The Depression Goes Global

Recently by Charles Goyette: Goosing the Market

While the attention of the financial world and the business press have been focused so completely on the daily developments in Europe – though there’s not a game changer among them – other economic news from around the world has been largely crowded out.

The real news is that the depression is going global.

The spreading of the slowdown can be seen in the so-called BRIC nations. Surging growth from Brazil, Russia, India, and China has helped drive some of the world’s economic vitality for a few years now. But the downturn is now taking hold in those countries, leaving little to resist the rip tide of depression.

Here are some economic highlights from each of the BRIC nations:

Brazil: Commodity exports are crucial to the Brazilian economy. China is the largest buyer of Brazil’s exports, so a slowdown in China and lower commodity prices have affected Brazil. Growth has slowed considerably there already. 2010’s 7.5% growth was sliced to only 2.7% last year. It’s a trend in force: the Brazilian economy actually contracted in April. Foreign investments in Brazil appear to have reversed and become disinvestments.

Russia: Resource revenues, primarily earned from oil and natural gas exports, have helped drive growth of the economy and the middle-class in Russia. But it is a restive middle class that has taken its anti-Putin protests to the streets. As natural gas prices have taken a big hit in the last few years, and with oil down sharply since spring, Russia will run larger deficits, financed by inflation, a policy that will create more unrest. Earlier this year, the Russian central bank, which has been a net buyer of gold, surprised many with its first gold sales in five years.

India: Consumer price inflation in India is about 10%; food prices are increasing at a rate closer to 11%. Interest rates are high, the state deficit is widening, manufacturing has turned down sharply, and GDP growth is stalling. Standard & Poor’s, which dropped the outlook for Indian debt from "stable" to "negative" in April, says the slowdown puts India’s investment grade debt rating at risk.

China: Now the second largest economy in the world, China’s demand has had a huge impact on commodity prices. Slipping commodity prices may tell more about what is going on (or not going on) in China than any official numbers, which are no more reliable than government numbers in the U.S. Besides the slowing export sector determined by conditions outside the country, China has blown up a huge real estate bubble of its own. Central economic planning, state -owned enterprises, and crony deals, all widespread in China, are no more functional there than they are anywhere else in the world.

The People’s Bank of China’s concern about a slowdown was seen earlier this month as it cut key interest rates for the first time in years.

It has become a cliché, but it is nevertheless true that we inhabit a global economy. We cannot escape the effects of slowing conditions elsewhere in the world. Thanks in part to emerging market demand, U.S. exports were up 17% last year, mostly in manufactured goods. As emerging markets slow, so do U.S. exports. China’s slowdown threatens its ability to continue sponsoring U.S. debt. And then there is the inevitable currency warfare that ensues in a slowdown, as countries "race to the bottom" in their competitive devaluation of their own currencies, in the futile hope of generating prosperity by stimulating exports at the expense of destroying the people’s purchasing power.

My local newspaper sums up the G-20 nation’s talks in Mexico with a headline that reads, "G-20 talks on Europe debt spur optimism: Obama is encouraged strong action is near." It’s like Groundhog Day. It’s no different than the news stories about the European crisis that have run for years now. But no matter how many times the scene is repeated, the crisis of sovereign nations that spend more than they produce and cannot pay their bills is not fixed by loaning them more money.

The media focuses relentlessly on re-writing old news from Europe over and over. But despite the optimistic headlines, it is a situation that worsens as the debt deepens with each new rescue plan.

Meanwhile few notice that the tide is going out on the global economy.