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Emerging Markets Still Face The "Same Ugly Arithmetic"

Tyler Durden's picture




 

While Emerging Market debt has recovered somewhat from the January turmoil, EM FX remains under significant pressure, and as Michael Pettis notes in a recent note, any rebound will face the same ugly arithmetic. Ordinary households in too many countries have seen their share of total GDP plunge. Until it rebounds, the global imbalances will only remain in place, and without a global New Deal, the only alternative to weak demand will be soaring debt. Add to this continued political uncertainty, not just in the developing world but also in peripheral Europe, and it is clear that we should expect developing country woes only to get worse over the next two to three years.

 

 

Via Michael Pettis,

...

Nothing fundamental has changed. Demand is weak because the global economy suffers from excessively strong structural tendencies to force up global savings, or, which is the same thing, to force down global consumption. Lower future consumption makes investment today less profitable, so that consumption and investment, which together comprise total demand, are likely to stagnate for many more years.

Squeezing out median households

Two processes bear most of the blame for weak demand.

First, because the rich consume less of their income than do the poor, rising income inequality in countries like the US – and indeed in much of the world – automatically force up savings rates.

 

Second, policies that forced down the household income share of GDP, most noticeably in countries like China and Germany, had the unintended consequence of also forcing down the household consumption share of GDP. This income imbalance automatically forced up savings rates in these countries to unprecedented levels.

For many years the excess savings of the rich and of countries with income imbalances, in the form of capital exports in the latter case, funded a consumption binge among the global middle classes, especially in the US and peripheral Europe, letting us pretend that there was not a problem of excess savings. The 2007-08 crisis, however, put an end to what was anyway an unsustainable process.

It is worth remembering that a structural tendency to force up the savings rate can be temporarily sidestepped by a credit-fueled consumption binge or by a surge in non-productive investment, both of which happened around the world in the past decade and more, but ultimately neither is sustainable. As I will show in my next blog entry in two weeks, in a closed economy, and the world is a closed economy, there are only two sustainable consequences of forcing up the savings rate. Either there must be a commensurate increase in productive investment, or there must be a rise in global unemployment.

These are the two paths the world faces today. As the developing world cuts back on wasted investment spending, the world’s excess manufacturing capacity and weak consumption growth means that the only way to increase productive investment is for countries that are seriously underinvested in infrastructure – most obviously the US but also India and other countries that have neglected domestic investment – to embark on a global New Deal.

Otherwise the world has no choice but to accept high unemployment for many more years until countries like the US redistribute income downwards and countries like China increase the household share of GDP, neither of which is likely to be politically easy. But until ordinary households around the world regain the share of global GDP that they lost in the past two decades, the world will continue to face the same choices: an unsustainable increase in debt, an increase in productive investment, or higher global unemployment, that latter of which will be distributed through trade conflict.

Emerging markets may well rebound strongly in the coming months, but any rebound will face the same ugly arithmetic. Ordinary households in too many countries have seen their share of total GDP plunge. Until it rebounds, the global imbalances will only remain in place, and without a global New Deal, the only alternative to weak demand will be soaring debt. Add to this continued political uncertainty, not just in the developing world but also in peripheral Europe, and it is clear that we should expect developing country woes only to get worse over the next two to three years.

 

Read more here

 

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Tue, 03/04/2014 - 23:58 | 4510451 TideFighter
TideFighter's picture

The world needs a serious 1% virus. 

Wed, 03/05/2014 - 00:26 | 4510526 UselessEater
UselessEater's picture

 

problem = 'excess savings'

reaction = 'global New Deal'

ZH elegant solution = 1% virus

Wed, 03/05/2014 - 01:40 | 4510671 DoChenRollingBearing
DoChenRollingBearing's picture

Michael Pettis apparently is very respected as a China commentator, he also lives there.  Most of what I have seen (limited, and via Mish's blog) seems to be spot-on.

I will be in Peru very soon for a little while.  I will report back as to how they are doing.  A guy I know who works for Sundyne (capital equipment like pumps for chemical plants & refineries) says that only Colombia & Peru are doing well in LatAm.

I would not be in a position to say re LatAm as a whole, but can report back re Peru (although when I was in Costa Rica about a month ago, they told me THEIR economy was weak too).

Wed, 03/05/2014 - 07:12 | 4510983 Supernova Born
Supernova Born's picture

Math must be taught a lesson in respect.

Math cannot fight the Fed.

Math is no more than a crusader and a fool that shall be shown its place in the order of things.

Wed, 03/05/2014 - 00:27 | 4510531 Rock On Roger
Rock On Roger's picture

The world has a 1% virus, we need to kill the damn thing.

 

Stack On

Wed, 03/05/2014 - 00:37 | 4510557 Element
Element's picture

+1%

Wed, 03/05/2014 - 09:10 | 4511134 KickIce
KickIce's picture

Exactly, nothing works until we clean up DC and Wall Street.

Wed, 03/05/2014 - 00:28 | 4510537 CognacAndMencken
CognacAndMencken's picture

Doomer goon Alert!! Your echo chamber has been compromised!

Did ZeroHedge just post a pro-Keynesian article? As I read this, the author is calling for a modern day "New Deal" to offset the excess savings rate. Without it, unemployment will remain too high. That's the core of this article.

