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By Catholic Online (NEWS CONSORTIUM)

10/4/2013 (6 months ago)

Catholic Online (www.catholic.org)

Reduced growth in emerging markets means less wealth for you.

Saying the global economy is experiencing "transitions on an epic scale," Christine Lagarde, managing director of the International Monetary Fund warned that "turbulence" in emerging markets could cut growth by a full percentage point.

When the IMF speaks, it's costly to ignore.

When the IMF speaks, it's costly to ignore.

Article Highlights

By Catholic Online (NEWS CONSORTIUM)

Catholic Online (www.catholic.org)

10/4/2013 (6 months ago)

Published in Business & Economics

Keywords: Lagarde, IMF, epic change, growth


LOS ANGELES, CA (Catholic Online) - Lagarde warned investors and policy-makers that turbulence in emerging markets could cut world economic growth by half a percent to a full percentage point. The cause of that turbulence is talk by the U.S. Federal Reserve of tapering its asset purchases.

What's happening here and why does this matter?

Emerging markets are identified by economists as those which are in the process of rapid growth and industrialization. The largest of those markets are China and India. Many smaller nations are also involved in the classification. These markets provide cheap labor and mass quantities of raw materials, even finished goods to the industrialized world for low prices.

Growth matters because it accounts for all the wealth the people of the world enjoy. Everything from food, to housing, to transportation, to every need and luxury is broadly summed by growth. As human population grows and as expectations for higher standards of living develop, growth must increase to keep pace. If growth remains flat, or diminishes, then somebody has to make do with less. The austerity can impact a little as a nation or the entire world.

In the United States, growth matters because it affects prices, interest rates, even retirement accounts. Less growth means less for everybody.

While a percentage point might not seem like much, the total figure could be in the billions or trillions. Spread around the world via a globalized economic system, you will feel the impact, even if you don't realize what's causing it.

Emerging markets depend on the easy cash to be had from the United States. Americans identify themselves as "consumers" and that means they will pay to be supplied with mass quantities of cheap goods. As cash flows from America to overseas providers, growth takes place in the newly-enriched emerging markets.

However, the Federal Reserve has suggested that it will soon begin tapering its growth, pumping less stimulus into the economy and allowing it to run more naturally, without the influence of fiscal policy. For a variety of reasons, this means less money available to flow to emerging markets.

Other large nations can pick up the slack of Fed tapering, but only to a small extent. Nations such as Russia and Brazil, which could help build up emerging markets, have problems with inflation so their central banks will not likely do much to increase the money supply by printing more currency as doing so would exacerbate inflation.

So just on the basis of talk by the Federal Reserve, planners in emerging economies must prepare themselves for the likelihood that the international market may become more competitive as American dollars become scarce. This causes their currency to lose value against the more precious dollar, and leads to a virtual tightening of the economic belt in emerging markets.

For people counting on these emerging markets for their investments, this is big news and a reason to examine their portfolio and plan accordingly.

For most of us, we will pay for this slowdown and make do with less, even though by world standards we are already fabulously wealthy and we will only feel a slight pinch. However, for people living in emerging markets without a social safety net, the consequences could be far more reaching, even deadly. Her use of the word "epic" is hardly hyperbole.

For that reason, when Lagarde speaks, the world had better listen.

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