THE EMERGING MARKET ROUT
Emerging markets are now big enough to drag down the global economy. As Indonesia, India, Ukraine, Brazil, Turkey, Venezuela, South Africa, Russia, Thailand and Kazakhstan try to shore up their currencies, the effect is ricocheting back into the advanced world in higher borrowing costs.
Even China felt compelled to sell $20 billion of US Treasuries in July. "They are running down reserves by selling US and European bonds, leading to a self-reinforcing feedback loop," said Simon Derrick from BNY Mellon.
We are told that emerging markets are more resilient than in past crises because they have $9 trillion of reserves. But any use of that treasure to defend the exchange rate entails monetary tightening, and therefore inflicts a contractionary shock on countries already in trouble.
We are also told that they borrow in their own currencies these days, immune to the sort of dollar squeeze that caused such havoc in the early 1980s and the mid-1990s. This is true, but double-edged. India, Brazil and others will surely be tempted to stop fighting markets, let their currencies slide and inflict the pain on foreigners - that is to say, on your pension fund.