Thursday, April 11, 2013

Emerging Markets: Credit Tightening and the 1837 US Recession

Lengthy rant here.

I found interesting this article from Bloomberg citing Michelle Gibley, a Charles Schwab international research director, as saying Brazil will be the first emerging market nation to raise interest rates.  This in turn she says will cause China to raise interest rates.  So if this happens, will it be any different than the 1837 US recession?

In 1836, to prevent the outflow of capital (gold) to the US, the Bank of England raised its key interest rates, which being the hegemon to the US, led to a a rise in US interest rate.  This was the exogenous influence on the US which lead to the recession of 1837.

Before the economy recessed, it grew under Andrew Jackson's last term as president.  Jackson removed $10 million from the national bank (whose charter he vetoed) and placed the money in state (pet) banks.  This lead to an explosion in land speculation, largely in the south.

The increase in land speculation lead to higher land prices, and higher land prices lead to higher cotton prices.  So when interest rates rose in England to prevent the outflow of gold, Jackson enacted the Specie Circular, cotton prices dropped, and major plantations began to default on their loan payments.

So if Brazil, a major commodity supplier for China, raises its interest rates, may something similar happen?

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