption that swept the globe, sunk in. Secondly, places like Romania, have become nice places to be. Unless, you look down on them? Right now, Russia has a large population and because it’s not given EU status, must build up an economy that can make almost anything. That is a big feat. If successful, Russia will then be able to grow much better, and become a much bigger global player.

          It’s difficult to grow your country, when few are growing and you are not given the same opportunities that Poland, China, Romania, Vietnam, or many others were given.

          In that situation, you must use what you can and try to build yourself up to make yourself more independent. The results from that, take time to show up.

          As for income distribution, your claim is that is magnitudes worse, than places like the UK. The question is according to who? Any source has to questioned, but when it comes to Russia, if it’s bad it’s true. Russia is slowly improving, while most countries are going backwards.

          If Russia is successful in making itself mostly technologically independent, it will have no problems reaching western European living standards, right now, it’s varies across the country, from upper European standards to lower European standards. Russia is physically a big country and that also slows down development.

          Just like any country, we’ll see.

        • Auldyin says:

          You can make a fortune in the West selling anti Russia best sellers, you should give it a go.
          The Steele Dossier rocked the whole country for a while.
          I used to believe all I was told for 60yrs but then I looked at both sides and realised what a dupe I had been.

        • Nick Kelly says:

          ‘Catherine Belton is a journalist and writer. From 2007 to 2013, she was the Moscow correspondent for the Financial Times. In Putin’s People, published in 2020, Belton explored the rise of Putin. It was named book of the year by The Economist, the Financial Times, the New Statesman and The Telegraph. It is also the subject of five separate lawsuits brought by Russian billionaires and Rosneft.’

          The Guardian describes the lawsuits as a piling on of billionaires this country has never seen. Five of the top firms each have one in ‘a socialism of the litigious’

          So I’m not going to compete with HER to make a pile of money.
          Since you don’t want to advance a single argument or fact, unlike Roberts who at least tries, tell us what you admire about
          this gang. One question for Roberts though, if Poland, Hungary, Greece and Romania have advantages Russia doesn’t, why aren’t they buying up the most expensive London real estate?

          To the allegation I’m anti-Russian, not at all, I’m anti-Putin. I regard the oligarch’s fortunes and Putin’s 40 billion as stolen from the Russian people. I’m just puzzled why anyone is so pro- Putin, they take criticism of him as anti-Russian. Guess his
          schtick of wrapping himself in the flag can be exported.

        • Thomas Roberts says:

          Hungary and some of the other quickly developing small countries have various advantages over Russia. The fact they are small means minimal infrastructure needs to be built, and neighboring countries actually pitched in, to make everything more interconnected. Countries like Germany helped build new factories and industries in these countries, allowing them to grow rapidly. Being small makes it easier to prevent corruption. They also were allowed to join NATO and had to spend very little on military. They also got various other free money from EU. All this and much more came together to result in quickly growing countries that had minimal corruption and wealth income gaps that were smaller, than the bigger western countries like America and Germany. These small countries simply don’t have alot of things going on, where corruption can thrive. Small countries can thrive while being good at only a few things. Large countries on the other hand, have to be good at far more, or they will run massive trade deficits and be stuck poor.

          Russia on the other hand let the western powers decide things in the early days, figuring a bright future would result. That didn’t work out, it was a major disaster. What happened was that eventually, Russia pulled itself together, with major lingering oilgarchs still in the background, though greatly weakened. And if it’s path of development is successful, will be the only major non western aligned country that can make anything and can function as a developed country who is a lone wolf, also able to potentially build a rival economic second world type system. That is something the west, would rather avoid. Many think China is capable of building a rival second world style economy, it isn’t.

          But for Russia, instead of developing in ways more similar to Poland or the Czech Republic, it has to build up powerful internal companies that can compete with say Boeing or Airbus, that takes time, during which, people don’t see much benefit. This also means you as a country have to push other Russian companies and the populace to buy from them. Russia can’t simply build most types of international companies, because other countries (especially, the rich ones) will not buy most things from them. This means building of powerful people within Russia. Being a population large country, means that owners of ordinary national level companies, make far more money. Because of its physical size, massive infrastructure projects need to happen, something that is ripe for corruption. All this and much more results in income inequality, at least for time being. The rich like to own things across the world, as status and luxury items, including London RE. Were it a part of the EU, everything would develop differently. Instead, we have the potential for another second and third world situation. Though, not necessarily, a cold war situation. It’s still something to avoid.

