It sure looks like a possibility. Emerging markets are struggling and they are in no mood for “austerity” out of America at the moment. And while there may be an inclination to ignore them, the fact is they are a larger portion of the global economy than ever before:
Emerging markets are half the world economy, according to IMF data. The “power ratio” is no longer 1:2, it is 1:1. Those who fell in love with the BRICS and mini-BRICS in the boom were entirely right to claim that an economic revolution was taking place.
This puts the Fed in a tough spot. As is obvious any talk of tapering in the U.S. markets can cause queasiness at the least and with many emerging markets in even worse shape than America, any slowdown of the money spigot will not be welcome. Right now the Fed seems to be unconcerned:
Yet all we heard from Jackson Hole this time were dismissive comments that the emerging market rout is not the Fed’s problem. “Other countries simply have to take that as a reality and adjust to us,” said Dennis Lockhart, the Atlanta Fed chief. Terrence Checki from the New York Fed said “there is no master stroke that will insulate countries from financial spillovers”.
Yes, all of that is true, but there has to be some worry, if not publicly, that the Fed has the entire world’s economy on its shoulders. Additionally, there is no doubt that some countries are going to blame the U.S. for any global downturn. And while they may have a point, there are hardly any countries that have handled the 2008 downturn with distinction. The troubles can be blamed on all sorts of policies around the globe, but with the U.S. printing money (or, if you prefer, easing money) at unprecedented levels for the last five years any deceleration from those highs can be easily pointed to as a primary cause of any subsequent slowdown. Before the blame though, comes the warnings:
“Central banks around the world think they have been doing something they shouldn’t do with all this stimulus, and they want to unwind it as quickly as possible. But the danger is that they will go too far and trigger a relapse like 1937.”
That kind of talk is meant as warning to bankers everywhere. It is gospel in most “progressive” circles that the 1937 downturn was caused by their version of “austerity” in government spending. It is seen as the reason that Roosevelt was just not able to get the country out of the depression. As most bankers currently consist of people most decidedly in the liberal camp, the last thing they want to do is be seen repeating the “mistakes” of 1937. Whether that appeal will work remains to be seen of course, but it certainly shows that the critics are ready to pounce at any sign of fiscal “tapering”. So while there will definitely plenty of reasons for a possible downturn to go around, ultimately it will come down to the Fed. These next few months may tell the tale for the world economy and all eyes will be on America. Again.