With yesterday’s news of the Fed’s decision to Taper the pace of QE3, markets and economies that have benefitted the most are jittery.

The Fed countered the Taper decision with an announcement that they are likely to ignore their previous threshold target for unemployment and keep their Zero Interest Rate Policy (ZIRP) for longer than expected. This was likely the main reason for many equities markets rising. ZIRP can be viewed as a longer-term source of liquidity and was enough to counter the reduction in shorter-term liquidity (the Tapering of QE).

The problem for emerging markets such as India and China is that the benefits from the ZIRP policy had long since faded. They had become passively reliant upon the immediate potency of Quantitative Easing. This was the high-octane fuel that instantaneously drove a number of international property bubbles and convenient current-account surpluses as capital rushed in. (The irony is that earlier this year India and Brazil were complaining about too much excess liquidity and capital rushing into their economies).

Initially, the emerging markets’ problems resulting from less QE might not seem that serious. However, these areas, and especially China, have been a critical component to the global economy. Without their economic growth, it is unlikely that the North American economy would have grown much at all recently.

The unintended consequences of a Taper might be more than what the Fed bargained for.

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