"What we want to see is some real, tangible evidence of money
creation...which will have an impact of reflating commodity prices.
We want to see gold at US$400 (S$659) an ounce, we want to see
the commodity price index...20-25 per cent higher ...to be confident
that this upturn in global reflation is going to lead the world economy
out of this abyss."
Falling rates could set off
stocks bubble
By Catherine Ong
HE US Federal Reserve is likely to cut interest rates by
another 25 basis points on Tuesday, but central bankers
around the world have to be careful not to allow falling
interest rates to set off a serious bubble in equity markets, a senior
economist warned yesterday.
George Magnus, the London-based global chief economist of
Warburg Dillon Read, said: "What policy makers have to do is to
carefully engineer a reduction in interest rates which is going to help
address the problems of indebtedness, debt service, credit crunch,
and liquidity shortage while at the same time making sure we do not
get one or two other things like an investment boom taking off,
which is very unlikely given the excess capacity."
He added: "We also don't want
falling interest rates to set off a
very serious bubble in the equity
market because what you will
get, given what has happened
with corporate profits, is you
get a whole lot of Ps and no
Es," in a reference to prices and
earnings.
Addressing Warburg clients at a
luncheon talk in Singapore, Mr
Magnus pointed out that the
present global economic
downturn was set off by very different factors from those that
triggered previous global depressions.
While the latter were mostly caused by excess demand and inflation,
the present downturn resulted from a debt overhang in emerging
markets, excess capacity in many sectors such as steel, chemicals,
shopping malls, banks and semiconductors. While Warburg is
forecasting positive GDP growth for the US, Europe and Asia in
1999, Mr Magnus said: "Don't be fooled by real GDP numbers, the
growth rate of money GDP is still declining."
He warned that there is precious little prospect for recovery in
output growth in G-7 countries.
"What we want to see is some real, tangible evidence of money
creation...which will have an impact of reflating commodity prices.
We want to see gold at US$400 (S$659) an ounce, we want to see
the commodity price index...20-25 per cent higher ...to be confident
that this upturn in global reflation is going to lead the world economy
out of this abyss."
Fighting deflation, he added, is the main order of the day for central
bankers. Mr Magnus reckoned that the Asian crisis, the economic
troubles in Latin America and Russia are old news. The key
uncertainty now is the extent of economic damage in the industrial
countries, and this uncertainty will impede any return to stability in
financial markets, he said.
Warburg estimates that 40 per cent of the world is currently in
recession.
Mr Magnus expects that it will be a few more years before Asia can
regain sustainable growth.
Although Asia, with stronger fundamentals, isn't likely to go the way
of Latin America which lost a whole decade in the 1980s, "in Asia,
you are still going to be hostage to the Dow Jones", Mr Magnus
said.
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