Whatever happened to globalization? We used to have a flat seamless world where capital, goods and services traveled across the miracle of the internet. Now it seems that all of this has ‘decoupled’. According to GE’s Jeffrey Immelt and other commentators, the markets of India and China are strong and independent. So it does not matter that the US has a melt down, because it won’t spread.

The US subprime problems occurred for two reasons. The first is excess liquidity. This allowed a disassociation between perceived and actual risk. The second reason is information. Financial engineering did spread the risk, but it also reduced transparency and increased the asymmetries associated with any debt.

What Immelt and other commentators ignore is that these problems are exacerbated in emerging economies where information does not move efficiently or is actively suppressed. China and India have been awash with the same excess liquidity as developed countries. The lack of credit reporting, efficient courts, private banks or even free speech, in short accurate and timely information, has so far buried potential issues. This does not meant that they are not there. Both China and India are struggling with overheated economies and unstable markets that are often unresponsive to government efforts or even reality.

There are housing booms in over thirty countries. Chinese firms are gambling with their cash flows. The Indian stock market can move over 9% in one day from a slight regulatory adjustment. What is worse is that the bankruptcy systems, the plumbing of economics, is either non existent or dysfunctional in all but the most developed economies. If things go south, which in time they always do, putting these economies back together will be a long and difficult process.

William Gamble

EMERGING MARKET STRATEGIES
Suite 1D
1990 Pawtucket Ave
East Providence, RI 02914
Tel: 401-272-8906;Fax:401-272-8139; Cell 401–829-6729
Internet: william@emergingmarketstrategies.com
http://www.emergingmarketstrategies.com/