Paul Krugman is certainly one of my favorite economist and when he coughs markets can sometimes catch a cold. He is an unapologetic Keynesian and believes in strong liberal policies. Being a polarizing figure he often has controversial views about happening in the US economy and off course the world at large. This time his focus has been on the Emerging Market crisis that has engulfed Turkey, South Africa, China and even Nigeria. This is not the first economic crisis we have seen in recent times and certainly not the last. Iceland, Greece, Scotland and now Turkey have all threatened contagion with fear that it may set the world back into a recession.
He blames all this on developed economies who can’t hold back their thirst for higher yields and as such would not hesitate to move capital flows (cash) into emerging markets that are in many cases “subprime”.
If investors are being cautious and prudent, we are collectively, in effect, trying to spend less than our income, and since my spending is your income and your spending is my income, the result is a persistent slump. Alternatively, flailing investors — frustrated by low returns and desperate for yield — can delude themselves, pouring money into ill-conceived projects, be they subprime lending or capital flows to emerging markets. This can boost the economy for a while, but eventually investors face reality, the money dries up and pain follows.
If this is a good description of our situation, and I believe it is, we now have a world economy destined to seesaw between bubbles and depression. And that’s not an encouraging thought as we watch what looks like an emerging-markets bubble burst.
So what do you think? Are emerging markets like Nigeria Subprime?
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