<<Given that the death of the dollar must be avoided, what say we trash Asia (round two)>>
Consider it done! (soon):
prudentbear.com
THE UNRESOLVED ASIAN SITUATION
This area of risk is increasingly in view recently. The 1998 crisis in Asia was never "solved" but rather "shelved"! Contrary to the views of sole old credit curmudgeon, such as the writer, the players in that scenario discovered and/or invented some truly ingenious mechanisms to avoid "marking the excesses to market" as had previously been necessary to resolve a financial debacle. Massive rate cuts, particularly by A1.com of the Fed, huge infusions of funds by IMF, World Bank etc. etc., and government/regulator sanctioned carrying of cadavers at cost or equivalent shelved the crisis repercussions. An export boom driven by multi-hundred billion dollar creation through the U.S. current account deficit put rouge on the face of the moribund and the always accommodating analysts cried "strong buy" to send massive infusions of portfolio capital to these "rebounding" emerging markets. "Buy the Dip" is so ingrained that mutual fund and portfolio managers will do so; even (briefly) in such swamps as Indonesia! During the course of a visit to Japan this Spring, the writer formulated a hypothesis on the inscrutable economic permutations of the world’s second largest economy. The most important element in "shelving" their difficulties for ten years has been the cost of carry/capital. In prior debacles, the afflicted financial institutions were eventually forced to recognize the problem by the sheer cost of the defunct assets. Japan mitigated this cost by bringing the cost of carry down near zero! The banks had neither to pay much for the funds to carry the bad loans nor reserve or write them down. A side effect of keeping the cost of money near zero for the banks has been the ability of the government to deficit finance also for virtually no cost.
The deficit finance (now humongous to the point of being record as a % of GDP) has permitted totally ridiculous infrastructure spending for a decade on projects of political merit with no economic rationale. A lot of the money so spent kept the contractor/real state players cash flowing enough to redound back to the beleaguered banks. A low cost of capital permitted migration of high cost production to low cost exogenous players with further profits/inflows over and above the magnificent trade surplus in the current account. Also a virtuous circle for the places the production migrated; Korea, Taiwan, Thailand, Indonesia, Pakistan etc. This whole Asian "rebirth" seems under increasing pressure. ANY DROP-OFF IN U.S. CONSUMER PURCHASES FROM THE REGION WILL BE CATASTROPHIC! A while ago this would have been known as "Catch22". If A1.com of the Fed actually slows the U.S. economy, the whole Asia mess could come unglued. Japan is particularly worrisome. The sale of a bank to a foreign buyer produced the unprecedented result in the SOGO department store case of a refusal to "forgive" loans. This has stalled any further bank sales while exposing the rotten sepulchers the other banks really are. The yen is headed down as the portfolio players exit. The Nikkei breached the psychological level of 16M. We think it is worth remembering that the crisis of 1998 may only have been a forerunner. In conventional financial debacles; the longer resolution was deferred; the worse the result. Might it be the same for the Financial Re-engineered Asian economies? |
