FINANCE: Economic Problems Arrive in Emerging Markets
This article could be called “As The World Turns”. The Great Recession which was kicked off by a significant credit crisis that hit the United States in 2007. Three years later it arrived in Europe starting with Greece, Italy, Ireland, Portugal, France and Spain. This year it hit emerging countries namely China and Brazil. It is hard to say where it goes next but the contagion continues to spread.
While the problems may be similar, the solutions so far have all been different. The U.S. had the Federal Reserve Board to step in and help with several forms of stimulus, the current version of which is Quantitative Easing III. Europe tried austerity measures which did not appear to work well and have since moved to a form of stimulus through the European Central Bank. China can use the socialistic government to dictate what it wants and has since dropped in GDP (gross domestic product) from over eleven percent down in the five percent neighborhood.
It may be too early to see how China and other emerging countries will come out of their economic downturn but there appears to be some conclusions about the effects of stimulus over austerity.
We can look at two large developed countries both needing a fiscal life boat and their respective outcomes. Both Europe and the U.S. had to cut spending and increase taxes. We are recovering; Europe continues to deteriorate although they entered the race a little later.
According to several economists, the likely difference is our monetary policy. The Federal Reserve Board cut short-term interest rates back in 2008 and followed through with continued stimulus to the money supply through their bond buying program. The European Central Bank did eventually cut interest rates to 0.5 percent in May, which is still higher than the U.S. rates at zero to 0.25. They too started some bond buying programs but at a fraction of what the Fed is doing at $85 billion per month in this country.
The end result is the United States started coming out of recession and had continued on a path towards growth with virtually no lost ground or double recession. Europe continues to struggle as more countries announce deficit problems and are lining up for help from the European Central Bank.
When Greece first announced they were going to do on a significant spending diet, the riots and loss of major services and supplies threw the country into an economic standstill. Other parts of the Eurozone tried to follow suit which resulted in several countries voting out their leaders who were in favor of strict austerity measures.
Maybe the phrase “You can’t get blood out of turnip” stands. You have to fuel a little growth to keep from sliding backwards. While no one wants to continue the addiction indefinitely, it appears at this stage our monetary policy may have saved us from a prolonged recession or even a double dip.
The real question about the long-term consequences of course remains. Currently inflation is tame but over time we will learn the true effects of these levels of stimulus.
Meanwhile emerging countries are seeking their own measures of austerity and stimulus, first with spending cuts and interest rate changes. Unfortunately the world recovery is on hold until all parties are safely off the Kool-Aid and on their own economic two feet.
Patricia Kummer has been an independent Certified Financial Planner for 27 years and is President of Kummer Financial Strategies, Inc., a Registered Investment Advisor in Highlands Ranch, 4 year Top Wealth Manager 5280. She welcomes your questions at www.kummerfinancial.com or call the economic hotline at 303-683-5800.Any material discussed is meant for informational purposes only and not a substitute for individual advice.