The Newest Emerging Market
Desmond Lachman, a fellow at the American Enterprise Institute, was previously chief emerging market strategist at Salomon Smith Barney and deputy director of the International Monetary Fund’s Policy and Review Department. So, he’s spent a lot of time watching emerging markets from the IMF’s point of view, and pointing out where the leaders of developing countries ran the economy off the rails.
Just like he’s watching our political leaders doing the same thing to us. In essence, he writes that the US is repeating the same mistakes that led to Japan’s “Lost Decade”, and Russia’s default on it’s debt.
A singular characteristic of an emerging market heading for deep trouble is a seemingly suicidal tendency to become overly indebted to foreign creditors. That tendency underlay the spectacular collapse of the Thai, Indonesian and Korean currencies in 1997. It also led Russia to default on its debt in 1998 and plunged Argentina into its economic depression in 2001. Yet we too seem to have little difficulty becoming increasingly indebted to the tune of a few hundred billion dollars a year. To make matters worse, we do so to countries like China, Russia and an assortment of Middle Eastern oil producers — none of which is particularly well disposed to us.
Like Argentina in its worst moments, we never seem to question whether it is reasonable to expect foreigners to keep financing our extravagance, and we forget the bad things that happen to the Argentinas or Hungarys of the world when foreigners stop financing their excesses. So instead of laying out a realistic plan for increasing our national savings, we choose not to face up to the Social Security and Medicare crises that lie ahead, embarking instead on massive spending programs that — whatever their long-run merits might be — we simply cannot afford.
After experiencing a few emerging-market crises, I get the sense of watching the same movie over and over. All too often, a tragic part of that movie is the failure of the countries’ policymakers to hear the loud cries of canaries in the coal mine. Before running up further outsized budget deficits, should we not heed the markets that now see a 10 percent probability that the U.S. government will default on its sovereign debt in the next five years? And should we not be paying close attention to the Chinese central bank governor’s musings that he does not feel comfortable with the $1 trillion of U.S. government debt that the Chinese central bank already owns, let alone adding to those holdings?
Speaking of canaries in the coal mines, I note with interest that there have been two failed bond auctions in Germany this year, followed by a failed bond auction of 5-year gilts this week in London.
I just keep watching the kangaroo.