Whisper quietly: the bursting of the BRICS bubble is already happening but few are paying attention… and it might become the main story of 2013.
According to a recent article by Andy Xie, the bubble bursting is happening in slow motion, confusing financial markets, because interest rates are low everywhere. As the months pass, the picture will become clear. The global economy is likely to be dragged into recession again, he says.
“When debt bubbles bursting brought down OECD economies, their central banks adopted quantitative easing to stabilize the situation. The resulting cheap liquidity flooded into emerging economies. Instead of learning from the bubble lessons in the West, they used the liquidity to manufacture bubbles themselves. The resulting growth led many to believe that emerging economies had found a way to grow despite the crisis.
The emerging market bubble, especially in the BRICS countries, is now bursting. The process is slow because interest rates are low everywhere. The slowness makes this bursting unusual. Financial markets are still confused about the situation. There is constant speculation that growth is being revived.
The BRICS countries can choose asset deflation or currency devaluation. China is likely in the first category. Brazil and India will likely fall into the second. The growth difficulties of the emerging economies will be the main source of global instability in 2013. They may drag the global economy back into recession.”
Until then, Brazil may remain an expensive country, but just watch for the future signs of a Real weakening and you’ll see what’s in store. Bubbles correct themselves and usually tend to reverse prices to the mean.