Emerging Markets in Liquidity Crisis

I researched the strong decline in Liquidity Supply in the Emerging World from mid 2013 to Spring 2014. Many observers believe the problem is limited to Indonesia, Turkey & Argentina – thus isolated. But my personal research and the feedback of the researchers in my research network show it has broadened to some 16 Emerging Economies by mid March 2014.

The following Emerging Economies are experiencing a deceleration or constraint in Liquidity Support: China, India, Russia, Brazil, South Africa, Turkey, Mexico, South Korea, Indonesia, Thailand, Malaysia, Peru, Chile, Nigeria, Venezuela and Argentina.

The liquidity-squeezed Emerging Economies account for roughly 41% of World Output (IMF’s PPP-adjusted country weights). The governor of India’s central bank has made an appeal to Western and Emerging Powers to get together soon to address the rout. Most Policy Makers in Emerging Nations are unfortunately following their G7 peers in using monetary tools forcefully (short term fix) instead of taking the painful & unpopular measures to address their structural macroeconomic flaws.

Macroeconomic-Geopolitical Perspective: The current fast deceleration in Money Supply growth could prove to be “too late, too fast” and impact Global GDP growth. Emerging Nations used for years excessive growth in Money Supply to boost GDP growth – printed money, pushed excessive informal credit and welcomed QE money which was recycled via excessive Monetary Multipliers. Despite being warned they focused instead on aggressive foreign policies, market intervention and extensive military build-up. They failed to remove excessive credit before the FED began exiting QE. China alone allowed a doubling of her external debt in just 4-5 years. With European banks once more showing the biggest exposure, US banks seem less exposed.

What seems right for individual emerging nations, could prove negative for the global economy:

1. Most large and mid-sized Emerging Nations are decelerating Money Supply at the same time & too fast. The Liquidity and Credit squeeze will affect consumption, which in many countries is credit-driven, reduce GDP growth, make further devaluations necessary to regain lost competitiveness. The likelihood of collective competitive devaluations is rising.
2. Many of these nations have been experiencing rising political instability & geopolitical tensions before this Liquidity Crisis – with a significant rise in nationalism and calls for more intervention in free markets.
3. The deflationary pressures – that took massive QE and QQE to neutralize – will likely resume as Western corporate profits are revised downwards, lower inflation is imported and competitors improve their Terms-of-Trade. The Eurozone looks most vulnerable. With the partial exception of China and Mexico the large Emerging Nations still refuse to address their structural problems.

Many EMs implemented interventionist policies resembling those in Argentina, Venezuela & Brazil: Money Printing, excessive credit growth & protectionism. Although still far behind Argentina, they are also troubled & unsustainable just as Argentina’s 30 year socialist course nears “reset”. Brazil needs 3x more debt than Colombia, Peru and Mexico to build Net Wealth per capita – this low Macro Efficiency Ratio (MER) is a key proprietary indicator pointing to political instability. Mexico’s economy is more robust than Brazil’s thanks to lower household debt and superior cost competitiveness.

The Liquidity Squeeze in the Emerging World is uncovering a truth that many are reluctant to admit: Half of large Emerging Nations moving backwards politically and macro-economically – i.e. retraining free markets.