The first signs of that turn, of the ebbing of the tide, are there in markets around the globe.

Since the Fed announced May 4 that "policy accommodation can be removed at a pace that is likely to be measured," meaning that the target for the short-term Fed funds interest rate would soon be raised, the Dow Jones Industrial Average has fallen by 3 percent and is now 700 points and almost 7 percent down on its early February highs.

The yield on the Treasury's 10-year note has jumped to approximately 4.8 per cent, a percentage point above its level in late March and 1.7 percentage points above the lows of only a little over 3 percent touched in June last year.

Corporate bonds in the United States and, even more so, emerging markets bonds have felt this move in Treasuries. According to John Bowler, Country Risk Director of The Economist Intelligence Unit in London, "Average spreads on emerging market bonds have already widened by more than 150 basis points from the very low levels reached in January...how much further spreads widen will depend on how aggressively the U.S. Federal Reserve tightens policy."

Currencies have also been on the move. The U.S. dollar has rallied and some of the currencies that had previously strengthened against it have been knocked back. The dollar is now trading at close to $1.19 per euro, as against a level of around $1.28 per euro three months ago -- a rise of 7 percent. The Mexican peso has hit an all-time low.

The Australian dollar, meanwhile, has lost 4 percent of its value against the U.S. dollar just since May 4, and a colossal 10 percent since April 1. From the southern hemisphere, too, the tide of money has ebbed.

Are all these trends linked? They are. The world economy is stitched together by flows of trade and flows of capital. Several years of ultra low interest rates in the United States have worked like global warming to raise the levels of what economists call liquidity around the world.

The ebbing of the tide began several months ago, as some of the comparisons we make above hinted, when the markets became more optimistic about U.S. growth -- and more fearful about inflation and interest rates. Now we will see what impact the ebb tide will have: what will stay afloat and what will be beached.

The U.S. housing market risks being left beached. The Mortgage Bankers Association reported May 12 that its weekly index of mortgage loan applications was down by 5.0 percent on the previous week -- and by 45.2 percent compared with the same week one year earlier.

The drop in mortgage applications reflects the rise in mortgage rates. The average interest rate for 30-year fixed-rate mortgages, the association found, increased to 6.32 percent from 6.10 percent one week earlier. In June 2003 the average rate for new 30-year mortgages was just 5.1 percent.

In 2003 as a whole the average was 5.7 percent. It was these exceptionally low rates -- which first appeared late in 2002, the first below 6 percent 30 year mortgage rates in decades -- that funded the mortgage financing boom that has now come to an end and the housing market sales and price boom which may be about to come to an end.

A new phenomenon in the housing market reflects an attempt by borrowers and lenders to evade rising rates: a shift towards adjustable rate mortgages. According to the MBA, the share of applications for one-year ARMs is now the highest in almost a decade and the rate on these mortgages was just 3.74 percent. These cheap one-year mortgages risk encouraging buyers to buy now, with the housing market inflated, and exposes them to the risk of payments they cannot afford in future if mortgage rates go up.

It is also lenders that could be caught out by the receding tide of liquidity. The U.S. mortgage market, like most US capital markets, is bigger and more flexible than any other in the world. Lenders securitize their mortgage loans and sell them on in a market in which the government-sponsored Fannie Mae is a huge player.

But the concern is that when markets are so easy, risk is not assessed properly. How vulnerable are US lenders and investors to a fall in house prices? It does nothing to reassure us that the Office of Federal Housing Enterprise Oversight criticized Fannie Mae's accounting a week ago, obliging it to restate its earnings.

The U.S. stock market, and stock markets around the world, must also be vulnerable now. In theory, the rise in growth that is threatening higher inflation (and therefore higher interest rates) should bolster them as companies earn more. But this depends on the degree to which abundant money has inflated markets excessively.

And moreover it is growth itself, and therefore earnings, that are vulnerable to higher interest rates. The recovery in the U.S. economy has been achieved through, on the one hand, tax cuts and federal spending increases--generating a $1.4 trillion increase in government debt under the current "it's the people's money" president -- and, on the other hand, very cheap money and a house price boom. Such is the size of its deficit that the government cannot cut tax rates more. And suddenly rising interest rates mean the cost of the debt President George W. Bush is accumulating is going to go up.

But the interest rate rise might not last long. Our view is that higher interest rates will be quick to hurt the bubbly stock and housing and bond markets that have helped to lift growth in the United States and elsewhere. It does not help that China, whose rapid growth has fuelled the global economy, also needs to quell its cheap credit and steady its boom.

As soon as 2005 the much vaunted U.S. recovery looks vulnerable. Renewed slowdown could come quickly -- and with it lower interest rates again. But the first question to be answered is this: when recovery has been created by flooding the world with money how many assorted (debt overburdened) around the world are going to be left beached?

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