Foreigner Bond Tax becomes favorite Capital Control as Dollar Deluges Emerging Markets

Deflating Developed Countries are fueling Inflation in Developing Ones with ultra low interest rates.QE2 has been heavily criticized around the world due to the dangers of it creating asset bubbles in emerging markets as yield hungry investors look for growth at any price.With hundred of billions flooding emerging debt and equity markets,the situation has become volatile for a lot of  countries.Brazil has already seen its currency skyrocket in the last 2-3 years due to the huge spread between its bond yields and the US interest rates.With carry investors able to make around 10%,Brazil remains a favorite market for the inflow of dollars.Other countries like Thailand,Malaysia,Indonesia have seen their stock markets rallying to all time highs as well.Many of these countries have already imposed capital controls earlier.Now they are increasing further,as monetary authorities rush to close the gates.

Thailand has removed the tax exemption on interest income recieved on fixed incomes by foreigners while Brazil has repeatedly increased the tax on foreign bond purchases by outside investors.South Korea is about to introduce a 14 percent tax on interest income from treasury and central bank bonds and a 20 percent capital gains levy on their sale.Other countries are also thinking of imposing some forms of capital controls as well.Note Capital Controls were frowned upon by the financial czars at World Bank and IMF earlier,but now those very institutions are approving these Capital Controls.Currencies have become extremely volatile with each major developed market facing serious structural problems.The European Contagion,American QE2 and the Huge Japanese Debt all make the fundametnals of the Euro,Dollar and Yen Suspect.Gold has been increasingly at a steady pace with major officials now calling for a Gold Standard.

Everyone turns into a Currency Speculator

Businesses around the world have turned into major currency speculators.Sharp movements in exchange rates are causing massive foreign currency losses for companies around the world.Solar companies for example have reported foreign currency losses exceeding their total profits in some cases.Japanese companies have reported FE losses to the tune of 10% of their total profits  with the yen appreciating sharply against the dollar.German Exporters who were making hay with the Euro Fall again face headwinds with the Euro appreciation.With movements of 10% or more in a quarter,businesses have very little control on their revenues and profits.China despite being proclaimed a villain in the whole “currency wars” is perhaps not all wrong in pegging its currency to the dollar.