Time has run out for the United States’ long-standing dependence on emerging market currency growth to underpin its economy, according to leading economist Russell Napier.
Speaking at the Citywire Alternative Ucits event in the UK, Napier, who is a consultant with CLSA Asia-Pacific Markets, said the situation was reaching crisis levels due to the United States’ dependence on foreign market purchases of its government debt.
‘This relationship between the emerging markets and America, this innate relationship, is over,’ he said. ‘The two decade vacation the United States took while foreign inflows went into Treasuries, is coming to an end.’
The amount of foreign ownership of US Treasuries reached a peak of 37% during the past two years but this has started to steadily decline.
Napier points to a deflationary scenario, where the US Federal Reserve has continued to produce Treasuries but emerging market spending power has slowed as the global economic crisis has hit.
Using China as an example, Napier said, currency growth has fallen to a zero per cent level and borders on falling into negative territory. This is despite the much discussed internationalisation of the renminbi.
‘China can produce less money and therefore buy less Treasuries, I could put any emerging market in that bracket, as they are all doing the same. They are going to produce less currency and buy less US Treasuries as a result.’
In his keynote address, Napier also warned over the sheer scale of inflows into emerging market bond funds. He said if, as he anticipates, deflation does take hold then the highly-favoured emerging market debt sector could cause huge problems for investors.
‘I think that there is a crisis coming and it is coming from the emerging markets. That is a very contrarian view, as everyone wants to concentrate on Europe and the debt crisis, as well as the fiscal cliff in the US, but this is where there could be a lot of trouble.’
Napier, who is also a financial historian, said the path of developed world dependence on emerging market growth had not been foreseen on this scale.
‘We were all concerned about capital being sucked out the West and sent to the developing world to fund all their infrastructure and development. There was a real fear of capital starvation.’
‘That is 100% wrong. It has been completely the other way around. All the money we put into the emerging markets, they have put back into western government debt and then some. That capital flow from the emerging market to these markets is over.’