          Being a small country that is interconnected, makes everything easier, being a large semi-isolated country makes everything harder.

          Pretty much all international metrics are hugely biased. I doubt the average Turkish person is richer then a Russian. Russians are also known for hiding and underreporting their income.

          As far as turkey goes, I simply see them as not significant, this isn’t something against them, most aren’t, they would be fine. But, the head Turkey could single handedly crash the entire country. I’d recommend, they not let that happen.

        • Auldyin says:

          Do you really think that one outsider woman knows more about Putin than 180m Russian people who are extremely clever and will not be pushed around by anybody. They are, however, extremely tired of the constant ‘jokes’ about their country coming from the West.
          They are extremely patriotic people and they admire what Vlad is doing for their country. They would probably want their leader to have an appropriate mansion to match all the show-offs in the West. Navalny 3% western agitator.

      • Augustus Frost says:

        Turkey is a very important country geopolitically. Just wait until it leaves NATO and aligns more with other Islamic countries.

        It’s destined to be a much more important country in the future, but I think that’s further off.

        Russia has a big demographic problem longer term, even worse with it’s European population to my knowledge.

        • Nick Kelly says:

          I gather you have never been there. Neither have I, but my sister has and loves the people. (Not Erdogan) She remembers the Turkish currency traded one for one for one with dollar. Now 7 to 1.

          Just to acquaint you with basic reality, Turkey’s geopolitical relevance DEPENDS on its NATO membership. Absent NATO, Turkey has NO OPTION but to enter Russia’s orbit.

          When Turkey shot down a Russian jet fighter, Turkey came running to NATO, infuriating Putin.

          Aligns with other Islamic countries??? Any examples you want to share with the group? Which branch of Islam: Sunni, Shia?
          Iran? What’s left of Syria?

          This drivel makes the ‘Russia economy great’ seem almost normal.

        • Eugene says:

          Russia labour minister told they would need 5mln construction and 1.5 mln agri workers.And it will be filled by Afghans and Central Asia refugees .Usually they have 5-6 kids minimum. Russian hedonist women hardly have hust one kid.By 2030 Russia might be muslim majority. There are already 10 mln muslims from Central Asia working in Moscow,St Petersburg and other major cities.They were doing fireworks in Moscow when Kabul taken by Taliban .10 mln muslim refugees wave is coming to Russia and will be welcomed by Russia authorities. 90 % probability. Too sad.

        • Thomas Roberts says:

          Russia has no problem getting immigrants though, right now, most are from neighboring countries like Ukraine. Despite the claims otherwise, A properly run developed country could easily make do with a combined replacement rate of as low as 1.5. In the future, I’m sure changes will result that many of these countries will start having more babies.

          For Russia, they always have the choice of giving temporary (can be years long) work visas to people from India, Russia is very pro India, so properly done, this could work very well. There be alot of Indians.

        • Nick Kelly says:

          Sorry AF, my last was rude.

  4. Marco says:

    I do not understand, if the Fed ends QE who is going to buy the US Government’s ever increasing and massive debt load ?

    • Wolf Richter says:

      If yields are high enough, they’ll be very attractive to lots of investors.

      • gametv says:

        If yields rise, then bond prices fall, so that means capital losses on bond ETFs, so investors will want much higher rates to offset the lost principle for the interest, or at least that is the way I see it.

        With a 30 year rally in bonds, there are very strong trendlines that support the price of bonds and once those break down, the trend change will cause investors to dump bonds and rates need to rise alot.

        If the Fed cant buy bonds due to inflation, we are in a really interesting and dangerous economic situation. With massive deficits, the Treasury needs to raise a heck of alot of money with bond/note/bill issuance.

