The G8, the bond bubble and emerging threats
G8 leaders meeting in Northern Ireland this week can hardly ignore the ructions in financial markets, though they are not really supposed to do anything about them. These days, the big decisions about the future of the world economy are supposed to be left to the G20.
But when it comes to the global bond market, the real power lies not with the G8, or the G20 - but with the Fed. It's the US central bank that investors will be listening to most closely this week, when it concludes its policy meeting on Wednesday.
How and when the US central bank starts to unwind the incredible support it has been giving to the US and global economy will be the big story in financial markets for months and years to come (for more on this see my earlier blog).
There will surely be many more bumps on this road. But for now, at least, the investors and analysts I hear from don't seem to think the US central bank will let the panic in the US bond market get out of hand - or go too far ahead of the recovery in the real economy. There's a similar air of cautious optimism in the UK - though, as Robert Peston has pointed out, people are understandably less relaxed in other parts of Europe.
The mood in many emerging market economies is not relaxed at all. All the talk there is of a "sudden stop" in capital inflows - and what that would do to their domestic economies. And for good reason, because it is in these countries that a lot of the cheap liquidity pumped out by Western central banks has ended up.
A recent report from Morgan Stanley reminds us how big the numbers are. They point out that the market value of equity in the main emerging market stock markets has risen from $570bn in early 2003 to $3,730bn.
There has also been an explosion in developed country demand for these countries' domestic bonds, with cumulative investments of about $400bn since 2010, according to the same report.
Emerging market currencies have been tumbling since the ructions in global bond markets began. This comes as welcome relief to some, like Israel, who have not enjoyed their currency being so popular with international investors.
But, to others, the change in market mood poses a real threat, especially countries that are still heavily dependent on foreign borrowing, in currencies that they do not control (usually dollars).
The Indian central bank declined to cut interest rates today - partly thanks to fears that the falling value of the rupee would lead to domestic inflation getting out of hand. Many other emerging market central banks could face the same dilemma in the coming months, caught between easing policy to support the domestic economy, and raising interest rates to limit inflation and defend the currency.
Who is most exposed to what economists call a "sudden shock" - a big rush out of emerging markets, as the flood of cheap liquidity in US and European markets begins to dry up?
Every analyst has their own list, but if you look at who is most dependent on borrowing from global investors, in foreign currency, and who has seen the biggest run up in domestic markets, Morgan Stanley says Brazil, Mexico, South Africa, Turkey, and Ukraine look most exposed, with Argentina, Hungary, Indonesia and Poland considered "borderline". Safest, in their view, are China, Israel, Russia and Peru.
We've got so used to financial crises happening in rich developed markets, you might say a good old fashioned emerging market crisis is long overdue. But to many it will seem a rough kind of justice, if the people most affected by the end of loose money policies in the US and Europe are in countries that those policies were never really designed to help.