It is now evident that the way in which emerging markets are financed has a critical effect on the overall financial well-being of these countries.
The devaluation of the yuan hit emerging markets harder than it did countries that have large foreign currency reserves. This includes the debt-laden U.S. The financial management of countries is heavily influenced by competitiveness in international trade. This is much too important a skill to be left to central bankers and politicians who have no trade finance expertise. This scenario is made palpable by comparing FDR with the current U.S. Congress. In 1934, FDR who said that education is the first duty of a statesman, created the Ex-Im Bank. Robust exports create jobs and jobs were what was needed as a result of the Great Depression. By contrast, the current cast of characters running the U.S. have not re-authorized the Ex-Im Bank. To quote Shaw, "those silly people don't know their own silly business." They (Marines are not supposed to use this term "they" because it violates the first law of leadership. You can delegate authority but never responsibility. There is no "they," there is "me.") have acted irresponsibly. To get at the perpetrators of crony capitalism, they've (sic) thrown the baby out with the bath water. The U.S. is a plutocracy according to Princeton's studies. The U.S. Congress is the epitome of crony capitalism. Mediocrity is at its peak. Cry my beloved country.
Investors are deserting emerging market bonds in droves. The gyrations of the stock market in NY and Shanghai indicate that resorting to stocks is no way to finance countries either.
It is now clear that multinational bank loans, stock and bond issuance through capital markets are not sustainable ways to finance nations. The currency risk is too high and central bankers deal in currency manipulation, not economic growth and job creation.
When China coughs, countries with large foreign currency reserves catch colds, emerging markets catch pneumonia. It is not simply a matter of devaluation impacting the USD. Countries that have commercial ties to China, countries whose trade is tied to other countries that are made vulnerable by the devaluation, are more severely affected. Many emerging nations have USD-denominated debt or have currency pegs to the USD. When the value of their currencies falls, the repayment of their debts becomes more expensive, more onerous. Maintaining the peg becomes excruciating.
I have argued long and hard that financing entrepreneurship and emphasizing bilateral and multilateral trade are the way to go. Once again, bilateral and multilateral trade, exporting and importing at the same time, is a natural hedge against foreign currency risk. The economic well-being of countries is a matter of vigorous and competitive trade, not a matter of centralized currency manipulation.
Can you hear me now?