Unfortunately, it does not mean the U.S. can escape a protracted bear market, or indeed a deflationary slowdown in the real economy. Both are now signaled by the inversion of the yield curve. Unfortunately, the unambiguous lesson of history is that it is harder to reactivate deflating economies, via interest rate cuts, than it is to rein in overheating economies through monetary tightening. This is a lesson which the former Bank of Japan governor, Yasushi Mieno, was painfully slow to learn in the early 1990s. This has also been the recent experience of Chinese Premier Zhu Rongji, who has been behind the curve in recognizing that deflation is now the greatest threat to the mainland economy.
Leaders can also wreak havoc by overreacting to the problems brought by deflation.
The bear market in the emerging markets will last much longer than necessary if the seductive case for capital controls is not fought much more aggressively. Finally, none of the above means that emerging markets should be written of as an asset class. Emerging markets are here to stay, if for no other reason than the populations of developing countries have developed a taste for capitalism and consumerism. The sooner creative destruction is allowed to work, the sooner they will emerge on the other side.