A Submerging Global Economy

Many emerging markets are now turning to submerging markets as country after country is experiencing falling economies, currencies and stock markets.

The currency is often the best indication of a country’s economic health. Just look at these six currencies submerging into obscurity:

CURRENCY CONTAGION IS SPREADING

But these are just some of the worst ones. The currency collapse is spreading like wild fire. High inflation and hyperinflation is hitting country after country. Here are some more countries with collapsing currencies in 2018: Sudan -61%, Angola -39%, Liberia -18% and India -12%. The list goes on. There are at least another 15 countries whose currencies have lost 10% or more against the dollar in 2018.

GLOBAL STOCK DOWNTURN STARTING

AmazonBasics Security ... Buy New $52.78 (as of 03:30 EST - Details) Many major stock markets around the world are also telling us that the global economy is now starting a secular bear market. China is down 25% in 2018, Brazil – 20%, Turkey -23%, Italy -16%, Spain -15%, Germany -10%, UK – 10%. The Emerging Market ETF is down 20%.

The BRIC countries – Brazil, Russia, India and China encompass 40% of the world’s population and has a GDP of $20 trillion. Therefore, the weakness that these economies are showing is an ominous sign for what is to come. Their downturn so far is obviously not on the scale of Venezuela or Argentina but it is an indication of how the world economy is starting to fray at the edges.

EMERGING DOLLAR DEBT DISASTER

An economic downturn would not be so serious if the world wasn’t indebted up to the hilt. Western economies have debts that they can never repay but it is even worse for submerging markets since their growth has been financed to a large extent with US dollar debt.

Submerging market debt was $8 trillion in 2000 and is now approaching $50 trillion. 

The dollar denominated part of this debt has grown exponentially and since most of these countries’ currencies are falling substantially against the dollar, they are likely to default on their debt in coming years. As the graphs show below, dollar denominated debts have gone up 5 to 10 times for most of these countries. The currency of virtually every country in the graph, is coming off rapidly and will continue to fall until it becomes practically worthless.

ARGENTINA 60% INTEREST RATE

If we have a quick look at Argentina, we can see the pattern that will hit not only emerging markets but also the West. With high inflation and the Peso collapsing 50% this year, Argentina has raised interest rates to 60%.

No country can cope with interest rates at 60%, especially not one with a heavy debt burden. So rates at that level is total lunacy and will quickly kill the patient if it continues.

The message cannot be clearer. Debt growing exponentially and totally out of proportion to the growth of GDP will eventually lead to a currency collapse and then default. The world could deal with Argentina defaulting. It has happened numerous times already. Same with the catastrophic Venezuelan economy.  Although, there is a total collapse of both the economy and society, it will not in itself have global ramifications.

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