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Emerging Economies Increase in Share of World Trade December 29, 2008

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When Markets Collide is quite an eye opener, one of those books that formalises the near thoughts you had been having over the last couple of years that things are changing fundamentally (or secularly as El-Erian might put it).

Whilst the balance of payments graph is overly sobering (showing the West’s deficits against emerging surpluses) my favourite wake up moment is the ‘Vendor Financing Deal’.

Consider the following ‘engine’ of recent economic growth:

1. The US consumer had been willing to sustain consumer demand well beyond income growth (spending on products imported from emerging markets)
2. Financial markets had been able to monetise assets held by US (and UK for that matter) consumers including in particular housing stock – “using the house as an ATM”
3. Emerging economies have recycled their trade surpluses back to the United States through heavy purchases of US treasury, mortgages and corporate bonds

Hence the ‘vendor financing’ – we borrow from emerging markets to spend in emerging markets….

One key characteristic of this current crisis is that emerging markets are weathering it so far at least as well as developed markets – this is historically odd – something fundamental has changed?