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Politics : Stockman Scott's Political Debate Porch -- Ignore unavailable to you. Want to Upgrade?

To: Jim Willie CB who wrote (3207)	7/25/2002 9:50:50 AM
From: stockman_scott	Respond to of 89467

Blowing Bubbles: U.S. From Across the Pacific By Patrick Smith Norfolk, Connecticut, July 25 (Bloomberg) -- Funny how silent Asians have been as they watch the U.S. economic model come unstuck and the wreckage proceed in the financial markets. East Asians are modest by tradition, it is true, and not given to declamatory assertions. But do they understand the gravity of what they witness across the Pacific? I wonder. There is now an emerging consensus forming around an idea mooted in this column for some time. The U.S. consumer is no longer reliable as a source of Asian growth. This is not merely a matter of the now-evident dive in the confidence of American consumers. It's a fundamental shift away from the dynamic between Asian exports and U.S. consumption that has prevailed since the Cold War opened in the late 1940s. ``It is to be hoped that Asian central bankers and policymakers are not taking official reassuring statements coming out of Washington at face value,'' writes Chris Wood in his latest edition of Greed & Fear, the newsletter he publishes for CLSA Emerging Markets in Hong Kong. ``They should be assuming that the falling dollar and falling U.S. equities are sending a message. That is that America can no longer be taken for granted as the growth driver of the world economy.'' Borrowing and Buying The U.S. administration is evidently and scarily clueless on this point. President George W. Bush and Federal Reserve Chairman Alan Greenspan are desperate to keep Americans borrowing and buying: It's the only strategy they seem to have. Nobody on this side of the pond is even talking about the unsustainable current account deficit Americans are running. ``Investors are advised to ignore this waffle,'' Wood writes, ``and realize that the long-awaited unwinding of America's macroeconomic imbalances is coming.'' Indeed, financing the American current account deficit looks more and more like yesterday's fun thing to do. But Asians are in a tough spot. With the late-1990s crisis still fresh in their minds, they are reluctant to surrender any source of growth that promises a contribution to their current recoveries. So the export machines roll on. This makes Asian central banks the world's only enthusiastic purchasers of dollars at the moment -- starting with Japan's interventions over the past six weeks or so. In an effort to keep their currencies at advantageous exchange rates, the dollar reserves of Asian central banks jumped up by $51 billion in June. This is finger-in-the-dike stuff. We've reached the limit so far as Asia's weak-currency strategies are concerned. And we've reached it not with a bang but with a bubble. Five Stages An interesting paper comes our way in this regard from James Montier of the global equity strategy team at Dresdner Klienwort Wasserstein in London. ``The Anatomy of a Bubble'' places the U.S. in a long historical context and identifies five stages in the classic bubble, from boom to bursting: -- Displacement: This is when new profit opportunities develop and crowd out old ones. It's the opening of a boom. -- Credit creation: The boom grows by way of monetary expansion, credit creation, or both. ``Monetary and credit expansion in the U.S. high-tech bubble were largely the result of overly accommodative monetary policy on the part of the Fed in 1998,'' Montier writes. -- Euphoria: The boom takes on the aspects of a bubble -- ``overtrading,'' in Adam Smith's term, speculation or ``momentum trading,'' as Montier calls it. Cashing Out -- Critical stage/financial distress: This is signaled by insiders who start cashing out of the market. ``Significant selling by insiders has been a hallmark of 2000/2001,'' Montier observes. Insiders, he points out, ``are still selling four times the amount of stock they are buying.'' -- Revulsion: The final stage of the bubble cycle sets in when ``people are so badly scarred that they can no longer bring themselves to participate in the market at all.'' Montier sees no sign of ``capitulation,'' as the final stage can also be termed. So he places the U.S. just now at the beginning of stage four, marked by ``an awareness on the part of a considerable segment of the speculating community that a rush for liquidity may develop.'' This is smart, large thinking, and I'm not surprised to learn that it is based on the work of Hyman P. Minsky, the late liberal economist who contributed some of the great work of the postwar era. Montier's charts go back to the 1930s; the historical comparisons he applies to our moment begin with the South Sea bubble of the early 1700s, the greatest Ponzi scheme of its time. Historical context counts for much; never mind that Americans have little capacity for it. Asians should recognize that they are caught up in a huge economic swing that will force up the U.S. savings rate, leave Americans buying less, and Asians buying more -- all of which are desirable trends. To an extent no one could have guessed amid the late-1990s crisis, the Asian model of capitalism has proven out, and the growth they enjoy now still rests to a great extent on exports. But what now? More on this question in coming columns.