As major economies spiral downward in 2009, the ghosts of past financial crises will haunt a divided world
By ANDY XIE, Director, Rosetta Stone Capital Ltd. 30 December 2008
The much-hyped G20 Summit in Washington in fall 2008 was a disappointment. It removed the last hope for a coordinated global approach to the financial and economic crisis stalking the planet. The summit’s hollow results speak volumes about the current world leaders and the antiquated power structure governing the global economy.
What’s in store? A rapid contraction of the global economy will likely continue into the first quarter of 2009. The second quarter 2009 may still see some contraction as well. The global economy may stabilize in the third quarter 2009, but surely will be battered and directionless.
The 2008 wave of monetary stimuli by governments around the world laid the groundwork for inflation in coming years, I believe. Deflationary effects of asset deflation are temporary. They shift the demand curve downward and decrease inflationary pressure. However, as businesses cut production in response to lower profitability, demand weakness is no longer deflationary.
Increased money supplies temporarily hoarded by banks could be released through unexpected channels. Another wave of commodity inflation or wage increases through labour union demands could release the inflationary impact of monetary growth.
History Lessons
There are three ways out: working it off over time like Japan, bankruptcies like the United States in the 1930s, and inflation like Germany in the 1920s. The United States has not thought through which way it is going. It will not follow Japan’s path; I don’t think Americans will stick to their mortgages in a negative equity situation because this is not American culture. So the choice will be either bankruptcy or inflation. The Fed is staving off bankruptcies by bailing out banks and, increasingly, non-financial businesses as well. Thus, it’s heading toward an inflation solution.
Before the 1920s, German businesses took on too much debt during the First World War. They pushed its central bank toward an inflation solution, which Keynes erroneously blamed on payments to the war’s victors. The chaotic process, probably created on purpose to hide the central bank’s true intentions, led to hyperinflation. The result paved the way for the Nazi rise to power.
In contrast, the United States’ willingness to accept bankruptcies at that time pushed the country into institution building, which laid the foundation for a gigantic U.S. economy and its superpower status.
The catastrophe of today’s financial crisis is largely self-made. Half a century after the Great Depression, no one from that era was left in the power structure. Greed pushed politicians, regulators and financial institutions to try their luck again. Financial crises are inevitable because humans forget past lessons.
Beyond 2009, economies in the United States, Europe and Japan will remain sluggish with high inflation. That is to say, stagflation will haunt them for years.
But developing economies could break out of this stagflationary trap by promoting trade among themselves. In particular, strengthening trade between the manufacturing sectors of emerging economies and resource sectors could allow them to regain growth and tame inflation. And if emerging economies manage a mutual upturn – which has never happened before – stagflation would be reinforced in developed countries.
The solution to America’s crisis must involve countries that owned about $10 trillion in foreign exchange reserves as 2008 drew to a close. The U.S. economy is undercapitalized. A standard internal solution is to replace one form of debt with another. The current proposals fall into this category. When the shell game runs out of options, printing money is the only way out. That will eventually lead to a U.S. dollar collapse.
The world should come together to prevent such a tragic ending. Countries with big foreign exchange reserves such as China, Japan, Kuwait, Saudi Arabia and the United Arab Emirates, for example, should sit down with the U.S. government to find a way to recapitalize its economy. They should swap their U.S. dollar assets in debt instruments such as T-bills for equities.
The world has a vested interest in ensuring an orderly resolution to the U.S. crisis. If America prints money to solve its problems, it will lead to the destruction of other nations’ wealth in U.S. dollar assets and a global depression of unimaginable proportions. Rising leverage in the United States has driven demand growth in the global economy in the past decade. High foreign-exchange reserves of its trading partners and the excessive leverage of the U.S. economy are two sides of the same coin. It seems both sides must participate in a solution.
The United States must change its policy toward foreign investments. Its xenophobic attitude toward investments from non-western nations is a major barrier. A massive debt-equity swap is needed. The real economy may need 40 percent of GDP in additional equity, or $5.5 trillion – equal to one-third of America’s stock market capitalization. Foreign capital should be sought for at least half that amount.
Americans may need much more hardship to change their attitudes. Their country is not strong enough to run the world by itself. But an alliance between China and the United States could. Unfortunately, neither country is embracing the idea.
3 comments:
Mutual Aid Or Mutual Destruction
As major economies spiral downward in 2009, the ghosts of past financial crises will haunt a divided world
By ANDY XIE, Director, Rosetta Stone Capital Ltd.
