March 8, 2011

Emerging Markets Overheating, Inflationary

Yet another quick hit.  The IMF is looking at emerging market economies that have powered the global recovery and considers inflation to be a significant danger. The emerging markets they're talking about aren't just the small players - they include the likes of China and Brazil.

"For the emerging economies, growing at 6.5 to 7 percent, their margins of excess capacity have been largely used up, and as a result we're starting to see incipient signs of overheating," Lipsky told Reuters Insider in an interview.

After the global economic slump of 2008 and 2009, the recovery took divergent paths, with emerging markets powering ahead while advanced economies merely trudged along.

With growth and interest rates remaining unusually low across the developed world, investors have flocked to emerging markets, bringing much-needed capital but also a risk of inflation
What that means is that if the emerging markets are carrying the burden and inflation gets out of control, you can bet they'll start fighting inflation hard and there goes the recovery.  Brazil is already looking to slow things down and so is China.  In fact, China's efforts have considerable impact on the Obama Terabudgets (Megabudgets is so 1983, Gigabudgets, so 1998).  The borrowing will dry up fast if China's inflation worries start driving their actions.
Separately, Zhu Min, special adviser to the IMF's managing director, said China's loan growth was too strong and addressing that was key to safely slowing down the economy.
That's the U.S. they are talking about with respect to loans. That might be good news for deficit hawks but that means the potential for QE3, money printing and spiralling inflation in the U.S. Those deficits have to be funded somehow.  Not to mention, it could curtail the recovery at the same time. Remember stagflation? While it's too soon to consider all that as the only outcome, the possibility should not be overlooked.
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