We might have been in the eye of the storm

The United States' gaping current-account deficit of the mid-2000s was, in fact, a glaring warning of the distortions created by a shift to asset-dependent saving at a time when dangerous bubbles were forming in asset and credit markets. The eurozone's sovereign-debt crisis is an outgrowth of sharp disparities between the peripheral economies with outsize current-account deficits especially Greece, Portugal, and Spain and core countries like Germany, with large surpluses.

Central bankers have done everything in their power to finesse these problems. Under the leadership of Ben Bernanke and his predecessor, Alan Greenspan, the Fed condoned asset and credit bubbles, treating them as new sources of economic growth. Bernanke has gone even further, arguing that the growth windfall from quantitative easing would be more than sufficient to compensate for any destabilizing hot-money flows in and out of emerging economies. Yet the absence of any such growth windfall in a still-sluggish US economy has unmasked quantitative easing as little more than a yield-seeking liquidity foil.

The exit from quantitative easing, if the Fed ever summons the courage to pull it off, would do little more than redirect surplus liquidity from higher-yielding developing markets back to home markets.

Never mind the Fed's promises that any such moves will be glacial, that it is unlikely to trigger any meaningful increases in policy rates until 2014 or 2015. As the more than 1.1 percentage-point increase in 10-year Treasury yields over the past year indicates, markets have an uncanny knack for discounting glacial events in a short period of time.

Courtesy of that discounting mechanism, the risk-adjusted yield arbitrage has now started to move against emerging-market securities. Not surprisingly, those economies with current-account deficits are feeling the heat first. Suddenly, their savings-investment imbalances are harder to fund, an outcome that has taken a wrenching toll on currencies in India, Indonesia, Brazil, and Turkey.

As a result, these countries have been left ensnared in policy traps: Orthodox defense strategies for plunging currencies usually entail higher interest rates, an unpalatable option for emerging economies that are also experiencing downward pressure on economic growth.

Where this will stop, nobody knows. That was the case in Asia in the late 1990s, as well as in the US in 2009. But, with more than a dozen major crises hitting the world economy since the early 1980s, there is no mistaking the message: Imbalances are not sustainable, regardless of how hard central banks try to duck the consequences.

The author is a faculty member at Yale University and former Chairman of Morgan Stanley Asia. Project Syndicate