In recent months, as financial markets have priced in the prospect the US Federal Reserve will taper off its quantitative easing and US bond yields have climbed, the flood tide of money which had flowed into emerging markets has turned.
Among the effects have been double-digit percentage declines in the exchange rates of India and Brazil.
As the rupee hits new lows it seems to be one of those cases where billionaire businessman Warren Buffett's aphorism applies: that it is when the tide goes out that you discover who has been swimming with no togs on.
India's currency crisis - rather like New Zealand's in 1984 - has focused minds on underlying structural weaknesses, with a lot of commentary from within India about policy paralysis, cronyism and corruption, and so on. Is that fair? From this distance, who can say.
What is beyond dispute is the close correlation between the rise in US benchmark interest rates since May and the depreciation of the rupee. A chart in the New Zealand Institute of Economic Research's latest Quarterly Predictions, released Tuesday, makes that very clear.
And if US monetary policy can have that impact on the third largest economy in Asia it is vain to imagine that little old New Zealand can shield itself from these sorts of forces.
Yet the Opposition parties continue to peddle the idea that if only the Reserve Bank was told not to be so hung up on inflation, and if its interest rate decisions were made not by the governor but by a board stacked with representatives of the tradable sector, a lower exchange rate would ensue and New Zealand's parlous external accounts would come right.
Never mind that in only a small minority (five) of central banks across the developed world are interest rate decisions made by a committee containing external members. The vast majority, including the Federal Reserve and the European Central Bank, leave it to the central bankers.
Never mind that when it comes to international competitiveness it is the real exchange rate that matters, not the nominal one. You do exporters and firms competing with imports no favours by letting inflation run away on them.
Never mind that there is no simple mechanical connection, as the critics of the status quo imagine, between relative interest rates and the exchange rate.
It is more complicated than that. Relative economic growth outlooks, and what that is liable to mean for future interest rates, are what matters.
Monetary policy settings that are not credible, and do not look sustainable in light of evidence of what is happening in the real economy, will cut no ice in foreign exchange dealing rooms.
The governor, like a judge, has to respond to the evidence in front of him, in light of his statutory obligations.
Judgment is required, and errors of judgment are always possible.
But in the end the evidence is what it is. Right now the evidence includes an overheated property market, in Auckland anyway, domestic (non-tradables) inflation of 2.5 per cent and inflation expectations two years out of 2.4 per cent.
It also includes a kiwi dollar which has fallen about 7 per cent since April against the US dollar, notwithstanding expectations in the financial markets that the Reserve Bank will raise the official cash rate by at least a percentage point next year.
In the meantime the bank is trying a new macroprudential policy in a bid to cool the housing market, limiting low-deposit mortgages as a share of new lending by the banks.
Westpac's economists have been looking at the effectiveness of macroprudential policy in the four countries which have used it and are most like New Zealand - South Korea, Canada, Sweden and Israel.
They conclude that the effects of macroprudential tightening tend to be modest and short-lived, with most of the impact occurring within a three to six-month window. Multiple turns of the screw over several years may be required.
The impact is to slow the growth in house prices and household debt rather than reverse it.
Price-based measures, which alter the cost of credit, appear to be more effective that quantity-based measures like the one the Reserve Bank has opted for.
"Put another way, changing the financial incentives faced by borrowers and lenders seems to work better than limiting the number of people who can act on those incentives," Westpac economist Michael Gordon said.
As for the part of the equation that no one in New Zealand can do anything about, when he was asked this week about the turmoil around the ebb tide of capital flows affecting emerging markets, the former governor and head of the Apec secretariat, Alan Bollard, described them as "not particularly helpful". He is a master of understatement.
NZIER's principal economist Shamubeel Eaqub warns that if the latest emerging market scare becomes more serious "it will almost surely result in a recession in New Zealand".
"A full-blown capital account crisis like the 1997/98 Asian financial crisis is not yet likely," he says. "But it is possible and should be on the watch list."
