A couple of interesting FT pieces from Wednesday point to potentially opposing forces at work in the event that a) tax cuts are allowed to expire in America; and b) monetary policy among developed nations remains accomodative.

Per Richard Bernstein on the first point: 

“The Bush tax cuts may have encouraged capital flight from the US because the dollar was weak and capital – including incremental funds in taxpayers’ pockets – tends to flow to stronger currencies.  In a weak dollar environment, US policymakers must consider whether a tax cut’s positive effects on the US economy might be muted relative to its collaterally positive effects on stronger-currency economies.  Record flows to emerging market debt and equity funds, coupled with anaemic US investment spending, suggest that this might be an issue.  If we are correct about the growing extraterritorial leakage of US monetary and fiscal policies, then an increase in the capital gains tax rate might have a larger negative effect on non-US investments such as emerging market funds and exchange-traded funds than on US investments.”

Meanwhile, HSBC’s Pablo Goldberg on the latter issue:

“Global policy is likely to remain accommodative for longer.  One effect of low global interest rates has been a flow of capital into EMs – so we expect the primary markets to remain open for EM issuers.  Combining our estimates of business cycle correlation with that of policy flexibility shows China, Brazil, Argentina, Indonesia and Korea as the countries that could be more resilient to a slowdown in the US and Europe.  On the other hand, Venezuela, Turkey, Singapore, Hungary and Mexico – under our metrics – appear less resilient.”