30 December 2008
The much-hyped G20 Summit in Washington in fall 2008 was a disappointment. It removed the last hope for a coordinated global approach to the financial and economic crisis stalking the planet. The summit’s hollow results speak volumes about the current world leaders and the antiquated power structure governing the global economy.
What’s in store? A rapid contraction of the global economy will likely continue into the first quarter of 2009. The second quarter 2009 may still see some contraction as well. The global economy may stabilize in the third quarter 2009, but surely will be battered and directionless.
The 2008 wave of monetary stimuli by governments around the world laid the groundwork for inflation in coming years, I believe. Deflationary effects of asset deflation are temporary. They shift the demand curve downward and decrease inflationary pressure. However, as businesses cut production in response to lower profitability, demand weakness is no longer deflationary.
Increased money supplies temporarily hoarded by banks could be released through unexpected channels. Another wave of commodity inflation or wage increases through labour union demands could release the inflationary impact of monetary growth.
History Lessons
There are three ways out: working it off over time like Japan, bankruptcies like the United States in the 1930s, and inflation like Germany in the 1920s. The United States has not thought through which way it is going. It will not follow Japan’s path; I don’t think Americans will stick to their mortgages in a negative equity situation because this is not American culture. So the choice will be either bankruptcy or inflation. The Fed is staving off bankruptcies by bailing out banks and, increasingly, non-financial businesses as well. Thus, it’s heading toward an inflation solution.
Before the 1920s, German businesses took on too much debt during the First World War. They pushed its central bank toward an inflation solution, which Keynes erroneously blamed on payments to the war’s victors. The chaotic process, probably created on purpose to hide the central bank’s true intentions, led to hyperinflation. The result paved the way for the Nazi rise to power.
In contrast, the United States’ willingness to accept bankruptcies at that time pushed the country into institution building, which laid the foundation for a gigantic U.S. economy and its superpower status.
The catastrophe of today’s financial crisis is largely self-made. Half a century after the Great Depression, no one from that era was left in the power structure. Greed pushed politicians, regulators and financial institutions to try their luck again. Financial crises are inevitable because humans forget past lessons.
Beyond 2009, economies in the United States, Europe and Japan will remain sluggish with high inflation. That is to say, stagflation will haunt them for years.
But developing economies could break out of this stagflationary trap by promoting trade among themselves. In particular, strengthening trade between the manufacturing sectors of emerging economies and resource sectors could allow them to regain growth and tame inflation. And if emerging economies manage a mutual upturn – which has never happened before – stagflation would be reinforced in developed countries.
The solution to America’s crisis must involve countries that owned about $10 trillion in foreign exchange reserves as 2008 drew to a close. The U.S. economy is undercapitalized. A standard internal solution is to replace one form of debt with another. The current proposals fall into this category. When the shell game runs out of options, printing money is the only way out. That will eventually lead to a U.S. dollar collapse.
The world should come together to prevent such a tragic ending. Countries with big foreign exchange reserves such as China, Japan, Kuwait, Saudi Arabia and the United Arab Emirates, for example, should sit down with the U.S. government to find a way to recapitalize its economy. They should swap their U.S. dollar assets in debt instruments such as T-bills for equities.
The world has a vested interest in ensuring an orderly resolution to the U.S. crisis. If America prints money to solve its problems, it will lead to the destruction of other nations’ wealth in U.S. dollar assets and a global depression of unimaginable proportions. Rising leverage in the United States has driven demand growth in the global economy in the past decade. High foreign-exchange reserves of its trading partners and the excessive leverage of the U.S. economy are two sides of the same coin. It seems both sides must participate in a solution.
The United States must change its policy toward foreign investments. Its xenophobic attitude toward investments from non-western nations is a major barrier. A massive debt-equity swap is needed. The real economy may need 40 percent of GDP in additional equity, or $5.5 trillion – equal to one-third of America’s stock market capitalization. Foreign capital should be sought for at least half that amount.
Americans may need much more hardship to change their attitudes. Their country is not strong enough to run the world by itself. But an alliance between China and the United States could. Unfortunately, neither country is embracing the idea.
关羽：
明天我们就要和2008年说再见了。在这里想对你说三个感谢：
第一个；谢谢你让我走入你的生活，做你的网友。
第二个；谢谢你愿意走进我的生活，扮演朋友的角色，直到今天你依然是我生命中唯一最精彩的部分。
第三个；谢谢你这一路走来，很多的安慰、关心，支持与鼓励。感恩你。
祝
新年快乐 ~ 2009! ^_^
PC,
我好感动啊。谢谢你这些话。
明天会跟好。
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