Ken Rogoff, an expert in global financial crises, takes a look at what’s happening in emerging markets and asks if they are a warning signal for the global economy. There are currency crises in Turkey and Argentina. EM currencies are declining in value, and many EM stock markets are down even as the U.S. markets are higher. Rogoff has an even-handed conclusion. He doesn’t think the EMs are signaling that we’re on the verge of a global crisis. But he believes developed nations should be using this period to improve their finances instead of doing business as usual.
The most important reason for optimism, notwithstanding all the surrounding political noise, is that global long-term real interest rates are still extremely low. Even with all the drama surrounding Fed tightening, 30-year inflation-indexed Treasury bills are paying around 1% – far below long-term real returns, which have averaged closer to 3%. As long as the underlying global interest-rate picture is so benign, it is hard to see the big Kahuna of bond-default waves coming just yet.
It is notable how much the IMF, the world’s debt and financial crisis watchdog, has been ratcheting up its warnings. After years of saying advanced countries no longer need to worry about their near-record public-debt levels – now averaging over 100% for general government debt – the IMF has started to warn that many countries may find themselves squeezed for fiscal space if faced with a new recession anytime soon.