Firstly, it increases the amount of money owed by EMs who borrowed in USDs as opposed to their own local currency. This is simply due to currency effects, for example:

Here we have a company which owes USD 1000, but earns revenues in a different currency, XYZ.

Therefore, the company has to exchange XYZ into USD in order to repay its debt, which exposes it to changes in the USD/XYZ rate.

When USD/XYZ strengthens from 1 to 2, this doubles the amount owed in terms of XYZ, which means that it now has to find a way to make up the shortfall.

Unfortunately, times where the USD strengthens dramatically tend to also be times where USD reliant foreign economies also face economic headwinds.

As such, a strengthening USD leaves the company in a terrible position. It now owes more in terms of XYZ, even as the economy contracts and reduces its ability to generate the extra revenue needed to make up the XYZ 1000 shortfall.

On top of this, businesses that have to pay their suppliers in USDs now find that their costs have increased by as much as the dollar has strengthened against the local currency.

This has a major economic impact as firms have to find some way to lower their costs – most likely by laying off workers. These layoffs in turn send a deflationary impulse rippling through the economy, as people start conserving cash and cutting spending in the face of mounting job and income insecurity.

Furthermore, import costs for all goods and services priced in USD, commodities being a prime and very pertinent example, will have skyrocketed. Supply cuts made by producers in the face of falling demand will exacerbate this situation, as observed in oil and copper during March/April 2020.

The higher cost of imports now creates an inflationary impulse in the economy, but not the “good kind” of inflation.

In fact, this is the worst possible kind of inflation to have at a moment when the economy is also contracting and thus experiencing deflationary forces.

Why?

Because the higher prices only serve to further increase the cost burdens of already struggling businesses. More layoffs are in order, which compounds already existing deflationary impulses and further reduces the willingness of EM creditors’ to extend any sort of credit for fear of loss. 

And so the negative feedback loop perpetuates itself until all markets involved, USD, interest rates, labor, etc, find some kind of tenuous balance from which a potential recovery might arise. 

Note that what started out as a USD shortage in the global Eurodollar market has now morphed into a massive economic crisis in the countries which cannot get USDs. At the height of the crisis, this would include pretty much every country other than the United States. 

The sequence of events and their interconnectivity described in this 4 part article are not a hypothetical, reductive and overly linear forecast of events that might happen.

They have already happened, twice in very big ways in 2008 and 2020, with a few smaller ones along the way, causing massive economic damage.

Even so, those in charge continue to not only prescribe policies that undermine more than they help, they also continue to misdiagnose the problem!