So what are the risks?
What can go wrong in the global capital markets when we have Chinese surpluses funding US deficits?
One risk is in the transition. China, India, Indonesia and Brazil have immense infrastructure needs. These four countries comprise over 40% of the world’s population but account for less than 15% of the global economy. If they invest some of their surplus into their own infrastructure, it could pay off handsomely through higher productivity.
But shifting surpluses from foreign to domestic investment is hazardous. It could evoke the bad old days of crony capitalism and political pay-offs, where corruption and incompetence become national liabilities. This was a major cause of the Asian Contagion in the late ‘90s. We don’t want to go back there again.
Also, investing external surpluses at home can put upward pressure on the currency, which could threaten a nation’s exports. The key is moving gradually–but even minor shifts can cause major disruptions when you have $2 trillion to invest.
Finally, cultural issues can make it difficult to shift spending back home. Most developing nations have a culture of saving: when there is no social safety net you tend to keep cash in reserve. Spending down these reserves goes against the grain.
But in the end, the surplus countries need to spend. Either that, or force the deficit countries to deflate.
Douglas R. Tengdin, CFA
Chief Investment Officer
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