THE QUESTION I’VE BEEN ASKING FOR 20 YEARS: What Happens When The Days Of Low Interest Rates And Strong Global Liquidity End?

According to an old Wall Street adage, when the winds are strong even turkeys fly. By this it is meant that when global money is ample, even those emerging market countries with highly impaired economic fundamentals have little difficulty in borrowing abroad to finance their wayward budget ways. However, when global liquidity dries up and interest rates rise, those same economies come crashing down to earth sending ripples through the world’s financial markets.

With the Federal Reserve poised soon to start dialing back its ultra-easy monetary policy, world economic policymakers would do well to keep the old Wall Street adage in mind. This would seem to be especially the case considering that the emerging market economies now constitute around half of the global economy. It would also seem to be the case considering how highly compromised many of these economies’ public finances have become in the Covid-19 pandemic’s wake.

Higher interest rates won’t be much fun here, either, since many of Washington’s borrowed trillions were borrowed short-term and will need to be refinanced at the higher rates.