by Bruce Yandle
Mercatus Center
March 11, 2014
Quivering financial markets in a post-taper economy remind you to follow the money when trying to predict where the world is headed. New Fed chair Janet Yellen spoke truth when she testified in February that the Fed had stopped watering the money tree and that US labor markets were a long way from normal. When the money tree was yielding bucks at a fast pace, investors looked to the developing world for yields well above the Fed-preferred zero point. Foreign currency values rose relative to dollars as investors fattened their portfolios, and foreign equity markets soared. Then tapering reversed this. Investors began to sell their foreign equities and buy dollars. Home currencies weakened, prices for imported goods increased, and taper-driven inflation entered the developing world. Political instability followed. This paper explores the central question: what will happen as other central bankers cut off the water that feeds their money trees?

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