Much of what is happening in the global economy would have been unimaginable not
long ago. Just the idea that the United States would be in a position of even
technical default, let alone that its own obtuse politicians would deliberately
put it in that position, would have been labeled mind-boggling as recently as
two years ago.
The developing European disaster was more
But even so, only one week after another bigger, more
comprehensive rescue plan was unveiled, the situation in the markets has
reverted to where it was prior to the announcement of the plan. And that has
staggered even the skeptics and cynics.
The flip side of the woes of the
developed countries is the strength of the developing countries. That is the
accepted mantra. The future belongs to China, or maybe India, or maybe both. And
while these giants will dominate most of the world, another major player is
emerging in South America: Brazil.
These are the countries of the future
– or so everyone has been programmed to believe.
are not that simple. It is entirely possible that the flip side of the woes of
the developed world are the serious problems of the developing world. These
latter seem to be very different from the former, but they may not be. What is
certain is that they stem from the same source.
When you get down to the
roots, the global problem is that the global economy is totally unbalanced. That
was clear back in 2007, before the crisis exploded. What has made matters worse
is that after experiencing the severe crisis and dislocation of 2008-2009, and
spending vast amounts of money addressing the immediate symptoms of the crisis,
the world has not made any meaningful progress toward rebalancing its
In simple terms, the Americans are still focused on consumption;
their efforts are still directed to stimulating the economy via increased
household spending. And the Chinese are still focused on investment and
The extent of the problem was highlighted by an event earlier
this week that some analysts believe will prove to be a milestone in the
development of the Chinese economy and hence, by extension, of great
significance to the global economy. For the first time, two high-speed trains
crashed into each other. Mind you, these were “old” high-speed trains, compared
to the newer models that go much faster.
But that’s not the point. The
issue here is that this crash exposed a harsh truth about China’s incredible
record of rapid growth, specifically its enormous investments in infrastructure,
which makes it the mirror image of the crumbling American economy.
the Chinese have more high-speed trains than anyone else, but they have cut lots
of corners in building the system, and the cracks are now beginning to show up.
Same for houses and schools, as an earthquake last year highlighted. In fact,
it’s the same pattern right across the economy: too much investment, sloppily
executed because of the rush to meet government- imposed targets, standard
incompetence and, especially, corruption. But the warnings in advance and the
public outcry after a disaster occurs are all stifled by the authorities
(Reuters managed to report this week on the “guidelines” provided to Chinese
media with regard to their reporting of the train crash).
Nor is it just
China. India has enormous problems, too, albeit different ones. Then there’s
Brazil, which is again a very different story, although these countries are
commonly lumped together under the “BRIC” label (the R is for Russia, which is
totally different from the other three).
Brazil this week announced a tax
on derivative transactions in the foreign-exchange market. This is the latest
round in an ongoing struggle between the Brazilian government and large
financial institutions that have been pouring money into Brazil, to take
advantage of its high interest rates and rapid growth. This inflow has sent the
real, Brazil’s currency, spiraling higher and higher against the dollar (by an
amazing 48 percent since the end of 2008) and euro, making Brazil’s exports
The government has started this tax, at the rate of 1%, as
a warning shot – as if there haven’t been previous warnings, all of which have
failed to reverse the real’s rise. If necessary, the tax could rise as high as
25%, which sounds absurd, but that’s what the law says, and the Brazilians are
Anyway, 25% is not so much in Brazil. It turns out
that the Brazilian economy, which has come a long way over the last decade,
still has major problems – one of which is the cost of finance for ordinary
people. Currently, the average rate of interest on consumer loans is at 47%, up
from 41% last year.
So that’s getting worse, not better, despite the huge
inflow of hot money.
Not surprisingly, when faced with finance costs of
that magnitude, the cost of servicing this consumer debt is also horrendously
high: 24% of disposable income last year, higher this year. For the famously
indebted US consumer, the cost of servicing debt is “only” 16%, while for the
other big emerging economies, such as China and India, the rate is well below
10%. Hardly surprising, the delinquency rate on these debts is rising rapidly.
In short, expect unbalanced Brazil to tumble into trouble