Also in Barron's, an excellent interview with Marc Faber on deflation and the emerging markets crisis. Excerpt:
Q: It [Asia] certainly seems to be blowing an ill wind in our direction. Isn't some
massive pump-priming in order?
A: The right medicine for the emerging countries would be to try to stabilize
their domestic economies as quickly as possible. I don't think this can be
achieved necessarily by lending them more money, because as you lend them
more money, their debt-to-GDP ratios rise and their credit ratings deteriorate --
and the yield spreads on their borrowings over U.S. Treasuries increase. In
other words, the emerging world's problem is that they have too much capacity
and are faced with an economic slump. They have depreciating currencies.
What they export -- mainly raw materials, T-shirts, Nike shoes, garments,
electronic components -- are all deflating in price. At the same time, the interest
rates on their borrowings, especially foreign borrowings, are going through the
roof. So they are faced with unbelievably high real interest rates that are, in my
opinion, totally unsustainable. These rates are a recipe for aggravating the
economic crisis and pushing these countries down the drain far further than
necessary [see chart].
The best medicine would be for the Western world to accept the fact that you
have to give them breathing space. Let's say, six to nine months in which these
countries wouldn't pay the interest on their debts; in which they could stabilize
their domestic economies one way or the other. Otherwise, I see a problem
similar to Germany's after World War I, where the reparation payments were
just too burdensome, resulting in hyper-inflation and all its social consequences,
including the rise of the Nazis. We have to be very careful that these emerging
economies don't get out of hand, leading to widespread political and social
disturbances.
For subscribers, the full article is at
interactive.wsj.com
Katherine |
