The BIG Risk is Becoming Real -- Collapse of "Global Imbalances"

This powerful article by economist Brad Setser (which I located via Yves Smith), explains that the global current account imbalances are collapsing. There is a lot more pain to come before the current bear market ends. To fund their purchasing binges, U.S. consumers were using artificially cheap debt provided by the U.S. financial system, which was given artificially cheap capital by the likes of China and other "emerging economies" that were buying U.S. dollars to keep their own currencies artificially low to boost exports. Now that the U.S. consumer "leg" of the stool has been kicked out, the U.S. financial system and thus emerging economies who have lent so much to the U.S. are now in BIG trouble because they bought way too much U.S. debt at low prices that will cause them formidable losses. Equity investors are only now beginning to understand that there will probably be a resulting collapse of numerous emerging economies. This disaster scenario is becoming more of a certainty with every passing day, and today's 10% declines in some emerging economy stock markets is representative of that. So we maintain our determination to stay underweight equities until we see more emerging economies collapse -- Hungary, Russia, others. We wish we'd been more underweight all this time, but must keep looking forward. We're preserving capital fairly well now (despite wishing we were preserving all of it), and hope to be at our full equity "policy allocation" near the bottom and end of the current bear market. '09 is our hope, but '10 or beyond is perfectly conceivable.