Paul: The gathering financial crisis in Korea sent another
shock wave through Asian markets Wednesday, as the
Korean government unveiled a tough new bail-out
package that analysts immediately pronounced too
little, too late.
At the core of the crisis: the plunging value of the
Korean currency -- the won. As recently as Friday,
Oct. 25, you needed only 930 won to buy one U.S.
dollar. Since then, though, the exchange rate has
soared almost daily. And on Wednesday, it took only
minutes for the rate to hit 1035.5 won to the dollar -
- enough to trigger the third straight halt in trading
in the currency this week and add to the recent Asian
financial turmoil.
The bail-out package, announced after the market halt
Wednesday by the newly appointed Minister of Finance
and Economy Lim Chang Yuel, lays out a number of tough
measures, including a boost to a government-support
fund to cover bad debts, opening some bond markets to
foreign investors to attract overseas currency and
widening the amount that the won can fall before
currency trading is halted.
But one key element that many analysts had been
looking for was missing: the Korean government still
will not accept an International Monetary Fund
bailout, nor the tight fiscal controls that would come
with it. As a result, though Korean stocks closed up
7.93 points to 502.59 by day's end, many analysts said
the bail-out package would not be enough to solve the
country's woes. (For more on the origin and effect of
currency crises.
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HOWEVER...... while you were out raking your leaves <G>:
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Problems in Asia Overcapacity in Asia is putting downward
pressure on prices. "Overinvestment is the basic engine of
deflation," points out Merrill Lynch economist Charles Clough."
And the 1990s saw a surge in Asian capacity building, as high
domestic savings rates coincided with strong foreign direct
investment to massively inflate Asia's capital stock." This trend
is directly linked to the current round of worldwide currency
devaluations, which themselves put downward pressure on prices
elsewhere. "Countries in Asia are trying to export their way out
of deflation by devaluing," says Clough. The U.S. and Europe will
"import" some of this deflation, he says.
Put together, all these factors point to downward pressure on
prices ahead. What's different this time is that many of the
trends can't be changed by politicians or economic cycles. In
other words, they will have an impact on prices regardless of
economic shifts that normally might cause inflation to kick in.
"So the old cyclical indicators of inflation no longer play the
role they once did, even though the Fed, market strategists and
the press continue to focus on them," says Paulsen.
Keep in mind that as good as the case for lower prices sounds, not
everyone is convinced. "I don't really see a strong deflationary
trend materializing," says Carl Wiese, a portfolio manager at
Hokanson Capital Management in Encinitas, Calif. "People are
arguing that there is overcapacity in Asia. But I believe the
market has a way of adjusting itself and that capacity will be
taken out."
Other detractors point out that Asia is not big enough to drive
global disinflation by itself, even if the Japanese economy sinks
even lower because of problems there. What's more, money supply is
growing in most of the world, and that's not usually a condition
for deflation, points out David Shulman, the market strategist at
Salomon Brothers. Other naysayers point out that the evidence of
rising productivity, a key part of the deflation argument, is
spotty at best.
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Somtimes illogical is logical <g>. Who knows?
Regards,
Joe... |
