Underground economy and corruption are a further blight on economic forecasting and investing. Both hide the price signals that make markets efficient and predictions accurate. This information is considered too dangerous to be revealed to consumers. The enormous value of the information is also illustrated by the killing of activist trying to enforce the RTI in India

JP Morgan described the panic of 1873 as a "cyclone which came upon us without an hour's warning". But actually there was warning. The boom prior to the panic was like all other booms. It was driven by too much unsecured debt that had driven the stock prices far beyond rational valuation. We want to think that 1873 was the dark ages of finance. But the problems and reason for the panic of 1873 are around today. No one knew then as no one knows now, just how much debt is out there and who owes what to whom. This is why the panic of 1873 occurred. This is why the world went into recession after the collapse of Lehman. This is the danger today.

The lack of information is simple enough. No one wants to give it for the simple reason that it has value. The irony is that much of economics including financial, quantitative and economic analysis assumes that there is sufficient accurate, timely and complete information available to make the theories work. When this rather obvious flaw can no longer be overlooked markets lose it.

The bleeding sore of the Euro crisis is a good example. Despite two sets of stress tests and relentless attention, there is a constant concern for the safety of European banks and the debt of several countries. Greek statistics come in for constant criticism often with good reason. Their unemployment rate is supposed to be 18% but is most likely higher. Still that is nothing compared to Spain's unemployment rate, which is reported to be 21%, but, like Greece, is probably much lower because of a large unreported underground economy.

Underground economy and corruption are a further blight on economic forecasting and investing. Both hide the price signals that make markets efficient and predictions accurate.

Governments certainly contribute and one of the largest contributors is China. Li Keqiang, the man who is likely to be China's next head of government, once described the country's GDP data as "man-made" and "for reference only".  Some assume that Beijing is the problem, but according to a recent book by Tom Orlick, it is a "recalcitrant sample set". In other words the locals are lying.

In some ways this is more unsettling than the central government spinning the numbers. If the Chinese government was responsible for the fraud, we could assume that at least someone was aware of the real numbers. If no one really knows, then policies based on bad numbers will be a failure. The prime suspects include the informal lending sector and the vast tumour of China's local government debt, which makes the US muni market look positively healthy. Added to these problems are Chinese corporate debts, which cannot be revealed. The reason given to the US Public Company Accounting Oversight Board, when it requested a review of Chinese auditing firms: state secrets. The issue is that these secrets are probably also withheld from the state.

It is unlikely that China will have a financial panic. A financial panic usually requires a question about the solvency of banks. China's state owned banks may be insolvent, but the state is not. China cannot have a run on itself. This does not mean though that there isn't plenty of room for panic. The China boom has caused bubbles all over the emerging markets. Even a slowdown in China could have some unfortunate effects.

The antidote for bad information is legal disincentives. However, legal disincentives have an issue. They have to be enforced. The Chinese banking regulator the China Banking Regulatory Commission (CBRC) has an enormous conflict of interest. It is a government agency trying to regulate government banks.

What does provide a disincentive are laws like India's Right to Information Act 2005 (RTI). Modelled on the United State's Freedom of Information Act, these laws allow any citizen the right to force a government to divulge information.

The resistance that governments put up to avoid revealing this information is stunning. It took five years for the British government to reveal information required under its act. The reason was simple. The information revealed massive waste by MPs. In India audits and inspections conducted by the central bank on the countries banks to insure solvency and safety is supposed to protect consumer. But the same information is considered too dangerous to be revealed to those consumers. The enormous value of the information is also illustrated by the killing of activist trying to enforce the RTI.

What investors don't know certainly could hurt them. What is worse is that governments who are theoretically responsible for maintaining economic growth and stable markets are systematically either preventing disclosure or allowing information to remain a secret. These are the real enemies of capitalism. If there are further panics, we know whom to blame.

(The writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected]).