U.S. growth: Lessons from Emerging Economies

Mid Week Bond Update

U.S. growth: Lessons from Emerging Economies

Could there be useful lessons for the U.S. in how emerging nations deal with their own burgeoning indebtedness and trade imbalances?

The U.S. economy strongly influences the fortunes of many emerging market (EM) countries.  But as corporate and government indebtedness rise in the U.S., could there be useful lessons for the U.S. in how those nations deal with their own burgeoning indebtedness and trade imbalances?

The question has become more relevant thanks to the debate about the ideas behind Modern Monetary Theory (MMT). That theory asserts that no country that prints its own currency can ever truly go broke, so worries about government indebtedness are misplaced. In principle, then, governments should spend to maximize employment and not worry about deficits and debt levels.

But counterexamples abound in EM with Turkey, Argentina and Venezuela among those who have sought to money-print their way out of debt, with unhappy results.   Brandywine Global suggests in a recent article that current account deficits, i.e., the net outflows of funds, can indeed generate investment funding shortfalls. In the U.S., however, that shortfall is more than made up by corporate borrowing, at least for now. But countries like Turkey, are in a tough place, because Turkey’s companies and much of the rest of its economy are dependent on foreign investment, making the printing press a double-edged sword.

U.S. Non-Financial Corporate Debt and Current Account Level

US Non-Financial Corporate Debt and Account Level Chart

Chart courtesy of Brandywine Global.  Source: Haver Analytics, as of 3/31/2019.  Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.


On the rise: Turkish Lira

Turkey’s currency rose an astonishing 2.26% vs. the U.S. dollar on Monday, July 1, making it by far the best performing EM currency over the past week. One cause: a change in the central bank’s regulations of banks’ foreign currency reserves.

The current upper limit for banks’ holdings of foreign currency is 30% and allows the holdings to be counted as part of a bank’s overall reserve requirement.  Lowering the limit would cause banks to buy lira, shrinking the supply in the market and increasing the availability of foreign currency. So part of the rise in the lira has to do with its anticipated short supply.

Other possible reasons for the boost include a rumored easing of U.S. sanctions over Turkey’s purchase of Russian anti-aircraft missiles and a potential boost to Turkey’s available funds.

Unfortunately, those funds would come from Turkey’s central bank, prompting the global Bank for International Settlements (BIS) to cite Turkey as an example of why central bank independence matters. “You see the government undermining the autonomy of the central bank and at the same time you see the negative consequences,” said BIS General Manager Agustin Carstens. 

On the slide: Eurozone manufacturing

While U.S. market observers fret about a hypothetical U.S. slowdown, Eurozone manufacturers have been relieved of the suspense, seeing the aggregate manufacturing PMI for the region fall below the expansion/contraction level of 50 in January 2019 and stay in the 44-45 range since then. The most recent value, as of June 30, was 45.0.

The UK manufacturing PMI was 48.0 as of June 30, while the U.S. turned in a barely expansionary 50.6 for the most recent period. China's PMI came in at 49.4.

Observers lay the blame on declining trade in the Eurozone for manufactured goods at the feet of the year’s trade and tariff conflicts. 


All data Source: Bloomberg as of July 1, 2019 unless otherwise specified.


Emerging markets (EM) are nations with social or business activity in the process of rapid growth and industrialization. These nations are sometimes also referred to as developing or less developed countries.

Purchasing Managers Indexes (PMI) measure the manufacturing and services sectors in an economy, based on survey data collected from a representative panel of manufacturing and services firms. PMI greater than 50 indicated economic expansion; below 50, contraction.

Gross Domestic Product ("GDP") is an economic statistic which measures the market value of all final goods and services produced within a country in a given period of time.

The Turkish lira (lira) is the national currency of Turkey.



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