Emerging Markets vs. Submerging Economies

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.

Bill Bonner
for The Daily Reckoning