Paul Krugman- This Age of Bubbles
So, another BRIC hits the wall. Actually, Ive never much liked the whole BRIC Brazil, Russia, India, and China concept: Russia, which is basically a petro-economy, doesnt belong there at all, and there are large differences among the other three. Still, its 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.
Whats going on? Its 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 theyve reversed course. As a result, Indias rupee and Brazils real are plunging, along with Indonesias rupiah, the South African rand, the Turkish lira, and more.
Does this reversal of fortune pose a major threat to the world economy? I dont think so (he said with his fingers crossed behind his back). Its 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 isnt completely absent this time around, but it looks much less serious.
In fact, count me among those who believe that the biggest threat right now is that policy in emerging markets will overreact that their central banks will raise interest rates sharply in an attempt to prop up their currencies, which isnt what they or the rest of the world need right now.
Still, even if the news from India and elsewhere isnt apocalyptic, its not the kind of thing you want to hear when the worlds wealthier economies, while doing a bit better than they were a few months ago, are still deeply depressed and struggling to recover. And this latest financial turmoil raises a broader question: Why have we been having so many bubbles?
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http://www.nytimes.com/2013/08/23/opinion/krugman-this-age-of-bubbles.html?hp&_r=1&