Great article, by the way. I completely agree. We need QE for the people, not the bankers. All that QE money went straight into the financial markets, which, in turn, filled the pockets of the plutocrats and the coffers of corporate profits.

Wed, 03/05/2014 - 07:18 | 4510994 kurt
kurt's picture

GIVE THE STIMULUS TO THOSE WHO WILL SPEND IT!

Wed, 03/05/2014 - 07:57 | 4511031 Poor Grogman
Poor Grogman's picture

Tax the FED!!

A small tax on every dollar of QE, ( say 10 %). An amount so insignificant the fed wouldn't even notice it.

Then just hand it out at street corners and sports events!

Here is a concept so simple, even the Bernanke could grasp it.

Just do it Hellen...

For the children's sake...

Tue, 03/04/2014 - 23:59 | 4510459 Greenskeeper_Carl
Greenskeeper_Carl's picture

Ugly athrimitic? Come on, get with the program. There's no such thing as math anymore, all that matters is how many magic unicorn farts we conjure into existence. Haven't you read any Paul krugman?

Wed, 03/05/2014 - 00:16 | 4510500 disabledvet
disabledvet's picture

I haven't read any of his work but i have certainly listened to him.

"He has product" as they say.
I would disagree with article's premise that "nothing fundamental has changed."

I cannot speak to what is on "Russia's" mind here...but clearly they are not merely A major supplier of resources but in many ways are THE major supplier of resources...in many ways...to the world.

While everyone here likes to talk about the Suez Canal...not many folks here talk about the Bosphorus.
http://en.wikipedia.org/wiki/Bosphorus

That thing can be "closed" simply by having a major clash of arms on the Black Sea.
"The Sultan need not do anything more but watch."

This unprovoked attack on Ukraine has an eerie "programatical" feel to it...almost like it was "contrived." My first instinct is to say the Russians walked into a trap...and my second instinct is to say they cannot get out of it now as well and "everyone else has just followed the order flow." That could include the President of the United States I might add.

So...no, not only does "math" still exist, but in many ways it matters now more than ever. "We all might need to find the off ramp here" shortly.

Somebody just decided to put some planets in motion...

Wed, 03/05/2014 - 00:11 | 4510488 HulkHogan
HulkHogan's picture

You heard it here first on ZH, "it is clear that we should expect developing country woes only to get worse over the next two to three years." That means BUY stocks in develping countries. ZH hasn't been on the right side of a trade yet. 

 

Wed, 03/05/2014 - 00:18 | 4510507 prains
prains's picture

neither has your hairline

Wed, 03/05/2014 - 00:29 | 4510519 chump666
chump666's picture

* Obama has Offered Russia's Putin a way out of Ukraine Crisis through use of Monitoring in Crimea and Pullback of Russian Forces -Senior WH Offici

Alright!

sarc

Wed, 03/05/2014 - 00:28 | 4510534 kellycriterion
kellycriterion's picture

Imo non-western players don't grasp the cost to the global economy of western banking cartels.

The stupendous risk cost has been demonstrated. I've heard estimates of 11 to 24 trillion in loans by the Fed to stem the financial crisis. But maintenance and opportunity costs? Given the nature of bank balance sheets, mark to model, and well they're called TBTF for a reason it's impossible to do anything but WAG.

I wonder if they really understand the currency manipulation game. There can be only one "real" winner, the dollar. Others can play and even achieve goals but only at a significant cost.

Wed, 03/05/2014 - 01:40 | 4510672 elwind45
elwind45's picture

Japan!

Wed, 03/05/2014 - 00:34 | 4510556 Element
Element's picture

The Bear may intervene to put this sick puppy down.

Wed, 03/05/2014 - 00:41 | 4510573 Schmuck Raker
Schmuck Raker's picture

Michael Pettis' take:

Will emerging markets come back?
Wed, 03/05/2014 - 01:36 | 4510660 elwind45
elwind45's picture

America should be building a giant wall in two to three years to keep the madness OUT? Really the soon the better!

Wed, 03/12/2014 - 02:00 | 4537515 Schmuck Raker
Schmuck Raker's picture

How'd that work for the Chinese?

Wed, 03/05/2014 - 03:38 | 4510831 pachanguero
pachanguero's picture

In Thailand where I live it's buble gone wild in real estate.

Wed, 03/05/2014 - 03:38 | 4510832 pachanguero
pachanguero's picture

In Thailand where I live it's buble gone wild in real estate.

Wed, 03/05/2014 - 03:51 | 4510842 q99x2
q99x2's picture

You don't need to be worrying about no dang rebound. All you have to do is: BTFD.

Wed, 03/05/2014 - 07:02 | 4510977 Dollar Bill Hiccup
Dollar Bill Hiccup's picture

Jobs?

No Jobs -> Bread and Circus

No Bread and Circus -> Pitchforks

Pitchforks -> Destruction

Destruction -> Rubble

Rubble -> Jobs

Wed, 03/05/2014 - 07:14 | 4510989 kurt
kurt's picture

Shovel ready!

Wed, 03/05/2014 - 07:03 | 4510980 Dollar Bill Hiccup
Dollar Bill Hiccup's picture

I need a Federal Government for certain things. Halve the budget and staff, and it's still too much.

Who will defend the homeland then? Defend it yourselves, bitchez.

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