Hi George: Asia's dominoes and the West
The IMF screwed up not only in policies that forces the Asian people to absorve the bad debt of 30 big corporations (see socialization of the debt in my previous post siliconinvestor.com, but also in the procedures. They just started (half) admiting it. So far they have solved nothing as you can read below. At one point the Asian countries will take theit own path.
It is hard to understand that countries that have an ethic of hard work (like Japan) are in troubles, while in North America were we have a hard time convincing our kids that the money does not fall from trees we have the strong currencies. (Beside the Japanese own our debt). Can anyone explain?
Sergio
Wednesday, January 14, 1998 Globe & Mail
By Peter Cook
BRUSSELS
BRUSSELS -- IN a week when South Korea seems a safer place, Indonesia does not. Hong Kong's dollar survived one desperate siege; now it faces another. And if Hong Kong's currency is at risk, so is China's.
For Westerners and Asians who hoped that the troubles that started in Thailand last summer would cease when the International Monetary Fund came up with a big cheque, there is a lot in the news of the past few days to be disappointed about. Asia's financial crisis is entering a protracted second round with no hint that any of those hurt in the first round have found their feet.
In the West, the main impact has been to send long-term interest rates to new, deflationary lows and, perversely, to create worries that
the Asian effect may not have much effect except to increase the risk of central banks getting policy wrong. Suppose the U.S. economy
simply carried on with domestic demand growing at a 4-per-cent annual rate? Suppose Asia's troubles did not make any dent on growth?
On one recent trading day, that thought was enough to knock 150 points off the Dow Jones index.
Traces of an Asian contagion reaching beyond Asia are, indeed, hard to find. In Europe, surveys show consumers and business becoming more confident. In the United States, the December employment statistics showed job growth still on the fast track it has been on for the past four months and wages advancing strongly. In Canada, unemployment fell to 8.6 per cent in December, its lowest level since 1990.
On the surface, all this is good news and welcome. Where it becomes bad news is that, taken together with what is happening in Asia, it
increases the risks for monetary policy and adds to the unbalanced state of the leading economies.
First, it is hard to know how seriously to take recent warnings of deflation from U.S. Federal Reserve Board chairman Alan Greenspan.
If Asia's impact on the United States proves to be a paper tiger, the Fed may fail to cool an overheating economy until too late, then
resort to raising interest rates abruptly, increasing the risk of a hard landing. Second, a continuation of the situation in which final
domestic demand grows 4 per cent in the United States but only 1.5 per cent in Europe, and shrinks in Japan, is not healthy. It is driving
the U.S. dollar to unsustainable heights.
So far, Europe has been content to see the U.S. dollar climb, since it adds to its own growth and exports -- but the German Bundesbank
watches import and producer prices closely and worries when domestic costs rise. Very probably, in the next weeks, there will be an
increase in European interest rates, a move that would be taken by all countries preparing for Europe's new single currency, led by
Germany. When that happens, the supremacy of the U.S. dollar will be checked. And financial markets will get a nasty shock.
Obviously, the first worry about Asia is Asia itself. The attempts being made to persuade President Suharto of Indonesia to actually do
what he told the IMF he would -- balance the budget, reform banks and free up food and fuel prices -- show how intractable the crisis is.
Asia's autocrats, used to economic success, are unwilling to take tough measures. Yet, without them, their currencies continue to sink.
Moreover, when one currency sinks, another follows it, in a cycle of devaluations.
To reverse this process and create confidence will not be easy unless Asian leaders start to recognize what must be done and are
prepared to uproot a corrupt business system that, too often, benefits them and is their creation.
The common concern in all this is that a return to growth in Asia, and more balanced growth in North America and Europe, will not
happen for a long time unless remedial action is taken and markets are reassured.
Gavyn Davies, an economist with Goldman Sachs in London, discusses, in the firm's Global Research newsletter, whether the eventual
Asian recovery will be V-shaped and quick, like Mexico after 1994; or U-shaped and slow, like Latin America in the 1980s; or L-shaped
and non-existent, like Japan in the 1990s. It all depends, he says, "on the appropriateness of the policy reaction by Asian governments
from now on." The basic strength of the Asian economies is being undermined by deep-seated financial problems.
Meanwhile, the wait for Asia to recover adds to imbalances elsewhere. Those countries where domestic demand is expanding rapidly --
the United States, Britain, Canada -- may continue with accommodative monetary policies as they worry about deflation and Asia.
Moreover, if the United States tries to contain inflation pressures emanating from its own tight labour market by raising interest rates, it will merely add to the strength of a formidably strong U.S. dollar. This year, the U.S. current account deficit will reach 3 per cent of
gross domestic product -- a development that could cool enthusiasm for U.S. financial assets and, eventually, cause an abrupt reversal in
the dollar's strength.
Were the dollar to fall sharply, U.S. inflation would rise sharply, prompting the Fed to crack down. Hypothetical, perhaps? But from
Asia, then, would have come the seeds of a U.S.-led global recession. |
