Across the world many countries are faced with rising food and fuel prices as result of the invasion of Ukraine. This is particularly worrisome for emerging market economies as the FED has started raising interest rates – usually a negative for these economies. The rise in interest rates in the US and a stronger dollar makes import dependent nations with low foreign exchange reserves vulnerable to defaulting on their debts. The strength of the dollar coupled with inflation makes imports that much more expensive relative to weakened currencies. Like the Asian Financial Crisis in 1997 once the global interest rate environment changes emerging market economies will end up hurt from capital outflows and asset busts within their respective countries. This cycle in the globalized financial system is often referred to as the global financial cycle.

The global financial cycle as thought by French economist, Hélène Rey, is the idea that asset boom and bust cycles tend to be more aligned with other economies around the globe due to the shared dollar system. These asset booms tend to be aligned with periods of low interest rates in the United States. Eventually when the FED opts to hike interest rates, dollar denominated private finance heads back to the US and out of the emerging markets resulting in a bust globally.

In the following blog post: Emerging Market Crisis (2). I will explore a few examples across the globe of the consequences of the global financial cycle. Some countries have already began searching for bailouts from international lending organizations and others have defaulted on their debts. The benefits of a globalized financial system are many in number, but this current period may end up being a warning of the negatives of a globalized system.