Thursday, March 12, 2009

Whither The Global Economy (v2)

The current global financial crisis, and the ensuing global economic crisis, is the result of the inability of the US, as a global economic leader, to respond properly to the structural changes brought onto the global economic scene by the reawakening of the China economy after centuries of slumber.

China's reawakening means two major things:
1. Starting the economy from the ground up means rudimentary wages and a hunger to get out of the economic death trap means intense struggle and competitiveness.
2. With a third of the world population becoming less hungry and less impoverished, there must be immense demand on global resources.

In the meantime, the US has become less competitive because of the historical baggage of affluence, despite being innovative industrially. Industries then move to global locations where there is economic efficiency.

As the US economy falters in competitiveness and momentum, the US Federal Reserve sought to save the economy in financial terms (rather than in real terms) by printing money - which it can now do as the largest deficit economy in the world (as Spain and England were in the past centuries).

This resulted in the massive global liquidity that was - and still is - sloshing around in the world.

In the 1990s, the flow of excess liquidity into Asian economies led, in a few short years, to the Asian Financial Crisis.

These global funds (hedge or otherwise) go to national financial markets to get financial returns through the forex and equity markets. Their very behaviour determined the market forces to their advantage. Their entry raised the prices of local financial assets which they then extract a return when local investors followed by speculators joined into the foray.

After Southeast Asia, these global funds went to China and reawakened the dragon. Investments were for exports to the US because the Chinese economy was too small because of the low wages. This was the decade when the US bought real goods from the sweat of the poor peasants and paid them with paper money.

The US Federal Reserve under Greenspan thought it had found the magic fountain of fortune by printing money and getting real goods from abroad.

The excess liquidity in the US from the printing of money caused the US financial and real estate markets to soar - founded on the growth of the global economy led by China.

Every time the US stock market failed, the Fed fed it with more cash. This went on for years. The US stock market went from sober to a state of drunkedness.

The sustained growth of the US stock market then fed the US real estate market. The asset inflation in real estate then gave the US bankers the perfect excuse to do the inexcusable, in the eyes of bankers - funding speculative real estate gains collaterised on inflated real estate.

In computer language, the US asset markets went into a do-loop until it reached its limit of growth and then blew up.

That limit was defined by the real income growth of the people of the US. With the underlying real economy not growing as fast as the asset markets, the limit was when the people had taken loans which they were in a position to pay, now or in the future. That's the sub-prime. This arises thanks to Mr. Greenspan's ingenuity.

Whither the Global Economy

While the US is sorting out its financial crisis, the world should move on. The world economy cannot depend on the US anymore - because it has abused its seignorage as an international reserve currency.

This global financial crisis is really a US financial crisis with global implications.

This means that the global economy will have to limp on one leg for a while, while it finds its new balance - and get used to the gait.

China sees the opportunity for itself to be the next global economic power, and China is seizing it with both hands.

Its massive infrastructure spending - why not for it has now massive foreign reserves to buy foreign imports, if need be, or to expand its own money supply, which it should - is the right way forward.

This is China's opportunity to push its development inward into the hinterland from the coast, and bring development to the villages - mostly along the major river systems.

The expansion of transport - land, air and water - and telecommunications will be the first wave of growth for China.

As the communications system improves for the whole economy, the basic groundwork and infrastructure is now being laid for its next economic cycle - of inward growth and expansion which is being forced upon it by the US financial crisis.

In the meantime, China will continue to source for raw materials worldwide as input for its industrialisation.

With the US and Europe saturated with consumption, China's reawakening may be a godsend to the Third World to rise up from its underdevelopment.

In the next 30 to 50 years, the global economic picture will change from what we are now taking for granted. The New Economies will be China, Asia and Africa.

1 comment:

de minimis said...

With great perceived wealth comes sloth. With sloth comes decay. If the Laws of Nature prevail, we hope that after decay comes renewal and regeneration. All will be well again. But long may the memory remain. In order that the cycle will not repeat itself.