Asia Catching Cold

Economic troubles spreading around the world:

In recent months, some emerging market investors have preached the idea that fast-growing areas like most of Asia have “decoupled” from developed markets, meaning the economies of the two groups no longer move in tandem. The investing adage “When the United States sneezes, Asia catches a cold” no longer applies, the proponents of decoupling argue.

But a recent slump in emerging markets, capped by Monday’s slide, means investor sentiment is changing.

Indeed, this seems doubly wrong. The big hope for avoiding a recession, or for keeping a recession relatively short and painless, is that a pickupin exports tied to the declining dollar will cushion the employment situation even as the building sector collapses. That, however, means that a sharp decline in US imports from Asia is all-but-inevitable. That's what would happen in a recession, but it's also what would happen in the most-plausible non-recession scenario.

Comments

a pickup in exports tied to the declining dollar ...means that a sharp decline in US imports from Asia is all-but-inevitable

Net is different than gross. In the goldilocks scenario, our exports would pick up and our imports would hold steady.

Posted by Mr. Noah | January 21, 2008 11:18 AM

My view is that it's too late for a weak-dollar economy to take hold without a recession to intermediate between the old dear money economy (ie, since the end of Breton Woods, over many business cycles with varying degrees of relative differential to major trading partners) and the new paradigm. We've built up a world macroeconomy based on us consuming a shitload, and if that is not going to be the future then everyone's going to have some pain while supply chains are reorganized and developing economies (the ones without key commodities) take a couple of steps backward.

The sad thing from a political economy standpoint is that the whole post-Breton Woods system has created much wealth but exacerbated relative poverty and not done very much about absolute poverty. It's a whole economic epoch completed without making the least well off any better off. Conservatives 1, liberals 0. Let's do better next century.

Posted by Marshall | January 21, 2008 11:51 AM

in the face of rising raw materials costs, asian exporters have shown a surprising willingness to avoid price increases in the american market in order to retain market share.

so let's not jump to an assumption about what changing currency values might mean to american imports....

Posted by howard | January 21, 2008 12:00 PM

I think you misunderstand decoupling.

The whole point is that Asian markets are insulated from US markets because they need the US as a source for imports and as an export destination less and less as a percentage of total trade and more importantly total GDP. Supposedly Asia is driven in a domestic investment and consumption more than the US because China and India have so many consumers while in the 80's Japan alone did not have the critical mass to sustain its growth if the US economy faltered.

Doesn't matter much because investors are showing the don't believe in it anyway.

Posted by hj | January 21, 2008 12:10 PM

This is supposing the United States has something worth selling other than T-bills. It seems that so much in the US today is overvalued, probably including the much-vaunted worth of human capital. Maybe we are the fatted calf, ready for slaughter. Today European stock markets are in full dive mode. UK down 5.5%, Germany and France down 7%. Oh well, party on!

Posted by The Other Alan | January 21, 2008 12:45 PM

It seems we're inching closer to a Global Civil War caused by crumbling economies, plutocrats, and scarcity of resources.

Posted by MNPundit | January 21, 2008 3:48 PM

What hj said. The "decoupling" thesis was that Asian economies are trading more with each other and with Europe, and not as much, percentage-wise, with the US, so declining US imports would supposedly not hurt Asia as much. Which is at least partly true. But apparently not true enough, or so the markets seem to think this week.

Posted by brooksfoe | January 21, 2008 8:51 PM