A specter is now haunting the emerging market economies. It is the specter of U.S. economic overheating that will raise interest rates and provoke a major reversal of capital flows from the emerging market economies.
Any such capital flow reversal could have serious untoward consequences not only for the very troubled emerging market economies but also for both the U.S. and global economies. This especially would seem to be the case considering that the emerging market economies have never before been as indebted as they are today and that these economies now constitute around half of the world economy.
There now would seem to be every indication that by the end of this year the U.S. economy will experience significant inflationary pressure.
It is not only that with the passage of the Biden budget, but the U.S. economy will also be receiving this year a record peacetime budget stimulus of around 12 percent of GDP. It is also that it will be receiving that stimulus at a time that the Federal Reserve has its monetary pedal fully to the metal and that there is considerable pent-up demand in the economy.
The resulting spurt in additional aggregate demand will be occurring at a time that the Congressional Budget Office is estimating that the U.S. economy is operating at a level that is only some 3 percent below its potential. It will also be occurring at a time that the U.S. economy is already recovering strongly from the pandemic’s ravages.