The 2008-9 Great Recession centered on the wealthy Western economies with emerging markets suffering significantly shorter, less painful downturns. Then in 2009-11 the emerging markets, particularly the BRIC countries (Brazil, Russia, India and China — so named by Goldman Sachs’ Jim O’Neill in 2001) soared ahead of the wealthy West, leading to considerable talk of global economic realignment. However as we enter the second half of 2011 new doubts have emerged: are the BRICs overheating, and will they cease bringing growth to the rest of the world?

There has been a great deal of talk in the last few years that the Brazilian and Indian models of center-left social democracy could show the world that democracies with left-of-center governments were as efficient as truly free market administrations in generating growth. This column has warned on a number of occasions that the media admiration for both countries’ economic management was foolish, but until very recently this warning, like a number of this column’s doom-laden forecasts, appeared to have been overstated.

Now as often happens it is beginning to appear that the Bear may merely have been premature. Brazil in particular looks to be in deep trouble. Under Lula the country had an interesting mixture of an excellent monetary policy and an inferior fiscal policy, with interest rates firmly positive in real terms while the government persistently overspent. The fiscal problem was masked for a number of years by the relentless global increase in commodity prices, which improved Brazil’s balance of payments and allowed its public debt position to improve significantly as export revenues surged. Inflation, which would normally have become a serious problem in such a situation, was tamped down by the very high interest rates and the consequent strength of the real.

Then in 2010, as is often the case with center-left governments who have got lucky with the economy, Lula overdid the spending, as he attempted to secure election for his protégé Dilma Rousseff. Not only did the official budget deficit widen by about 2% of GDP, but the development bank BNDES went on a lending spree and the state corporate sector went wild with losses. The position was made to look respectable by the government extracting $50 billion from the unfortunate Petrobras, through selling the same oil reserves to it twice, but in reality overheating was inevitable, however sound the central bank’s monetary policy (12% interest rates – my kind of place, monetarily speaking!)

Rousseff has made only feeble attempts to control public spending, and has shown signs of meddling in Brazilian industry far beyond the official government companies, playing favorites recently in a retail takeover bid. Now Brazilian consumer borrowing is out of control, with consumer debt service at 28% of disposable income, compared with 16% in the U.S. at the height of the 2007 credit bubble. Admittedly high Brazilian interest rates (a mean 47% on consumer borrowing) make debt service greater than in the U.S. for a given amount of debt, but even so it seems likely that with both government and consumers overspending, Brazil is due for the father and mother of a credit crunch.

India’s problem is in many ways similar to Brazil’s. Like Brazil, it elected a center-left government in 2004, which has remained in office since, benefiting from the long boom caused by its predecessor’s market-opening policies. Like Brazil only to an even greater extent, the Indian government failed to control public spending adequately. As a result, India has for a number of years been running public sector deficits of around 10% of GDP, when you include both national and local governments.

India’s other problem is that its economy is structurally the other way around from Brazil’s, being a massive importer of commodities and exporter of manufactured goods. Consequently, when commodities prices rise as at present, its balance of payments deficit tends to worsen and inflation tends to rise. Its wholesale price inflation rose to 9.06 percent in May, year-on-year, and a poor monsoon is expected to re-ignite the flames of food inflation, which had been quiescent over the past year. The Reserve Bank of India has raised interest rates ten times, but its benchmark rate is currently 8.2%, still well below inflation, as is the 8.5% yield on Indian government bonds. Indian growth slowed in the first quarter to a year-on-year rate of 7.8%. That’s still magnificent, of course, but with the government overspending and the economy still largely subject to the inefficiencies of the “permit raj” a hard landing is much more likely than a soft one.

The Chinese government thinks it has inflation under control and that it has touched the brakes effectively on the country’s runaway economic growth. Since official inflation is only 5.5%, it would appear at first sight that China has little to worry about. The problem in China is that official figures are not to be trusted, so that an official inflation rate of 5.5% may translate into a real figure of 10%. That still would not be enough to get too concerned about, given China’s spectacular growth rates, except that Chinese short-term interest rates, even after six rate increases, are still at only 6.46%.