        Wolf, do you have any insights into whether the Treasury will be able to suppress the yield curve by simply issuing all debt in short term instruments, thereby continuing to starve the market of issuance on longer term debt?

        • nick says:

          We are in a deep poo

        • Wolf Richter says:


          To answer the question in your last paragraph — and I’m just doing some basic supply and demand speculation here: if the Treasury issues fewer long-term bonds, that decreases supply of those bonds, and therefore their yields should rise, which would steepen the yield curve.

        • Djreef says:

          Yep. TBT for the foreseeable future.

        • Auldyin says:

          They say in investing you cannot take the past as a guide to the future, but, but, but
          They had a massive crisis in 2008 and they QE’d their way out of it, they’ve got a massive crisis now and they’re QEing their way out of it. Don’t listen to the words, it’s the actions that count. Higher rates, wait till you see them.
          ” If you understood what I said, you must have misunderstood me” Greenspan I believe.

      • BatHelix says:

        Do you really see a way that could happen? We know that just a little higher rates would crush the stock market right? I mean going to 3% probably sinks it 50% so to me the idea of higher like 5-7% is just not going to happen. The Fed will step in when the market crashes so I don’t know how anyone can expect higher rates.

        If inflation were to actually go up a lot it will be very interesting because the Fed cannot raise rates and we know for sure that they will not just sit by and say “well this is the right thing to do even though the stock market fell 70% and the economy is grinding shut”

        I think they will go through mini cycles now and each will just take a long time to play out. They raise a little, stocks fall, they cut and stimulate … go again. All the while inflation will tick up but that is how they will make it seem acceptable or like it’s not their fault…. just dragging it out.

  5. Jon says:

    I have full confidence in Jerome Powell.
    He is not going to do anything stupid like this.

    FeD needs more asset purchase ..more than $120B.

    • historicus says:


      More of Same….and expecting different results is the definition of what?

      Maybe the Fed should have a new mission statement, because they do not adhere to the current one. They ignore the 2nd (stable prices) and 3rd (moderate long rates) mandates….two of three…..and they do things that confound the 1st (max employment).
      Maybe the new Mission Statement should be……

      “It is the Federal Reserve’s actions, as a central bank, to achieve these goals specified by Congress: promote unemployment by providing cheap money to the federal government to dole out and encourage idleness, promote inflation, punish savers and holders of dollars, and promote record low long term interest rates so as to facilitate the pulling of wealth forward from the future generations of the United States””

  6. georgist says:

    South Korea can try to reign in housing because they have other revenue streams beyond a “wealth effect” pyramid scheme. They are a big exporter.

    The UK, Canada and the USA, who all have a hugely indebted private sector, are painted into a corner.

    So inflation it is. But then the boomers will kick up a fuss and we might get real change. Oh dear!

  7. Willy2 says:

    – Anyone who looked beyond developments in the US, anyone who has followed the work of one Steve Keen, knew there was a housing bubble in South Korea. This came on the back of a sharply rising amount of mortgage debt (mortgage debt drives home prices).
    – And this housing boom & bubble came as no surprise when one looked at the demographic developments in South Korea. Just as the housing boom & bubble in the US can be explained by demographic developments in the US (think; Baby Boomers).
    – Nope, the BoK just followed korean short term rates, like the FED, RBNZ, RBA, ………. etc. do.

  8. TenGallonHat says:

    Supreme Court ruled eviction moratorium must end. Another kick in the pants to the Slo Jo regime.

  9. Ron says:

    Deflation fixes a lot of stupid people

    • Sams says:

      Demographics may fix inflation in a lot of countries too. With a declining population there will be less strain on the supply of housing. The population of South Korea may start to decline by the end of this decade and decline significant the next.
      If declining population make property prices go down there will be less colateral for issuing money.

      • Augustus Frost says:

        Well, at least to my knowledge, South Korea hasn’t and isn’t likely to open it’s borders to large scale immigration. So a declining population might do what you say.

        No such chance in the West. The elites are hell bent on destroying the culture.

  10. MCH says:

    Wait until soaring home prices become an issue in China… :)

    Actually, I wonder if China has done a better job managing its asset bubble than the US.

