Rising inflows of capital from developed nations threaten to overwhelm emerging markets and bring on more financial bubbles followed by economic crashes.
The executive director for financial stability at the Bank of England projects an 8% annual increase in capital inflows, relative to market capitalization, in the G-20 emerging economies through 2050. That’s a higher average rate than in recent peak years.
Andrew Haldane mentioned those stunning statistics at a conference Saturday at the Institute for New Economic Thinking in Bretton Woods, N.H. He calls it the “Big Fish Small Pond” problem. When the Big Fish (capital-exporting advanced countries) enters the Small Pond (financial markets in emerging nations) it “can cause ripples right across the international monetary system, never more so than in today’s financially interconnected world,” Haldane said.
At the end of his speech he warned of the potential for “growing waves of global financial exuberance, punctuated by crashing capital busts.”
Haldane focused on the need for policy-makers worldwide to protect the monetary system from the consequences of a bubble, but financial advisors should take note of the warning itself.
We all know that emerging markets carry extra volatility and other risks due to political and developmental issues, but the idea that a global bubble may be forming adds a whole new dimension of risk.