As the US Federal Reserve attempts to exit from its unprecedented policy of massive purchases of long-term assets, many high-flying emerging economies are suddenly finding themselves in a vise. Currency and stock markets in India and Indonesia are plunging, with collateral damage evident in Brazil, South Africa, and Turkey.

The Fed insists that it is blameless the same absurd position that it took in the aftermath of the Great Crisis of 2008 to 2009, when it maintained that its excessive monetary accommodation had nothing to do with the property and credit bubbles that nearly pushed the world into the abyss. It remains steeped in denial: Were it not for the interest-rate suppression that quantitative easing has imposed on developed countries since 2009, the search for yield would not have flooded emerging economies with short-term "hot" money.

But there is plenty of blame to go around, the Fed is hardly alone in embracing unconventional monetary easing. Moreover, the aforementioned emerging economies all have one thing in common large current-account deficits.

A large current-account deficit is the classic symptom of a pre-crisis economy living beyond its means in effect, investing more than it is saving. The only way to sustain economic growth in the face of such an imbalance is to borrow surplus savings from abroad.

That is where quantitative easing came into play. It provided a surplus of yield-seeking capital from investors in developed countries, thereby allowing emerging economies to remain on high-growth trajectories. Research from the International Monetary Fund puts emerging markets' cumulative capital inflows at close to $4 trillion since the onset of quantitative easing in 2009. Enticed by the siren song of a shortcut to rapid economic growth, these inflows lulled emerging-market countries into believing that their imbalances were sustainable, enabling them to avoid the discipline needed to put their economies on more stable and viable paths.

This is an endemic feature of the modern global economy. Rather than owning up to the economic slowdown that current-account deficits signal accepting a little less growth today for more sustainable growth in the future politicians and policymakers opt for risky growth gambits that ultimately backfire.

That has been the case in developing Asia, not just in India and Indonesia today, but also in the 1990s, when sharply widening current-account deficits were a harbinger of the wrenching financial crisis of 1997 to 1998. But it has been equally true of the developed world.

The United States' gaping current-account deficit of the mid-2000s was, in fact, a glaring warning of the distortions created by a shift to asset-dependent saving at a time when dangerous bubbles were forming in asset and credit markets. The eurozone's sovereign-debt crisis is an outgrowth of sharp disparities between the peripheral economies with outsize current-account deficits especially Greece, Portugal, and Spain and core countries like Germany, with large surpluses.

Central bankers have done everything in their power to finesse these problems. Under the leadership of Ben Bernanke and his predecessor, Alan Greenspan, the Fed condoned asset and credit bubbles, treating them as new sources of economic growth. Bernanke has gone even further, arguing that the growth windfall from quantitative easing would be more than sufficient to compensate for any destabilizing hot-money flows in and out of emerging economies. Yet the absence of any such growth windfall in a still-sluggish US economy has unmasked quantitative easing as little more than a yield-seeking liquidity foil.

The exit from quantitative easing, if the Fed ever summons the courage to pull it off, would do little more than redirect surplus liquidity from higher-yielding developing markets back to home markets.

Never mind the Fed's promises that any such moves will be glacial, that it is unlikely to trigger any meaningful increases in policy rates until 2014 or 2015. As the more than 1.1 percentage-point increase in 10-year Treasury yields over the past year indicates, markets have an uncanny knack for discounting glacial events in a short period of time.

Courtesy of that discounting mechanism, the risk-adjusted yield arbitrage has now started to move against emerging-market securities. Not surprisingly, those economies with current-account deficits are feeling the heat first. Suddenly, their savings-investment imbalances are harder to fund, an outcome that has taken a wrenching toll on currencies in India, Indonesia, Brazil, and Turkey.

As a result, these countries have been left ensnared in policy traps: Orthodox defense strategies for plunging currencies usually entail higher interest rates, an unpalatable option for emerging economies that are also experiencing downward pressure on economic growth.

Where this will stop, nobody knows. That was the case in Asia in the late 1990s, as well as in the US in 2009. But, with more than a dozen major crises hitting the world economy since the early 1980s, there is no mistaking the message: Imbalances are not sustainable, regardless of how hard central banks try to duck the consequences.

The author is a faculty member at Yale University and former Chairman of Morgan Stanley Asia. Project Syndicate

(China Daily 08/29/2013 page8)