Emory and others:
I am envisioning an impending fall in the US$ and stock and bond markets, contrary to the common punditry in the media.
Observe what happened in SE Asia; they imported more than exported with their current accounts under strain; and borrowed heavily from global capital markets. The pressure to repay mounted as the trade deficits soared and balance of payments went beyond control. These countries sold all their foreign-exchange, but could not satisfy the demand for US$ since the exports were less than imports and very little of the exports were profits -- insufficient to repay interests and principal on the US$ loans. The rest is history; local currencies had to fall and the stock and bond markets had to nosedive.
I think, the US has a completely parallel if not a more dangerous situation than the SE Asian countries had last year. My guess is that US has borrowed more from Asia (including Japan) than Asia borrowed from the US. How? The Asian exporters kept most of their US$ exports in US Treasuries and stocks [in fact, many Asian banking and finance companies were formed with "cheap" borrowed capital to invest in US equity markets]; I am excluding China and India where it is not legal to hold unauthorized foreign exchange; although some have cheated. We need to add all the Japanese and other Asian countries' trade surpluses "invested" in (lent to) the US. This massive cumulative trade surplus must have made the US the biggest debtor nation in the world; we need to add to that the $5 trillion federal debt and other local government debts.
The situation will likely turn grim when the US Congress assimilates the problem (Policy makers asking for direct lending will help explain the situation to Congress as they seek funds) and steps into the foray to castigate the Clinton Administration for the massive trade deficit through the free trade agreements. The budget deficit will mount as corporations will show less and less earnings and take more charges to cut taxes.
A point in time will come when investors will pull out of the US stocks and then bonds and move to Asia. I am beginning to read reports on foreign program buying in Indonesia, Korea and expectation of the same in Thailand, Malaysia, Singapore, and other countries. Investors are already slavering for the Korean debt market; they want to buy real estate, banks and other companies in these countries; deposit in Japanse bank preferred stocks; etc.
I do expect a mini (not a large-scale) run on the US$, thanks to the US monetary policy -- but the vastness of US resources cannot be presumed to overwhelm the vast amount of US debt -- these resources will reduce in value as the market plunges. I expect an eventual fall in the US$ once the entire situation fully seeps into the stock and bond markets. We have already witnessed a jittery market.
I have found it difficult to see a restoration of an equilibrium from the current serious global disequilibrium, resulting in US and European stock market jitters. How will a new equilibrium be restored?
Clearly, the US policy makers (Rubin, Summers, Stiglitz, Greespan) know these impending crises. They are scurrying around, but they cannot make clandestine loans and will soon deplete the emergency Treasury fund. The Congress will go wild; Republicans have not yet assimilated the vulnerabilities of the current Admin. Once they do, Gephardt will join to create a sufficient uproar against any significant direct lending which is now being done from the depleted Treasury emergency fund. [The new Republican slogan may be: it is the trade deficit stupid.] That will be enough to make the markets go haywire and tumble; capital to flow to Asia; some smart fund managers have already flocked to Asia.
The "optimal" scenario of direct lending will have kept the US markets
out of danger. But, politically, that will be infeasible and so there will be market forces to restore the equilibrium by exiting from the overvalued US markets to move to lucrative markets elsewhere, IMO.
Sankar |
