The global economy faces a dilemma. Attempts to boost growth have lowered interest rates in advanced economies. The resulting hot money has moved exchange rates out of line with fundamentals, creating inflation and asset appreciation in the developing world. Accumulation of foreign reserves and the imposition of barriers to inward capital flows have begun to replace tariffs and quotas in the trade protectionism arsenals of governments.

Yet even as brewing currency wars threaten full-blown trade conflicts, we must remember one fact: this moment will not last. The 30-year era of progressively cheaper capital is nearing an end. The global economy will soon have to cope with too little capital, not too much. And worries about hot capital moving too quickly into emerging markets could soon be replaced by an era of financial protectionism – in which governments restrict outflows of capital as a defence against rising interest rates for corporations and consumers.

Since 1980 differences in the cost of capital in most countries have converged, as financial markets globalised and risk premiums in developing countries fell. Capital became plentiful, and long-term interest rates declined too – primarily as a result of falling investment in assets such as infrastructure and machinery. Global investment fell dramatically, creating a fall in the demand for capital substantially larger than the growth in supply created by Asian current account surpluses. In other words, the “saving glut” so often cited as a cause for low interest rates really resulted from a decline in global investment.