The Tallest Pygmy
By Arnold Kling
Why is the U.S. dollar strengthening, given the crisis that is taking place here? I remember that Steve Roach once used the metaphor of the tallest pygmy to explain how the strength of the dollar. Maybe once again we are the tallest pygmy.
the financial crisis in the developing world has just started and there are indications that it will get a lot, a lot worse. What is different with this phase of the crisis is that it cannot be addressed by governments in the affected countries issuing their own fiscal guarantees and domestic currency.
…I have a feeling that this will be the make-it-or-break-it week for emerging markets. I hope the IMF will make an announcement in time to make a difference.
If emerging markets are catching pneumonia, then Europe will at least catch a cold. Ambrose Evans-Pritchard writes,
The latest data from the Bank for International Settlements shows that Western European banks hold almost all the exposure to the emerging market bubble, now busting with spectacular effect.
They account for three-quarters of the total $4.7 trillion £2.96 trillion) in cross-border bank loans to Eastern Europe, Latin America and emerging Asia extended during the global credit boom – a sum that vastly exceeds the scale of both the US sub-prime and Alt-A debacles.
Tyler Cowen has been reminding us constantly that there was a general appetite for risk-taking that was not limited to U.S. mortgage securities. He has been reminding us to watch for shoes to drop in international credit markets.