1/7. Warning: a geeky thread on #EmergingMarkets “original sin”. There is a seemingly unanimous view that local currency borrowing lessens EM vulnerabilities and allows countries to engage in counter-cyclical policies. I am not convinced.

2/7. The argument only works if one believes local-currency investors are less “flighty” than $-investors. But, of course, they aren’t. If local debt is risky, local-FX investors can (and often do) run. #EmergingMarkets.

3/7. The argument also works if one thinks #EmergingMarkets CBs can provide ("print") the liquidity to finance local-debt when/if needed. But excess liquidity leads to inflation and weaker FX. A debased currency is a tax on creditors that is no less painful than default.

4/7. Three inevitable retorts. First, if DM is doing QE, why can’t EM? Well, EMs are just not DMs. “Trust” in local currency matters. A DM investor is happy hoarding excessive local liquidity. An EM economic agent is not. In EM, undesired money will chase $s. #EmergingMarkets

5/7. Second retort: large output gaps mean EM CBs can ease without fearing inflation. But, EM Phillips Curve are flat. If there is no trust in the local currency, the “store of value” argument for money demand collapses—regardless of the economy’s health. #EmergingMarkets

6/7. Third retort: negative DM real rates debased DM FX and raised EMFX's relative attractiveness. EM CBs can monetize without fear of large depreciation. Makes sense if DM monetary policy stays easy. Taper Tantrum is a reminder of what happens when DM monetary policy reverses.

7/7. In sum, I am not convinced the #EmergingMarkets “original sin” has been vanquished. Local-FX borrowing is no panacea. Inevitably, fiscal realities will come back to haunt EM. And when they do, excessively easy monetary policy won’t be the magic wand its touted to be.