Oct 28, 2008
The world isn't flat, it's flattened
It wasn't the world that got flat, contrary to New York Times pundit Thomas Friedman, but the emerging markets that got flattened.
Faddish conventional wisdom over the past few years held that American influence was fading as technology radiated to the far reaches of the world. When America's economy went into a ditch, though, the supposed economic superpowers of the future went flying, like children on skates holding onto the back of truck.
The American consumer, it turns out, played Atlas to the global economy, taking the exports of Asia, so that Asia could buy the commodities of Russia, Latin America and Africa. Remove the
American consumer, and Asian exports crash, taking commodity prices along with them.
The financial crash exposes the fragility of large swaths of the world. The political consequences will be terrible. The worst of it is that America will not be around to moderate the melee, not if Democratic Senator Barack Obama is elected president, that is. Those who objected to America's role as world policeman will get what they wanted, but they won't like it: a religious war reaching from Lebanon to Pakistan, and Colombian-style narco-war spreading to Mexico and Brazil.
The wave of American self-pity that may carry Obama to the White House stems, in turn, from a global crisis that has sunk a good deal of the developing world. Worst affected are the most populous Muslim countries, and Russia's "near abroad". Pakistan, Ukraine and Belarus are out of funds and have applied for help to the International Monetary Fund. Indonesia and Turkey face drastically increased borrowing and import costs. Iran's economy will implode with oil in the mid-US$60s.
The table below shows the cost of default protection, a gauge of hard-currency borrowing costs, for some emerging markets. The numbers are somewhat arbitrary, reflecting a freeze on credit to emerging markets.
Annual cost of five-year default protection in basis points above the London interbank offered rate (LIBOR):
Country Basis Points Above
That is, with LIBOR at 3.5%, the Russian government will pay roughly 15% for dollar funding, while Ukraine and Pakistan will pay about 30%, and Turkey about 11%. That does not accurately gauge the damage to their economies, though, for many of these countries depended on huge borrowings from short-term credit markets that now are frozen.
The economic crisis buoyed Obama out of his post-convention slump and exposed the emptiness of the Republicans. But it also has crushed the aspirations of the most populous Muslim countries. Even before the financial crisis, Pakistan and Turkey had turned towards political Islam. Pakistan's intelligence service is providing support to the Taliban in Afghanistan, jeopardizing the Western position. The financial crisis will push Pakistan further towards radical Islam. Now this proclamation will be preached from every mosque from Tyre to Lahore: "The corrupt West tried to seduce you with consumerism. Now the poisoned gifts of the West are shown to be an illusion, and those of you who lusted after them are left only with your humiliation."
Just what has the rest of the world done to challenge the economic hegemony of the United States? The commodities boom has evaporated in a matter of months, with most raw materials trading at half of their May 2008 peaks. Like the housing bubble in the United States, the commodities bubble turns out to have been a way for the capital of the West to invent profits where there were none to begin with. With the commodities bubble came a fad for investment in emerging market currencies, drawing hundreds of billions of dollars into high-yielding currencies like the Brazilian real, the Turkish lira and the South African rand. The most popular emerging market currencies have fallen by 30% to 50% from their peaks.
The stock exchanges of the BRIC (Brazil-Russia-India-China) combination have fallen half again as far as the US stock market this year in dollar terms:
Country Stock Market Change
2008 to Oct. 22
No one in Asia, it appears, knows how to make money when American import demand shrinks, and when Asian growth falls, raw materials prices collapse. No one in Lati