One of the reasons the rich countries’ excessive money creation hasn’t ignited a generalized inflation is that today’s global economy is, well, global. When the Fed dumps trillions of dollars into the US banking system, that liquidity is free to flow wherever it wants. And in the past few years it has chosen to visit to Brazil, China, Thailand, and the rest of the developing world.

This tidal wave of hot money bid up asset prices and led emerging market governments and businesses to borrow a lot more than they would have otherwise. Like the recipients of subprime mortgages in 2006, they were seduced by easy money and fooled into placing bets that could only work out if the credit kept flowing forever.

Then the Fed, spooked by nascent bubbles in equities and real estate, began to talk about scaling back money printing*. The hot money started flowing back into the US and out of the developing world. And again just like subprime mortgages, the most leveraged and/or badly managed emerging markets have begun to implode, threatening to pull down everyone else. A sampling of recent headlines:

Contagion Spreads in Emerging Markets as Crises Grow

Investors Flee Developing World

Erosion of Argentine Peso Sends a Shudder Through Latin America

The Entire World is Unraveling Before Our Eyes

Chinese Debt Debacle Supports Soros’ ‘Eerie’ Portrayal

Venezuela Enacts “Law of Fair Prices”

Argentina Returns to Villa Miseria

Indian Rupee Falls to 2-Month Low; Joins Emerging Market Sell-Off

Turkey’s ‘Embarrassing’ Intervention Fails to Curb Lira Sell-Off

Prudent Bear’s Doug Noland as usual gets it exactly right in his most recent Credit Bubble Bulletin. Here are a few excerpts from a much longer article that should be read by everyone who wants to understand the causes and implications of the emerging-market implosion:

….continue reading HERE