Worldwide monetary easing will kill emerging markets and growth!

I've been trying to spot potential drawbacks of this worldwide monetary easing phenomenon. BOE is saying that it isn't hurting pensioners and the Fed is asserting that it was a necessary decision to save the financial system from breaking down and to revitalize the economy. And now we have the ECB that wants to use it as a tool to cap the yields of weak perhipheral countries' bonds. BOJ, PBOC are all using it as a tool for something like others.

The question is, what will be the impact of a synchronized worldwide monetary easing? I think until now, central banks were too caught up with their own domestic issues. Yeah, it did manifested itself in a form of "race to the bottom," where central banks were concerned about their countries' currency appreciation, which led them to intervene in the FX market in a large scale. This happened mostly everywhere, from China to Swiss. But these "safe-haven" avenues didn't want to give Mr. Bernanke a free lunch, making his job tougher.

But, on this post, I am not going to talk about this well-known situation. Instead, I want to write something down that most of the people haven't been discussing yet.

Everybody feels that somehow this monetary easing and quantitative easing will end up in a bad way. But exactly how?

I think it will drag down the emerging markets with them.

Here's why :

Most of the emerging market countries can be classified into two groups: Either they are commodity-driven or export-driven countries. Russsia, Australia, Brazil are included in the first group, and China, Korea, Taiwan, Japan(sort of) could be grouped in the latter. But even commodity-driven countries rely heavily on exports to sell their commodities somwhere else in the world. So, we can argue that emerging markets are all sensitive to global demand.

However, we are today witnessing the governments and households deleveraging their balance sheets, and as a result, they are abstaining from spending more. Obviously, this will not be helpful for the emerging markets, since they derive most of their growth through exports. This is also not good for the global economy as well, as emerging markets now account for more than 50% of global GDP growth.

This is now being reflected on many fronts : We are seeing Japan experiencing the worst trade deficit figures in years, due to significant decrease in exports. Australia's once burgeoning iron ore industry is slowing down, due to sliding prices. China has huge accumulation of steels that are keep piling up. Korea, which weathered the situation pretty well, are now lowering their growth rate estimates, in face of huge challenges in the global market.

The problem is, these countries all have their own issues. For example, Japan has a terrible fiscal problem and Korea's household debt and plunge in real estate prices are hurting them now. I think unless global demand picks up, most of the emerging market countries will experience a recession or contraction in a foreseeable future.

What if these countries fail to withstand the situation? The answer can be offered from Japan's and Korea's experience.

Japan was in a self-denial mode of their bad loans, and adding insult to injury, their currency appreciated significantly after the plaza accord. This hurt their dominance in the global market, and they never recovered, except for breif periods of big earthquakes which artificially lifted their growth rates, due to reconstruction spending. In this 20-year time frame, the Yen only appreciated further and further against most of its trading counterparties.

On the other hand, Korea recovered from the Asian currency crisis in a relatively short manner of time. IMF, which offered them bailout money, imposed austerity programs and made them sell their companies to foreigners. But most notably, they were able to get on track because their currency depreciated very significantly. Export-driven countries like Korea, might actually see its currency being depreciated as a blessing in a crisis situation.

But what if they didn't have the option of letting their currency to depreciate, like what we are now seeing in Spain, Italy, and Greece? It would've been a disaster for them, and they wouldn't have been able to recover fully.

Now let's fast-forward to the present. We can easily assume that unless the Eurozone and the U.S. engages in its spending binge as it did before, emerging economies will have a hard time.

But unlike 10 years ago, developed countries are now arressively engaging in monetary easing, which will provide less room left for the emerging countries once they slowdown. Everybody is "racing to the bottom," so even if their fiscal situation gets worse and they become vulnerable, their currency will not depreciate as they used to be. In turn, this will slow down their recovery.

In effect, this worldwide easing is now and will hurt prospects of emerging markets as the situation above unfolds, which I believe is very highly likely.

Welcome to a "global lost decade!"