Emerging Markets vs. Submerging Economies

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We’re back in Paris. The flight on Air France was long, but not disagreeable. It was even better in the First Class cabin. Not that we were in it. But we were curious about the people who were.

Usually, on the Air France flight from Washington to Paris, you see a few rich people. You also see some people you wonder about. Typically, there is an African diplomat…or a hack bureaucrat from an international agency. Sometimes you will see a hip-hop star…or a fashion model. Or just someone who lucked into an upgrade.

But on the flight from Beijing, the people traveling in first class were almost all Chinese. We could not tell for sure, but they didn’t have that dull, stuffed-shirt look of politicians and aparatchiks. Instead, they looked like real entrepreneurs…real business people…people who probably paid for their tickets themselves.

Here in Paris, the weather is warm. Everywhere you look, people are out at sidewalk cafes. Life is very pleasant in Paris…refined…stylish…

.but where’s the excitement? The novelty? The growth? The innovation?

There’s something missing… It feels a little old… A little depasse…a little like yesterday’s news…a little stale…

.like, soooo 20th century…

The buildings here are old. The money here is old too. In China, everything is new. New buildings. New roads. New money everywhere.

We’re always wondering how the world works. How can a nation of 1.3 billion people under control of the Communist Party become the most dynamic, most capitalistic, most success-oriented race in the world? How can they grow their capital wealth at 3 to 10 times the rate of the US – when America is supposed to be the “most flexible and most sophisticated” economy in the world?

You’ll remember that Wall Street claimed to be using its derivatives and other math-heavy, fancy-pants products to make the economy safer while speeding up the rate of growth. It claimed to be way ahead of the rest of the world in its ability to raise and allocate capital. To hear the nation’s leading economists and Wall Street banks tell the story, allocating capital to its highest, most efficient uses is what makes an economy grow. That’s capitalism right? Using capital to make people richer. So, who are the world’s best capitalists? Surely the people with the most experience at it, right? And the people who got Nobel Prizes for describing how it works, right? And the people with the most capital…the most skills…the biggest market…and the greatest success record in history, right?

So how is it possible that people who just discovered capitalism 20 years ago could do a better job of it than Harvard grads motivated by million-dollar bonuses? How could a smart guy, with the best financial education that money could buy, with hundreds of years of capitalism behind him, backed by a government that professes to want to help him and flanked by almost unlimited capital, technology, and expertise, fall right on his face? How did so many winners turn into losers?

We’ll have some ideas on the subject later in the week.

Back to the markets…

Stocks bounced on Friday. The Dow rose 125 points following a big drop on Thursday. Gold lost ground too – down $12.

US stocks are now down about 3% for the year. The markets are deflating…

Don’t expect to find out by reading the market commentary in the mainstream press!

Journalists, commentators and the financial authorities are busily misunderstanding everything. According to the weekend analyses, last week’s downturn was a reaction to bad news from Europe. They claim it’s all the fault of the dumbo Europeans, who can’t get their act together. They created a jacked-up common currency – the euro – but never unified their economic and fiscal policies. So many of the member states got in trouble. And now the others are reluctant to bail them out. And the risk is that either the strong nations drop out of the euro, or the weak nations are kicked out. Either way, the whole thing could collapse in a heap.

Europe has a problem. But at least it’s out in the open. Everyone can see what is going on.

But that’s not why stocks fell. We don’t know why they fell. But we know it wasn’t just because investors were nervous about what is going on in Euroland.

The commentators and financial authorities have misunderstood everything…

.from what caused the crisis of ’07-’09…

.to what good the bailouts achieved…

.to what is happening in the markets today.

Tim Geithner, for example, is quoted in the weekend press telling the whole world that the ‘recovery will continue despite problems in Europe.’

He does not seem to realize that the recovery is not real…and that problems in Europe are really no different from problems in the US…

The problem is too much debt – in Europe, Japan and the US. The bailouts add trillions in new debt. This is not a way to solve the problem. It is a way to make it worse.

There are emerging economies. And there are ‘submerging economies,’ says our old friend Jim Davidson. The economies of Japan, the US and Europe are sinking under debt. All the slick Wall Street products merely added more debt to the private economy. Now, central banks and central governments are adding more public debt, too.

Markets will react to the fundamental problem – no matter what the pundits and politicos say. They will mark down asset prices in the debt-burdened economies… The Great Correction is at work.

