in the scenario of rapid adjustment of us current account deficit, for example following sizeable asian currencies appreciation, current account surpluses in em would have to correct massively, some countries may find that their current account surpluses are smaller than debt amortizations, and history shows that in 18 percent of cases sudden stops in emerging markets took place under current account surpluses. • calvo view implies very low risk of us long term rates going up ( high likelihood of soft landing, low likelihood of hard landing ), and relatively high risk of some emerging markets experiencing sharp current account reversals and possibly sudden stops. • calvo view is reinforced in the recent paper by faruqee, laxton, muir, presenti ( 2006 ) 18, which shows that even when a new wave of protectionism hits the global economy, the us growth will slow only marginally by 0. 2 percent, while impact on asia could be sizeable, reducing growth by more than 1 percent. caballero view : bubbles are inevitable and possibly long - lasting in economy facing asset shortages • there has been significant increase in global savings relative to investments ( you can merge bernanke global savings glut with imf global investment drought hypotheses here ) • this excess saving is chasing too few available financial assets, which leads to very high valuations ( rising equity indices, low long - term rates, low corporate and em spreads etc. ) • problem lies in the underdevelopment of financial markets in emerging economies, which due to poor governance and property rights do not have enough good quality collateral to back debt obligations. these economies have also many other macroeconomic and microeconomic deficiencies leading to asset shortages and reduction of value of existing assets such as : weak bankruptcy procedures, chronic macroeconomic volatility and sheer appropriation risk. http : / / www. rybinski. eu / wp - content / uploads / gi _ en _ rybinski _ panel _ discussion _ 1 _ 09 _ 2006. pdf calvo g. and talvi e. ( 2006 ) “ the resolution of global imbalances : soft landing in the north, sudden stop in emerging markets? ”, ceres, documentos de trabajo. caballero r. ( 2006 ) “ on the macroeconomics of asset shortages ”, nber working paper no. 12753, december 2006. faruqee h., laxton d., muir

will continue, and yield curve inversion may even deepen on major markets, and knock the door in some emerging markets 20. pimco seems to subscribe to this possibility, although they do not use asset shortage argument, but they do say : “ local markets investments may provide the greatest divergence of returns within the em universe, with those “ developing ” economies furthest along the road to “ developed ” market status able to enact traditional policy prescriptions in a slowing global economy and therefore providing enhanced return potential to local fixed - income instruments “. as a central banker in emerging market economy well advanced on the road to developed status i ask myself a question which view of the world is correct, because it may have different implications for growth and inflation prospects. should we expect slowing external demand combined with local currency strength or combined with a local currency weakness. these are important questions ( even in the context of falling exchange rate pass - through ) which will be empirically answered next year. today we can think only in balance of risks terms. evidence in the last few months, including december bis report 21 shows, that official institutions may have accelerated their attempts to diversify reserve assets, which may mean more demand for high - yielding assets and for non - core currencies, and in particular for emerging market currencies ( recall government of singapore investment corporation statement that emerging market weight in their assets under management will be increased, recall a number of hints given by oil exporting nations, or recall the statements given by gomez m. ( 2006 ) „ is it safe? ”, emerging markets watch, pimco, september 2006. i acknowledge that it would be against the historical evidence that after the end of the tightening cycle and the beginning of easing cycle the fall of 2 - year rates was deeper than that of 10 - year rates. but it is precisely the issue we discuss here : are historical patterns a good guide for the future? bis ( 2006 ) „ quarterly review ”, bank for international settlements, december 2006. chinese authorities that the central bank should be more open - minded about cooperating with the government institutions in managing huge reserve assets ). so, ceteris paribus, this factor will imply balance of risks skewed towards further risk premia compression in emerging markets in situation when us growth slows and expected returns in developed markets drop amid poor growth outlook. the important question is how it will end? temporary us growth slowdown is unlikely to solve global imbalances