| DJ, Richebacher March 97 continued . The main , immediate concern for developing Asia is the unfolding trade shock stemming from the retrenchment in the global electronics industries. But for the time being , any serious worries have been shelved with the comforting thought that this setback is overwhelmingly a short-term inventory correction. Strongly rebounding global growth, it is thought, soon will make short work of the slump. In this respect, all eyes in the region are focused hopefully on the U.S. economy and in particular on the U.S. consumer. unfortunately, the flip side of this optimism is a general refusal of the region's manufacters to reign in production and capacity additions. Meanwhile, the bill for overexpansive credit is coming due. If the region's banking problems are allowed to fester, its banks could become trapped, with bad loans crippling their capital bases, forcing a painful contraction of credit. Given the heavy dependence of many Tiger financial systems on " hot money' inflows from abroad, this could trigger tremendous currency turmoil. The resulting credit crunch could push some countires into recession, aggravating the bad-loan problem and worsening the squeeze on the banks. If this scenario seems improbable, given the Tiger's growth history, the same was said of Japan in the 1980s. Like Japan, the Tigers have created an economic juggernaut that can survive only by moving forward. Only rapid growth can justify the massive investments that have been made in industrial capacity and sustain the credit pyramid that has financed those investments. Slower growth threatens a catastrophic unwinding of the regions excesses. In short, the awesome growth performance of the tiger countries over the past ten years should not blind us to the enormous problems that have been accumulating. These problems have been aggravated by the credit excesses of the industrialized countries. Basically, the Tigers as a group generate enough domestic savings to finance their high investment ratios. but, because they have allowed their domestic marketds unfettered access to global financial capital, they have been inundated with yield- greedy " hot money " from abroad. This has fostered overheating, financial excesses, structural distortions and increasing dependence on those same hot-money flows. It would appear the surest way for a developing country to imbalance its economy and ruin its financial system is to peg its exchange rate and accumulate foreign reserves...... from the Richebacher Letter 1217 St Paul St Baltimore, MD 21202 Mike |