And more thoughts…

An update from the Emerald Isle, from our own Irish gem, Ronan McMahon. Ireland has been leading Europe by pledging deep cuts in the public budget. With a much lower government debt than the US, Ireland could still save itself. So far, the Irish have gone along with the ‘austerity’ measures with good humor. That may be changing:

“I really hope Ireland can hobble along (re below) but it seems to be looking more and more like a best case scenario. We ran the largest deficit in euro land last year. Tax revenues continue to tank this year. The banks need another 20-30bn, which could bring this year’s deficit north of 30% if the cash is dished out this year. The government proudly told us when they started giving Anglo [a major Irish bank] cash that it was ‘off book’ so it was ok. Now Europe is insisting it’s booked the year it’s paid. That’s why last year’s deficit numbers were revised up in March of April.

“We took our first doses of medicine but the mood is changing. There was a mini riot outside the Dail (parliament). The police held the line…ironic given that there have been quite militant murmurings of action from within their representative body. Another dose of medicine is due in the next budget. Another 3bn in cuts needs to be found (although the EU are now looking at our books to see if we need to shave more). This time it won’t be so easy to find or to cut.

“NAMA (our bad bank) seems to be insolvent from the get go, and may need to be recapitalized. Not even a single euro of interest is being paid on a huge chunk of the loans it has taken over. Our economy is completely out of whack. Big multinationals are doing well making chips to keep your computer running or stents to keep your heart running or little blue pills to keep other parts running. But, in total they only employ about 100,000 people.

“The public sector is bloated and horrifically expensive.

“Exporters to the UK, or retailers north of a line between Dublin and Galway have been living a nightmare with sterling weakness… Many have just disappeared. For the past 8 years the service sector was pretty much based on us selling houses to each other. Everyone had a ton of money…the bricklayer, the mortgage broker, the solicitor, the realtor, the BMW sales man, the stockbroker… That’s all gone.

“The residential real estate tidal wave hasn’t hit yet. Banks are ratcheting up interest rates in line with their cost of money. People will start walking away from their homes as they loose their jobs. Emigration is back…

“It’s pretty bleak. Hopefully we can hobble until we find the bottom of the rainbow.”

Regards,

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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12 Comments on "Emerging Markets vs. Submerging Economies"

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George
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Hi Bill,
China outsmarted the Anglo-Saxon Capitalistic model.Better still,
in China, Facism reign Supreme, would you admit it?

Cameron Murray
Guest

I would have thought part of the reason China is outpacing the US in growth and capitalist dynamism is that they started from a much lower base. The quality of life is surely still far greater for the average person in any European country, the US or Australia than in China.

Of course there is always the possibility that China will just be the last domino to fall.

Jason
Guest
From my POV, the reason china has had success is: a) resonably stable government (compared to other poorer countries) b) cheap labour c) a government (lucky enough) seems to be willing to make the counry richer (the chinese government could just decide to rape the country of its resources) d) corruption that mimicks capitalist wages somewhat This is something i find hard to understand, that as a communist country, the wages are all the same. How can people afford appartments/homes etc more than their neighbour? How can speculation occur? Ive heard this is because the use of credit has been… Read more »
huh
Guest

“This is something i find hard to understand, that as a communist country, the wages are all the same…”

Is this statement correct???

Joe
Guest

>>Is this statement correct???
No. Deng Xiaoping introduced the “socialist market economy”, which is seen as the major reason for China’s explosion. This introduced the idea of private companies, who have been doing all the innovating and money making.

huh
Guest

hmmmm sorry Jason, hope those 5 paragraphs didn’t take you too long to write mate : )

Ross
Guest

This is Bill at his most insightfull and he has the help of a Ronan account on Ireland that would have us believe that he has discipline of a real reporter’s reporter. An artist that accompanied me in our journey within China did her best landscape painting upon her return and so too it could be with one BB.

Jason
Guest

ah that makes sense then. oops

prozak
Guest

“So how is it possible that people who just discovered capitalism 20 years ago could do a better job of it than Harvard grads motivated by million-dollar bonuses”

I thought China has been around for thousands of years. Silly me. China only began 50 Years ago… of course that explains a lot… my old globe just has a blank hole where you can now find China….

prozak
Guest

I might add… capitalism is pretty easy when you have 1 Billion slaves available.

I reckon I could make a decent fist of a booming manufacturing economy in the Northern Territory if someone donated 1 Billion slaves….

Biker Pete
Guest

“I reckon I could make a decent fist of a booming manufacturing economy in the Northern Territory if someone donated 1 Billion slaves…. ”

Let’s hope they don’t settle for twenty five million… .

Don
Guest

In the Northern Territory they have a thing called NT time.

Not today, not tomorrow
Not tuesday
Not thursday
Next truck
or maybe Next train.

If you have lived there you will understand this one :)

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