Paul Krugman weighed in this week on the turmoil in emerging markets.
He connected the turmoil to weak economic performance in developed markets, and the mad rush by investors to seek return anywhere they can get it. What we’re seeing now is the downside of that — basically the argument is that Turkey (et al) are like subprime, and that they represented a search for returns in an economic environment that was very poor. Now that’s blowing up.
You may or may not have heard that there’s a big debate among economists about whether we face “secular stagnation.” What’s that? Well, one way to describe it is as a situation in which the amount people want to save exceeds the volume of investments worth making.
When that’s true, you have one of two outcomes. 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.
This is an idea that Larry Summers got a lot of attention for late last year in a speech about secular stagnation, the idea that basically the economy is continually underperforming, and so in the absence of good returns, we keep seeing speculative bubbles being formed.
This is, of course, is only one part of the emerging-markets story. The big countries that people are talking about (Turkey, South Africa, Argentina, etc.) each have distinct stories that makes them problematic. But when you see this big global rush of money in and out of groups of countries, it makes sense to tie it to a bigger issue.