

(Courtesy Federal Reserve Bank of New York)

Was the emerging market miracle a hoax?

In the years since China's economy boomed, Brazil blossomed into a global food supplier and India caught the wave of outsourcing, conventional wisdom has said that world economic growth would rest on the shoulders of dynamic developing countries -- rather than on the tired old legacy nations (ahem...) of the west.

Scan the headlines today: Riots in Ukraine, a drop in China's manufacturing index, mining strikes in South Africa, revolution in Egypt. It's clear that the torch may not pass that easily. An International Monetary Fund report on India this week, for example, dissected in excruciating detail the problems of the world's second-largest country. Meanwhile in Brazil, Finance Minister Guido Mantega put the country's expected growth in economic output this year at 2.5 percent -- on par with (ahem...) the United States.

The problems facing these countries aren't trivial, or simply a matter of adjusting to the U.S. Federal Reserve's mood of the day or the speed of tapering.

Look at India: There's a population that has lost such confidence in local conditions that people have turned toward gold -- not futures or funds, but the physical commodity -- to offset double-digit inflation and fading growth. Gold is a classic hedge, a store of value that holds its worth in a crisis, and, at least if you trust your neighbors, can be held or worn in physical form. If you have to leave town quick, it's easier to put on our rings and necklaces than wait in line during a bank run for a cashier's check.

So, when people start demanding gold, it's a sign of lost faith that the local money can hold its value, or that the local economy is going to flourish. India has consistently been the world's largest gold importer, losing that claim only this year -- to China. But the level of gold imports rose so fast last year that India had to intervene with new taxes and controls to slow demand. The imports were adding to the country's current account deficit -- which it has been struggling to finance -- and represented a troubling erosion of confidence.



Inflation in India means savers have been losing money....



...and turning to gold.

And that's only one of a list of problems that in IMF-speak amounts to a pretty brutal litany:

"Initially a problem of stalled infrastructure and corporate investment, the slowdown has become generalized across sectors. India’s growth slowdown is unusual among emerging markets (EMs) both in its severity and the fact it has coincided with elevated inflation. Global factors have certainly hurt exports and weighed on investment. However, staff analysis indicates that about two-thirds of the slowdown can be explained by domestic factors, including supply bottlenecks, delayed project approval and implementation, and heightened policy uncertainty."

Bottom line: Growth has fallen to nearly half the level India enjoyed during the heyday of the "BRICS," and is now down around 4.5 percent, which looks very normal for a miracle.

Things may turn up. The central bank has been hiking interest rates, and growth may edge back to six percent or more this year, according to analysts at the Institute of International Finance.

But in case they don't, the bag of coins in the dresser may prove handy.