|
|
|
|
Global outlook: No risks, no
gains
By Scott B MacDonald and
Keith W Rabin
NEW YORK - The usual set of
strikes in France, the possibility that reform of
Japan's postal bank will be diluted, and
apprehension that the Bush administration will not
make much headway on reducing the sea of red ink
on the federal fiscal ledger all point to one
thing - a certain warped convergence between the
world's major economies. In a very simple sense,
US, European, Japanese and even the Chinese
economies need each other - to maintain a status
quo that allows them to put off politically
painful and hardnosed economic reforms.
The current system of mutual support - the
flow of funds from Asian and European investors
into the US in the form of Treasury and corporate
bonds and, in return, the active stance of US
consumers in buying imported goods with that
borrowed money, keeps Japanese, German and French
companies pumping out products, making profits and
workers employed. At some point, the music in this
dance must come to an end and the band paid. Yet,
this day of reckoning could well be postponed for
several more years. While this will make the
inevitable meltdown all the more harsh - until the
carousel ride stops, the party goes on.
The sad thing is that all the players
recognize the problems. For the US, it is a
combination of large fiscal and current account
deficits, a top-heavy reliance on the consumer, an
alarming depletion of personal savings, a pressing
need for tort reform, and serious issues
concerning social security. For Japan, it is the
government's massive build-up of debt to about
150% of GDP, the need for further structural
reforms such as postal system privatization, a
continuing reliance on the export sector, and a
rapidly aging population.
For the
Europeans - in particular the continental giants
of France, Germany and Italy - critical reforms
are required in terms of labor markets, pension
systems and competition laws. Current efforts
remain inadequate. Failure to reform has resulted
in anemic economic growth, higher-than-expected
government spending and deficits and, in some
cases, a failure to meet EU Growth and Stability
Pact targets. Europe also has to consider similar,
though not as extreme, demographic trends as
Japan.
China has also bought into this
system. It is in the process of a massive economic
transformation. For its leadership to be
successful, it must have strong economic growth
and some ability to distribute its national
wealth. To achieve this goal, China needs markets
for its goods and the ability to source industrial
inputs such as coal, copper and oil. China also
requires some degree of stability in international
currency markets, hence its glacier-like approach
to allowing its currency to float. If Europe, the
US and Japan were to embark upon the needed
reforms, economic growth in those countries could
slow. If that were to happen, the current great
Chinese leap forward which started in 1978 could
sputter. Any major slowdown could result in social
unrest, perhaps even upheaval.
What all of
this means is that the US, Europe, Japan and China
are locked in their current patterns of economic
growth. The nagging issues of high unemployment,
looming pension and social security crises, and
untidy fiscal accounts are likely to continue. As
for China, do not look for any floating of the
currency in 2005 and for growth only to modify
down to 8% in 2005 from last year's, 9.6%. China
will achieve a soft landing, but is likely to be
longer and bumpier than many expect.
What
keeps this system in place is that no one really
wants to see it collapse. Change will be painful
for everyone, so it remains easier to push the day
of reckoning further into the future, beyond
current political terms. The US current account
deficit will continue to be a problem, with no one
wanting to make the adjustments - in terms of
allowing the euro or yen to appreciate too much to
threaten growth. We have already seen a recent
round of squabbling between Europe and Asia over
who will assume the burden of another round of
dollar weakening. In 2004 it fell more on Europe;
now the Europeans want to see the Asians pick up
some of the adjustment burdens. Japan was quick to
indicate that it might intervene in international
currency markets, especially if the dollar/yen
ratio drifts toward the 100 mark.
The
results of failing to act on economic problems in
the world's largest economies is likely to be one
of ongoing budget and current account deficits in
the US, marked by periodic weakening of the US
dollar. Japanese economic growth, while positive,
is likely to remain below its potential and the
nation will struggle to deal with the public
sector debt it has taken on. As for Europe, the
pressures on pension and social services are
likely to mount as there will be fewer people to
support an aging population. And Europe's large
economies will face strong pressures to move
businesses further east to countries like the
Ukraine, with well-educated populations but far
lower wages and social costs.
The ultimate
result of this system is a long, range-bound era
of moderate to weak economic growth, eroded by a
lack of the changes badly required to address
population shifts and the necessary economic
transition. At some point, something may give - a
plunge in the dollar that does not stop, an
unexpected currency move by China, or a major
financial meltdown caused by mistakes with
derivatives. Such a meltdown could be far worse
than anything seen in recent history due to the
accumulation of debt and structural inefficiencies
- sadly all of which could have been corrected at
an earlier period.
From an investment
standpoint, however, the key question is whether
we will see things unwind in a slow economic
crumble or a precipitous drop off the cliff. The
former would suggest the Fed is likely to continue
or even reverse its "measured pace" posture. Under
that scenario, current trends such as rising
commodity prices, an outperformance of emerging
over developed markets and even perhaps the
"bubble-like" appreciation of US real estate
markets may continue for some time. A drop off the
cliff, however - and many extremely smart
investors have patiently waited and underperformed
over several years believing this to be inevitable
- would have ominous implications.
While
entirely possible - and even justified, based on
the underlying fundamentals - it is hard to see
how anyone would benefit from an abrupt systemic
shock and major economic dislocation. This does
not mean it will not happen, and things could
certainly get out of hand. Massive liquidity,
however, and the complementary - though admittedly
dysfunctional - relationship highlighted above
does indicate that a more gradual adjustment is
entirely possible. While this does not eliminate
the potential for manic, volatile swings as we
seek to determine whether inflation or deflation
will gain the upper hand, it does argue against a
doomsday "imminent depression" in the immediate
future. These alternatives have very different
implications for fixed income and equity
investors.
(KWR International Inc, a New
York-based consulting firm specializing in
research, communications and business development
services for the public and private sector, with a
special emphasis on the Asia-Pacific region. Visit
the site.) |
|
|
|
|
|
|
|
 |
|
|
|
|
|
All material on this
website is copyright and may not be republished in any form without written
permission.
© Copyright 1999 - 2005 Asia Times
Online Ltd.
|
|
Head
Office: Rm 202, Hau Fook Mansion, No. 8 Hau Fook St., Kowloon, Hong
Kong
Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
|
Asian Sex Gazette Sex and Entertainment News
|
|
|
