Developing Crisis in the Developing World, Part 2

One of the reasons that the developed world seems relatively stable while our debt, currency creation and unfunded liabilities go crazy is that we have a safety valve. When the Fed or ECB or Bank of Japan lowers interest rates to zero or buys up trillions of dollars of bonds with newly-created currency, a lot of that potentially-destabilizing liquidity flows elsewhere, mostly to emerging markets like Brazil, China and India – where it frequently causes booms and busts that, in relative terms, can dwarf those of the developed world. While hot money is flowing in, it spikes asset prices and food inflation, forcing developing countries to take unpopular steps like raising taxes and interest rates to avoid destabilizing bubbles. When it flows back out, it crashes local stock, bond and currency markets and turns optimistic-if-illusory boom into abject bust.



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