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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: John Vosilla who wrote (31716)	5/22/2005 1:36:11 PM
From: Crimson Ghost	Read Replies (3) \| Respond to of 306849

Home Prices 150% above fair value -- Krugman Shift to domestic-led growth may become essential in Asia Threat of recession in US to drive change PARISTA YUTHAMANOP Adjustments to the global financial imbalance could be "messy", says Prof Krugman. — KOSOL NAKACHOLImbalances in the global financial market could push Southeast Asian economies to undertake a difficult adjustment in the future toward domestic demand-led growth from export-led growth models, according to US economist Paul Krugman. The Princeton University economist and well-known columnist for the New York Times, made the comment in Bangkok where he has been speaking on global and regional economic trends. Addressing a seminar at the Sofitel Central Plaza Hotel yesterday, Prof Krugman said the US economy was currently unsustainable, with the huge current account deficit and overinvestment in the housing market eventually leading to an economic recession and wiping out the US's role as ''the world's importer of last resort''. Thailand, together with other Asian countries, would need to shift investment to spur domestic demand to help compensate for a decline in exports following a US recession, he said. ''Private investment is currently low by historical standards. Interest rates are also very low. If the current account is going to decline, it would be difficult to figure out where the internal demand will come from. ... Public investment is a reasonable thing to do.'' The Thai government has announced plans to invest 1.7 trillion baht through 2009 in new transport, energy, water and communications projects. Prof Krugman said that while public investment could be a ''stopgap'' for economic adjustment as it would help strengthen private investment, the final benefits would rely on the quality of the projects. ''Thailand would be in a situation resembling Japan in the past, when enormous infrastructure public investments were made purely to increase domestic demand. Many projects had no receivables,'' he said. Prof Krugman cautioned that the adjustment to the present global financial imbalance could be a ''messy'' and ''deeply troubled'' one. ''The US current deficit, at close to 6% of gross domestic product, would be in a danger zone by any standard of a crisis. Most developing countries have no alarms ringing, but the US looks serious.'' The US housing market, he said, was also showing signs of a bubble, marked by high prices and speculative demand. ''Macro indicators suggest that the market is speculative mania. Day trading cannot be sustainable. There is a real bubble mentality in the US housing market,'' Prof Krugman said, adding that prices of US housing were 250% of their real values. A fall in the housing market and investment would spur a US recession and lead to capital outflows. ''There would be a difficult contraction in the US economy. It would be a very difficult contraction for monetary policy to deal with. I think there is 50% chance for a major break in the situation in the US next year.'' Prof Krugman said a US recession would force Asian economies to shift toward domestic demand policies. ''Asia and Japan will see a fall in exports. It will be an end of export-led growth. The US will no longer be an importer of last resort. Asia will need domestic demand for support.'' Prof Krugman said Asian central banks also were expected to increasingly diversify their foreign reserve portfolio away from dollars to euros and yen. Emerging Asian countries, led by China, are the largest investors in the world in US assets. Prime Minister Thaksin Shinawatra welcomed Mr Krugman's words of caution. ''It's good to consider and take heed of the warnings made by a US economist of a potential US economic bubble,'' he said. ''At the same time, we shouldn't become too alarmed.'' Mr Thaksin said Thailand's concerns were to conserve energy and minimise a potential current account deficit. ''We aren't saying that we can't have a deficit, only that we should try to minimise it if possible. We have plentiful foreign reserves and can accept a deficit if need be,'' he said.