George Magnus: We should take the emerging markets volatility seriously

George Magnus is one of the few economists that could reasonably claim to have predicted the financial crisis which began in 2007. And last night, he spoke with great concern about the budding crisis now ongoing throughout the emerging markets. I have posted the video below but I want to make a few comments about the discussion before you watch it.

I have written about the EM crisis for subscribers and I see three proximate triggers. First is what I am calling the slowing of Chinese growth and the rout in commodity currencies. Second are the macro imbalances and political weaknesses in several emerging markets like Argentina and Turkey. And third is the normalization of monetary policy in developed economies.

My view here is that people are paying far too much attention to the third cause i.e. the Fed’s tapering. Instead we should concentrate on the first two causes. Chinese rebalancing and slowing growth is going to be felt far and wide due to the loss of industrial commodities demand. And this will both engender an increase in bad debt in the Chinese financial system and economic weakness for commodity exporters. It is how stable the political institutions and how balanced the economies are in those countries which will determine how far-reaching the consequences are.

Now Magnus said last night that it is an emerging markets crisis, meaning we should worry about what is happening. It was interesting how he put it, reminding us that the Asian crisis started as a Thai Baht devaluation and metastasized and that the global financial crisis started as just a US subprime crisis before it too spiralled out of control. It occurs to me as well that the European sovereign debt crisis started as just a bust in Dubai before it too became an all-encompassing thing that ended in a depression in the eurozone periphery, several eurozone bailouts and debt restructuring in Greece. So we may well be in the next crisis already.

I am going to leave it there. But I also recommend you read Magnus’ FT piece from yesterday. He says “Emerging markets beyond Turkey face stormy skies”.

Video below

P.S. – I produce this show. So you can see me at the end of the clip talking to host Erin Ade about coffee.