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Strategies & Market Trends : Asia Forum -- Ignore unavailable to you. Want to Upgrade?

To: Zeev Hed who wrote (4164)	6/4/1998 2:20:00 AM
From: B Tate	Read Replies (2) \| Respond to of 9980

Zeev and thread; The following from the Bangkok Post is self-explanatory. ;-( Will speculators make the US the next target? The IMF has warned that the US dollar and stock market are heading for a fall. The Economist has said the asset-price bubble is bound to burst, bringing recession or inflation in its wake. Will the US be the next victim of financial volatility? Martin Khor Could the American economy be the next to suffer from currency and stock market volatility? It might well be, although it now seems to be riding very high. In a global economy where uncertainty and surprises are becoming the rule rather than the exception, what is up today can go down tomorrow. The East Asian economies affected by the financial crisis are the most recent proof of that. Could the US be next? This may sound unlikely at first. The economy is booming, unemployment and inflation are at low levels, the stock market has been shooting up, and many billions of dollars are flowing into the country, some of which has has been diverted from the troubled Asian countries after investors pulled out of their stock markets. Interestingly enough, this scenario is very similar to the situation the East Asian countries were in just before the onslaught of currency speculation and the stampede of investors moving out. Even more striking is the increase in the already high deficit in the US current account, expected to be at least $230 billion (9,660 billion baht) this year. The current account deficits in the Asian countries were the indicators that speculators focused on as indicators of financial weakness, thereby justifying their change of mind on the attractiveness of these economies. While only weeks ago there was widespread praise for the great performance of the American economy, now there is an increasing chorus of establishment voices warning about an impending downward adjustment of the US currency and stock market. They are not talking about a "crash" of the East Asian variety, at least not yet. But they are warning about the bursting of the US asset bubble, and about the risks of market corrections. Last week, the International Monetary Fund gave the most explicit warning to date. Its deputy research director, Fleming Larsen, showed concern about the rapid rise of the US current account deficit, due partly to the import slow down in Asia. According to a Business Times (Singapore) report from Tokyo, Mr Larsen said it was clear that "at some point financial markets will begin to raise questions about the sustainability of the dollar's appreciation". While the dollar could adjust downwards gradually, he said, the lessons of Asia were that when foreign exchange markets get out of whack they have the potential to correct quickly. Noting that the dollar is currently 15 to 20 percent above its medium-term trading range, Mr Larsen said the adjustment could take place "this year or next year". At some point financial markets may decide the dollar had become too strong and that other markets are more attractive. The Federal Reserve would then have to tighten monetary policy and that would have adverse implications for US stocks and bonds. Mr Larsen also warned about the dangers of asset price over-valuation in economies such as the US and Britain that were benefitting from a shift of financial assets away from emerging markets due to the Asian crisis. He said this may not be sustainable. The warnings from the IMF senior staffer point to the potential disruptive effects of large amounts of short-term capital moving into and out of countries in search of ways and locations from which to make a quick profit. When the returns in East Asian countries seemed to be on a high, as these countries were feted as the fastest growing and most profitable in the world, the funds rushed in. When sentiment suddenly changed, the billions flew out more quickly than they had entered. These billions have now been channelled to the "safe havens" of western countries, particularly the US. But now these economies are facing the same risks that ruined the East Asian countries, the syndrome that with a sudden change of sentiment, funds can be withdrawn, resulting in a downward spiral of currency and stock values. The Economist magazine also has warned that the recent surge in Wall Street is not due to faster growth and strong profits. Instead, it says: "America is experiencing a serious asset-price bubble." This asset-price inflation now poses a bigger and more imminent threat to the global economy than the Japanese recession. The Economist points to the signs of this bubble economy: the massive 65 percent rise in the US stock market over the past two years, the rising prices for commercial property, the merger mania, and excessive growth in money supply. The financial bubble could harm the US economy in two ways: the bursting of the bubble could cause financial instability and recession, or asset-price inflation could spread, causing over-investment, excessive consumption and inflation. The magazine criticises the Federal Reserve for not having raised interest rates sooner to prevent the bubble developing. "The longer America's party is allowed to continue, the worse the eventual hangover will be." The fact that the IMF and The Economist have in the same week sounded alarm bells on the unsustainability of the US boom indicates it is likely that the US dollar and the US stock market will decline from their current high levels. If the adjustment is too sudden and too sharp, it might trigger a recession, and this could have adverse global repercussions since the US is the world's biggest economy. But there also could be some positive effects. A decline in the US dollar could mean the strengthening of the ringgit and other Asian currencies. This would reduce the current terribly high cost of servicing foreign debt and thus ease the burden on companies. Also, it would reduce the high inflationary pressure caused by the hike in import prices. Moreover, if currency speculators now go for the US dollar, and if holders of US stocks and bonds were to pull out a significant part of their investments, it would shake the present complacency of the US Congress and administration regarding the dangers posed by the global financial market in which speculators have a free run. Perhaps then there will be a sudden flash of recognition that financial speculation and the market structure, in which sudden shifts in investor sentiment can cause damaging volatility, must be regulated. Until one of the big economies (especially the US) is hit by the way the financial markets now work, there will be stiff resistance to proposals towards international financial reforms. * Martin Khor is the director of Third World Network.