A steep rise in credit; rapid increases in house prices to levels way beyond available
income; use of overvalued property as further collateral to demand additional
funding from the banking system, resulting in even higher levels of debt; an increase
in the amount of credit needed for the marginal growth of gross domestic product; a
constrained installed capacity that yields to inflationary tensions; a labor force with
double digit wage rises; limitless liquidity flowing into sectors with low productivity,
such as real estate; a relaxation of the rules for granting loans; a rapid increase in
corporate debt as a consequence of accelerated investment, mergers, and
acquisitions, all fanned by the intoxicating feeling that demand will just keep going
up; a central bank incapable of containing such a self-complacent liquidity binge,
with interest rates far below those recommended by the Taylor rule; a political class
living off an apparent bonanza, refusing to carry out the reforms needed to avoid
disaster when the cycle eventually changes, ignoring calls for serious cutbacks in
spending, or rises in taxes that could counteract the exuberance.
Spain in 2006? The U.S.? Britain? Iceland, Greece, Ireland? No. I am talking about
emerging countries, in particular Brazil, Russia, India and China, the four known
collectively as the BRICs. In my opinion, the BRICs are repeating many of the same
errors committed by Europeans and North Americans in the lead-up to 2007, namely
A housing bubble. Lax monetary policy has allowed unsubstantiated rises in the price
of housing vs. available income, fuelled by bank loans. The growing value of houses
has in turn brought about rampant consumerism coupled with even greater
mortgage debt, piling yet more pressure on house prices.
Inflation. Savage increases in circulating capital, to keep pace with the speed of price
rises, have made inflationary tensions inevitable. Inflation has been further fuelled by
large wage increases, a production system operating beyond capacity, alarming
industrial price growth, and extremely dangerous price rises in countries where food
constitutes a considerable percentage of the consumer price index.
Over-reliance on the financial sector. This results from failing to curb increasing
credit penetration as a percentage of GDP, dodgy criteria for awarding loans,
dubious value of collateral assets, and, in China, the increasing influence of a
???shadow banking??? sector.
Unprecedented widening of the inequality gap. This is brought on by ignoring policies
that are essential to ensure at least minimum levels of social cohesion. Such
measures include halting inflation in food prices, which harm the poorest classes
(one way of combating this would be to revalue the currency, which would harm the
interests of the export oligarchy). Greater inequality results in greater geopolitical
tension, as we are now seeing in the Arab world.
Too much investment with uncertain returns. This comes from the failure to apply
strict fiscal policies to plans for investment in infrastructure of questionable benefit
(such as the ???bridges to nowhere??? built by the Japanese in the 1990s or Spanish
airports with no planes), as well as excessive residential investment.
Dependence on cheap money: ???The dollar is our currency, but your problem??? John
Connally, the U.S. treasury secretary, said to his French counterpart in 1971, just
before the Bretton Woods monetary system blew up. The same is true today, The
U.S. Federal Reserve???s zero rates of interest are aimed at resuscitating the American
economy, but they have brought about a wave of liquidity that looks to emerging
economies for profit, worsening an already delicate situation.
Fortunately, the stupidities committed by Europeans and Americans between 2002
and 2007 have served to provide excellent lessons for emerging countries that
should enable them to avoid the worst practices. Efforts are under way in the form of
less lax monetary policies in China (where the central bank is striving to curb the real
estate market, having achieved to date a 10% fall in house sales), in Brazil (where
interest rates now stand at 12.5%), and in Russia and India (both of which are now
raising interest rates), but they are woefully inadequate to stem the coming tide. The
worrying thing is that so far very little has been achieved. If more radical measures
are not taken, real estate markets will overheat and enter a crisis, and we will be
facing a situation similar to the subprime debacle of February 2007.
If real estate collapses and the resulting banking crisis affects the rest of the
economy, there will be a substantial drop in the demand for raw materials, with a
corresponding fall in exports from countries that produce and export raw materials,
and in OECD exports to emerging middle classes. A new tsunami could sweep
around the world and threaten recovery.
The BRICs still have time to stop this from happening by preparing ???soft landings,???
but then there is also the terrifying thought that there have been precious few soft
landings in the course of history, especially when investment as a share of GDP has
been consistently high.