Krugman writes: "It's a variant on the same old story: investors loved these economies not wisely but too well, and have now turned on the objects of their former affection."
Paul Krugman. (photo: NYT)
This Age of Bubbles
23 August 13
o, another BRIC hits the wall. Actually, I've never much liked the whole "BRIC" - Brazil, Russia, India, and China - concept: Russia, which is basically a petro-economy, doesn't belong there at all, and there are large differences among the other three. Still, it's hard to deny that India, Brazil, and a number of other countries are now experiencing similar problems. And those shared problems define the economic crisis du jour.
What's going on? It's a variant on the same old story: investors loved these economies not wisely but too well, and have now turned on the objects of their former affection. A couple years back, Western investors - discouraged by low returns both in the United States and in the noncrisis nations of Europe - began pouring large sums into emerging markets. Now they've reversed course. As a result, India's rupee and Brazil's real are plunging, along with Indonesia's rupiah, the South African rand, the Turkish lira, and more.
Does this reversal of fortune pose a major threat to the world economy? I don't think so (he said with his fingers crossed behind his back). It's true that investor loss of confidence and the resulting currency plunges caused severe economic crises in much of Asia back in 1997-98. But the crucial point back then was that, in the crisis countries, many businesses had large debts in dollars, so that falling currencies effectively caused their debts to soar, creating widespread financial distress. That problem isn't completely absent this time around, but it looks much less serious.
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