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Beyond ‘conventional unconventional’ policies

The Emerging View

21 April 2016

Emerging Markets (EM) economies can be thought of as a flotilla of sturdy ships sailing on a sea of developed market risk. Policy makers in developed economies are now whipping up another storm and EM investors must beware of the potential consequences. Having exhausted both conventional and ‘conventional unconventional’ easing options and with the short-term impulse from asset purchases fading, developed economies are now slowing again and a central question is what they can do when the next economic downturn takes hold. Their options are limited to increasingly distortionary, economically costly and ultimately ineffective policies unless they start to deal with their underlying debt and productivity issues. Sadly, the rise of populism across most developed economies bodes poorly for reforms. Of all the developed economies, the US is probably least badly placed if only because it has a chance of inflating and devaluing its way out of debt. For investors, this will be costly and there is still time to escape the crash zone.

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