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Emerging World Poses More Danger Than In 1990S: Cutting Research

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http://www.bloomberg.com/news/2014-03-07/emerging-world-poses-more-danger-than-in-1990s-cutting-research.html

Developed economies are less resilient to an emerging-market shock than they were in the 1990s, when crises from Thailand to Russia rattled investors without triggering a global recession.

That’s according to an 81-page study released March 5 by Morgan Stanley economists and strategists. They estimate a 1990s-style slump in emerging-market demand would create an average drag of 1.4 percent for four quarters on the growth of the U.S., while the euro area and Japan probably would be tipped into recession.

Reasons for the greater vulnerability include the fact that developing markets, and especially China, now have a stronger impact on the world’s economy, supply chains and trade. Emerging economies account for about half of global gross domestic product, up from 37 percent in 1997-1998.

Developed economies are also more exposed to their smaller counterparts via exports, corporate revenue and banking, and the financial crisis of 2008 means they are weaker now than two decades ago, said the authors, including London-based Manoj Pradhan.

The Federal Reserve and the Bank of Japan probably would respond by easing monetary policy, lowering commodity prices and bond yields as a result. That would help revive growth, although the recovery would be weak, they said.

Yet another reason for printy printy, although how much of this risk has been due to loose Fed monetary policy over the past couple of years? At least the solution is yet more easing of monetary policy.

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