A Ton of BRICs

It wasn’t too long ago that the BRICs were expected to be the next great economic tidal wave.  (BRIC stands for Brazil, Russia, India and China which were and are the first tier of the emerging market economies.)  Now the shine is off the shoe and these countries have suffered through the U.S. Federal Reserve Bank’s monetary shenanigan's ...  see: UK Telegraph Article.  And the Fed is now ignoring them (possibly at its peril) even though they represent a much more significant portion of the world’s economic might.

Economists worldwide are suffering monetary schizophrenia these days … undecided as to whether all the dollar liquidity with which Ben Bernanke is flooding the world will cause deflation or inflation … particularly after the Fed starts stepping on the monetary breaks (called “tapering”).  Just the expectation that this will happen has already caused the low interest rate on the 10-year U.S. government bond to increase by a full percentage point in just a few short months.  Higher interest rates here do suggest that money will be tighter and thus tending toward deflation. But emerging economies had been following our central bank’s lead and were also trying to cause their currencies to devalue … see: Race to the Bottom.  This complicates things …  possibly beyond comprehension.

So the real predictor in terms of inflation versus deflation, I think, has more to do with how rates change elsewhere.  Higher interest rates in the U.S do suggest that deflation might be the bigger bugaboo since money will flow here and away from emerging markets causing them fiscal apoplexy.  But now they have much more say as to how things turn out.  They can also halt their monetary easing in retribution with who knows what results?  Whatever these eventual outcomes are, I don’t think they will be happy.

.