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 Richmans' Trade and Taxes Blog

Is it 1929 again? - reposted from August 29, 2003
Howard Richman, 6/30/2015

[Note: I first posted this on this blog on August 29, 2003. With the Chinese stock market in free fall, it is becoming more and more apparent that I was correct.]

In today's Daily Telegraph, Ambrose Evans-Pritchard explained why U.S. Treasury interest rates have been rising:

As Indonesia, India, Ukraine, Brazil, Turkey, Venezuela, South Africa, Russia, Thailand and Kazakhstan try to shore up their currencies, the effect is ricocheting back into the advanced world in higher borrowing costs. Even China felt compelled to sell $20bn of US Treasuries in July.

"They are running down reserves by selling US and European bonds, leading to a self-reinforcing feedback loop," said Simon Derrick from BNY Mellon.

This is very close to my June 26 analysis  (see Why US Interest Rates have been Rising since May 1). At that time, I quoted an article which said that Chinese banks were selling their U.S. Treasury bonds, due to a liquidity crunch in China. Apparently, the liquidity crunch is emerging-market wide.

The emerging market countries built up their economies on the expectation that their export booms could continue forever. But eventually, those that export more than they import bankrupt the buyers of their products. The Southern European and U.S. governments tried to stimulate their economies to overcome the depressive effects of chronic trade deficits. That failed. Now they are trying to stave off government bankruptcy.

The exporters in the emerging market countries can't sell what they can produce. Their banks are calling in their loans, including their loans in the United States and Europe. All this started on May 1. 

In 1929, the chief mercantilist country of that day, the United States, went into a huge liquidity crunch and called in its world-wide loans. Instead of expanding the U.S. money supply, it contracted its money supply. Instead of taking down its trade barriers, it raised them.

The emerging market countries should now be expanding their money supplies and taking down their barriers to imports. The world's economists learned the importance of constantly expanding money supply from the 1929 fiasco, but they still haven't learned the importance of balanced trade.

We don't yet know the extent of the emerging-market liquidity crunch. If it is mild, maybe there is nothing to worry about. If it is severe, it still may not be too late for their central banks to restore liquidity to their banking systems, and it may not be too late for the trade surplus countries to take down their import barriers.

Is it 1929 again? If so, have we learned enough to avoid the crash?

Comment by Howard Richman, 7/9/2015:

I meant March 2013, not March 2003