QE's crippling cost to developing countries

QE2 caused other countries to bemoan the knock-on effects on their own economies & brace for measures to try protect themselves.

With globalized finance, lower US interest rates accentuates the carry trade – investors borrow cheaply in the US and invest in other countries where interest rates & anticipated returns are higher.

Massive inflows of “hot money” into emerging markets cause their currency to appreciate strongly thus inhibiting exports, & stoke asset bubbles. For example, Brazil's Real rose a stark 35% from 2008.

Developing countries have to shield their currencies by accumulating reserves or imposing capital controls, perhaps both. Accumulating reserves is costly as these funds are withheld from investing in their own economies. Capital controls on the other hand are difficult to implement, attracting critical sentiments.

Amidst global frustration, exasperated governments have little choice but to competitively devalue their currencies to support exports.

What then can we expect to see from the looming specter of “currency wars” ?

Who pays the bill for Fed's QE2