The problem people really worry about in China is the level of bad debts in the banking system. These were estimated at $911 billion by Ernst and Young as long ago as 2006 (in an estimate they later withdrew under pressure from the Chinese government) but have undoubtedly been much enlarged by the subsequent real estate boom and the “stimulus” lending, mostly to more real estate, which the government encouraged in 2009 – yet another foolish Western import the Chinese government must now regret!

The People’s Bank of China now estimates that local governments alone owe about $2.2 trillion – a high proportion of which loans must now be bad, since much of the lending was devoted to the foolish “stimulus” of 2008-09. Add in the debts of real estate developers, secured against the vast empty apartment and office blocks that dot the cities of inland China in particular, and the debts owed by the remaining state companies, most of which operate at a loss, and the total of bad debts in the Chinese banking system may be as high as $5 trillion, in other words 100% of China’s GDP and more than 50% greater than its much vaunted foreign exchange reserves.

Of course, as in most such situations, not all those debts will be completely worthless, but it appears likely that China has a bad debt problem that in terms of its economy is considerably larger than the U.S. mortgage debt overhang of 2008. With “true” public debt probably around 100% of GDP, the country seems likely to fulfill the criteria set out in Kenneth Rogoff and Carmen Reinhart’s magisterial book “This time is different” for a serious banking crisis that produces an intractable recession, probably involving below-par economic growth for a decade or more. China seems to be in very much the same position as Japan in 1989, apparently invulnerable but in reality heading for a very large crash indeed. It does not make it easier that, unlike Japan in 1989, China has not yet attained Western standards of living, except for a relatively thin slice at the top.

Finally Russia never really deserved to be put on a list of emerging growth markets at all, although when O’Neill coined the acronym in 2001 Vladimir Putin’s “flat tax” income tax reform had produced a bust of economic growth, and it appeared that the country’s natural resources would produce rapid income gains as they were exploited by a combination of international majors and domestic entrepreneurs. Needless to say this did not happen. Although the increase in oil prices produced growth, Russia’s economy by 2008 was in little better shape than Venezuela’s, with business suppressed (and in some case imprisoned) by the government and resource revenues squandered by a government greedy with corruption and Putin’s mad revanchist ambitions.

Since 2008, Russia’s position has somewhat improved. President Medvedev is at least marginally less nostalgic for the Soviet Union than Putin, and has some understanding of the need for Russia to develop a proper private sector. Unfortunately, the private sector Russia has now got is of very poor quality, with oligarchs in control and a short-term orientation even more extreme than that of the average Wall Street hedge fund. The effective collapse last week of the Bank of Moscow, the country’s fifth largest bank, is symptomatic of the rot in the system. Were Medvedev to win next year’s election and sideline Putin, there might be some chance of economic reform which, if lubricated by continued high oil prices, could produce a generally sound and growing economy. As it is, that must be reckoned unlikely, and the greater balance of probability is that Russia will join the other three BRICs in economic crisis at some point in the next year or so.

Outside the BRIC economies, there are signs of hope. Japan is in better shape than many people believe, while South Korea, Taiwan, Singapore, Chile and Colombia are well run and should continue to thrive. Then there’s Thailand, which this week can rejoice in a thumping election result and a new leader, Yingluck Shinawatra, even more pulchritudinous than Sarah Palin! In Europe, Germany is thriving and Sweden appears to need only a modest tap on the monetary brakes. Nevertheless, for the last three years, with much of Europe in economic disarray and the U.S. locked into what seems likely to be a decade-long economic downturn, the world had become very reliant indeed on rapid growth in the apparently invulnerable BRICS.

Turns out, the BRICS weren’t invulnerable – and the world will have to look somewhere else for a growth engine.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)