The Emerging Market Shift of Global Economics

Here in Laguna Beach today, it feels like summer. Gentle ocean breezes struggle to keep the mercury below 80 degrees, as beachgoers of all ages struggle to avoid sunburn while basking in the sun.

The conditions on Wall Street are not so different. Freakishly pleasant trading action is luring investors into a stock market that seems inviting and serene. For more than a year, investors have been basking in the comfort of steady capital gains. The trick, of course, is to avoid getting burned.

It’s never easy to know when enough is enough. It’s never easy to know when to close up the beach chair and retreat from the beach or when to close out winning positions and retreat from the stock market. Too often, you stay longer than you should. But in the pleasure of the moment, consequences seem…well…inconsequential. You can always worry about consequences later, like when you’re peeling your hotel bed sheets off your blistered skin.

But your editor won’t be a killjoy today; he can do that tomorrow. Instead, he will turn his attention from the stock market to an unfolding story that might influence share prices…eventually.

There’s a lot of chitchat these days about parlous government finances and perilous currencies. Greece can’t balance its books, for example, and Germany is in no hurry to place twenty billion euros on the asset side of the scale. Neither is France rushing to aid the Greeks. Instead, Europe’s leaders chitchat, while Greece’s citizens riot.

We have no idea if this unstable situation will spiral out of control; but we are skeptical that it will spiral under control.

The massive and growing government deficits of the Developed World have an “end of an era” feel to them. Maybe the Greeks can lift themselves out of fiscal disaster by their own sandal straps, but does anyone really believe that? More broadly, does anyone really believe that Greece’s difficulties are unique to Greece?

One plus one still equals two, last we checked. And, unfortunately, one minus ten trillion and one still equals minus ten trillion…which is the approximate debt load of the US.

“The US government announced the biggest budget deficit ever – $221 billion – for the month of February,” Bill Bonner observed last week. “In other words, per family, the American government spent approximately $2,000 more than it received in tax revenues. Hmmm….if it continues at this rate, it will spend $24,000 more than it receives per family this year. In round numbers, the typical family will pay about $25,000 in taxes…and receive about $50,000 worth of ‘services.’

“Is that a great deal…or what? It’s an absurdity…it’s preposterous…it’s weird and unnatural. And it can’t last.

“As long as people thought they were getting something for nothing,” Bill explained, “this economic model enjoyed wide support. But now that they are getting nothing for something, the masses are unhappy. Half the US states are insolvent. Nearly all of them are preparing to increase taxes. In Europe too, taxes are going up. Services are going down. And taxpayers are being asked to pay for the banks’ losses…and pay interest on money spent years ago. Until now, they were borrowing money that would have to be repaid sometime in the future. But today is the tomorrow they didn’t worry about yesterday.

“Several countries are already past the point of no return,” Bill concluded. “Even if America taxed 100% of all household wealth, it would not be enough to put its balance sheet in the black. And Professors Rogoff and Reinhart show that when external debt passes 73% of GDP or 239% of exports, the result is default, hyperinflation, or both. IMF data show the US already too far gone on both scores, with external debt at 96% of GDP and 748% of exports.”

Ironically, as the government finances of the world’s Western powers deteriorate, the government finances of several developing nations are improving. The list of countries that are running government surpluses includes some surprising entries like South Africa, Indonesia and the Seychelles.

Epitomizing this divergence, America’s national balance sheet has become so bad it looks downright Brazilian. But guess what? Brazil’s balance sheet has become so exemplary it looks like the American balance sheet of the Eisenhower era.

US vs. Brazilian Government Budgets

It’s hard to say any more where the First World ends and the Third World begins. “We are all Keynesians now”…or something like that.

But rather than lament what’s gone wrong or what might have been, your editor prefers to anticipate what might go right. And it appears that some things are going very right for countries like India and Brazil.

The economic axis of the globe seems to be shifting away from the US and Europe. This shift might occur slowly, but it’s not too early to notice the trend…and to prepare accordingly.

Eric Fry
for The Daily Reckoning