    • Nick Kelly says:

      There is no problem with popular protests. No storming of the CCP or Tiananmen Square.

    • Eugene says:

      No,China is even worse.But they will manage to get out of crises after 2025 faster.Not sure about USA,may be by 2030.

  11. polistra says:

    How have we reached the point where allowing normal economic feedback loops to function is described in the same way as a Blitzkrieg?

  12. Finster says:

    The notion that short rates can’t be allowed up off the floor while QE is ongoing is more dogma than economics. It’s based on the theory that the only effect of QE is to lower rates out the curve.

    The actual effect is far more complex. Statistically the relationship between bond purchases and stock prices is more reliable. What the Fed is doing with QE is better described as financing deficit spending. There’s no reason that couldn’t take place just as well with short rates 25-50 bp higher as at current levels.

    • Auldyin says:

      The inventor of QE Prof Richard Werner intended that the commercial banks would use the QE cash to finance sme’s but, the giant western banks chose to invest the money in real estate and financial assets which sent asset prices through the roof and created gainers and losers in society. He still reckons QE is an excellent tool if used ‘properly’ and not exploited.
      If you are interested in QE Google UK House of Lords QE Report July21, it’s worth a read.

  13. Dave says:

    WOLF, Please update your information of which developed country’s central bank was the first to hike.

    The Czech National Bank (Czech Republic is part of the European Union, considered a developed country and it’s a neighboring country to Germany) began increasing interest rates back in June 2021 amid fears of higher inflation. The national currency of Czech Republic is the Czech Crown (CZK).

    • Nikdo says:

      The Hungarian central bank has also raised interest rates several times.
      Both Hungary and the Czechia are small European economies that do not use the Euro. However, compared to Iceland, each is about ten times larger.

    • Nick Kelly says:

      For me to invest in the CZK, would require double digit rates. Having said that I wish all former Soviet Bloc (Comecon) countries well after all those decades wasted under Moscow. And lo!, shocking Putin, they don’t want to go back!

      • Dave says:

        I believe you have a wrong image of Czech Republic. It used to be a developing nation, but as for the economy, pre-covid it had one of the lowest unemployment rates in Europe & a government budget surplus! and a trade surplus!.

  14. Gregory says:

    MCH, we should never of traded with China more than 40 years ago. We created a monster. They are communists and now the world wants to go communists in fuller force. We all deserve what we get as we are all propping up, buying their crap quality products. We should of let China fall apart within like the USSR did.

    Look at monetary policy and central banks, interest rates. They look more and more socialist, communist to me everyday that goes by.

    • wilhemys#2 says:

      That’s the funny thing, like what are the cost of Levi Jeans when there’s no individual property rights? Or how do you have a Stock Market or price discovery?

  15. CJH says:

    Going out on a limb here, but why is the Federal Reserve the institution relied upon to regulate the economy? I believe that’s the responsibility of Congress. Congress has a monopoly over the currency. Creates the stuff every time it pays a bill. Uses taxes to destroy currency too. Spend in, Tax out. No debt required there. None. The Fed’s responsibility is, in my humble opinion, to make sure the checks get cashed. Millions of them every single day. And the Fed does a wonderful job there. Other than that, the Fed is limited to debt financing. QE is nothing more than a shuffling of
    the private sector’s debt. Not worth the effort.

  16. Jan de Jong says:

    Decreasing supply should give higher prices, lower yields, no?

  17. Turtle says:

    Come on Powell, just 0.25%. That’s all we ask for today! Everybody’s doing it. Actually, everybody’s not. This is going to take a long time, methinks.

    I actually wouldn’t mind if inflations hot up to 15% by the end of the year. At least then the Fed will really have to start doing something meaningful.

    • Old School says:

      Gunlach is a pretty smart guy. He says if inflation is above 5% by end of year the Fed is going to tighten. If it’s above 5% at year end they can’t say it’s transitory.

  18. Peanut Gallery says:

    Not that I would, but how does a typical average individual investor buy a Turkish bond?

  19. CreditGB says:

    At what interest rate does the US debt become unserviceable at even increased taxation rates?

    Asking for a friend.

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