Emerging Markets: The Latest Bubble?
LIANE HANSEN, host:
This is WEEKEND EDITION from NPR News. I'm Liane Hansen.
As the economy shows hints of improvement, investors are looking for places to put their money. Many are pouring billions into emerging markets like China and Brazil, which are far outperforming those in the United States. Roben Farzad is a senior writer for BusinessWeek. And he joins us from the studios of the Radio Foundation in New York. Welcome to the program.
Mr. ROBEN FARZAD (Senior Writer, BusinessWeek): Good morning. Thanks for having me.
HANSEN: First of all, what's the appeal of the emerging markets? Why are people putting their money there?
Mr. FARZAD: Well, aside from all the subprime (unintelligible) that we've had to deal with, largely in the United States and Western Europe for the past two years, these countries have had really robust growth. A lot of them were commodity centric countries. Peru, for example, with copper mining. Brazil having a certain sugar ethanol stash. Other countries out of central Europe and Asia exporting other wares. And they have been a beneficiary of that.
And on top of that, they have, for the better part of a decade, been paying down their debts, have taken on - have gotten kind of fiscal religion after these rolling emerging market crises of 1997 through 1999. So, some of this was just accumulated, pent-up prosperity that they had. So, to the extent that they look far better than the United States and some more developed economies, investors really have been giving them the benefit of the doubt.
HANSEN: Is this maybe not a reckless thing to do, but something that could be risky?
Mr. FARZAD: Of course. And it's something that we saw very large, painfully large, in the past two years. Emerging markets took it on the chin broadly last year when the entire global economy collapsed. And we saw what happened in Wall Street and in Main Street, USA emanate out to the rest of the world. But ever since we've been seeing these purported, you know, insipient, green shoots since March, they've been on fire, I think.
The broad basket of them is up 75 percent. That's almost double what the United States has seen. So the question is: Are you giving them this much of a benefit of the doubt or big, big, big this much of a benefit of the doubt? And we know that that can lead to heartbreak when you have investors committing, in this example, 35 times what they're committing to the U.S. into emerging markets.
HANSEN: But you're saying that investing in emerging markets could prove to be lucrative for investors. So, then, what's the effect on aspects of the U.S. economy - the trade deficit or inflation, for example?
Mr. FARZAD: Well, these are portfolio flows, but in reality we see some - if you're an emerging, for example, the big 50-ton elephant in the room is China. That's become the regional heavyweight in Asia, especially now that Japan is having its worst recession in decades. China is taking some of the trillions of dollars that it has banked in its trade surplus and its general export machine-driven economy of the past 10 years and is plowing that back into its own economy right now. To put unemployed, idled factory workers back to work to help absorb the influx of migrant workers coming in from the countryside looking for jobs.
So we're seeing real structural transformations happen. I mean, this is money that China could just park into U.S. Treasury securities and it - content itself with keeping its currency cheap in terms of exporting more wares to the United States. But to the extent that it's taking our dollars, which it's accumulated and husbanded over the past 10 years and plowing it back into its own economy, I think, augurs well for the long-term health of that economy. Question is: Is it seeing a speculative Internet stock-like bubble right now?
HANSEN: Hmm. And in the minute we have left, I mean, with that money going into China, does the burden of getting the U.S. out of this recession fall heavily on them?
Mr. FARZAD: This is the hope. We have never seen any sort of precedent for this. Ten years ago, I talked about the rolling emerging market crises. You saw what happened in Asia and Latin America, broadly kind of roll across the earth. The United States was the readout of safety. We were doing well. We were working. We had the tech and Internet economy, and we were lifting the rest of the world out of its morass.
The hope is that it can work the other way around this time. Never have we seen that precedent take place in recent memory. These countries have historically been fiscal basket cases. But now, investors are betting, really, with outsized fervor that this could happen. So, hope springs eternal.
HANSEN: Roben Farzad is a senior writer for BusinessWeek. And he joined us from the Radio Foundation in New York. Thank you.
Mr. FARZAD: Thank you.
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