Welcome To Phase Three Of The Global Financial Crisis

by James Gruber on January 29, 2014

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{ 5 comments… read them below or add one }

Mike February 5, 2014 at 2:45 am

Dear Mr. Gruber,

I am really grateful of your replies Sir.
I have prepared a conceptual model and I’d like to share it with you if it is not a trouble for you. Where could I send it to you sir?
I have considered your comments in to the model too.



James Gruber February 4, 2014 at 8:44 pm


You’re on the right track. I would add commodity price declines as another factor, though this is partially tied in with China.

I think you need to start with the current account deficits of the various countries and why these have occurred. The reasons are principally domestic and differ from country to country. Then branch out into the other factors which exacerbated the capital flows into and out of the countries.

The relationship of exchange rates and stock markets is an interesting one. There isn’t a direct relationship. Of course, if you have to borrow to finance your investments, which these current account deficit countries do, and that financing dries up, it impacts a country’s currency, bond ratings and ultimately the stock market. The most recent dramatic example of this was the Asian crisis in 1997.

I hope that helps.


Mike February 4, 2014 at 1:22 am

Dear Mr. Gruber,

Thanks for your reply.
EM has been under the effect of 3 major events since 2009 which have caused it to suffer severely in terms of cash outflow and currency. 1) The Fed’s QE and Tapering, 2) the ups and downs in china’s economy 3) domestic political issues in EM countries.
Do think other factors are involved, that i have not mentioned above?
Do you think having these factors in mind with the purpose of evaluating the relation of exchange rates and stock prices (during the period of each events) and cash out flow in state owned and private firms (evaluating separately) is a good idea for a PHD proposal?
Would you please kindly help me to improve the idea ?

James Gruber February 3, 2014 at 8:34 am


Thanks for the question. I am not sure that I understand it fully. However, the run on certain EM currencies has occurred due to large current account deficits and subsequent capital outflows. That’s forced them to hike rates to defend their currencies. This has obviously shaken faith in economic models, impacting share prices.

Many EM countries made themselves vulnerable given large current account deficits and a lack of reform, leaving them vulnerable to capital outflows. That said, the Fed bears some responsibility for the distortions in capital flows in EM created by QE.


Mike February 3, 2014 at 8:22 am

Dear Mr. Gruber,
I read your article and to be honest i am a fan of yours.
what do you think of the relation between exchange rates and share prices and also cash in/out flow in EM?

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