KARACHI ON WALL STREET?
March 31, 2005
Pakistan has been witnessing riots outside of the Karachi Stock Exchange and trading has been suspended - its looking like the Wall Street of 1929 in Pakistan! Hundreds of investors are being denied the ability to trade their investments due to volatility. There is a suspicion of insider trading and foreign manipulation. After a record run-up in the market they are experiencing record declines, with seemingly no end in sight. Where does this end, and can this happen again on Wall Street?
Your comments are always welcome.
LESSONS FROM ARGENTINA
March 09, 2005
The following is an article from the Washington Post. It's a critical analysis of what Argentina went through after becoming the world's largest debt defaulter. Unemployment, social restructuring and a lot of suffering by ordinary people.
ARGENTINA'S DEFAULT, the largest by any nation in history, has been a social catastrophe. It drove unemployment to nearly 25 percent, and millions have been forced into poverty. But the recent restructuring of the country's debt ought to be healthy for the international financial system.
More than three years after its default, Argentina has persuaded a majority of its creditors to accept a reduction of about two-thirds in the value of its debt, a cut roughly twice as aggressive as in past sovereign bankruptcies. Although this means that investors will take painful losses, this isn't a bad thing: It sends a signal that private lenders should consider the risks of emerging markets before pressing capital on them. If investors had treated Argentina more cautiously during the 1990s, the country would have borrowed less and its ensuing collapse would have been less painful to innocent people. If investors are capable of learning lessons, the Argentina signal could take some froth out of the current lending to emerging markets.
With luck, this salutary lesson to investors won't be counteracted by a destructive lesson to borrowers: that it's better to borrow crazily and default than to run government finances responsibly. Having forced borrowers to forgive two-thirds of their debt, and having experienced growth of nearly 9 percent for the past two years, populists in Argentina and beyond may argue that stiffing international creditors is smart policy. But if they do make such claims, the facts ought to puncture them. Argentines have paid a huge price for their default: As The Post's Paul Blustein reported last week, more than two out of five citizens live below the poverty line, and salaried workers who have held on to their jobs have had to endure a 20 percent cut in incomes. The country's recent economic growth is only a partial recuperation of its earlier contraction. If you devalue your currency, cutting the dollar value of your economy by two-thirds, your new international competitiveness is bound to spur a rebound from the depths to which you've plunged. But it's weird to call that progress.
If international investors absorb the lesson that they should lend more carefully (admittedly a big if), and if borrowing countries don't make the mistake of embracing default as a policy option, capital flows to developing countries may become less crisis-prone. The advantages that they bring (faster growth in poor countries) won't be so frequently undone by the disadvantages (the risk that investors will yank their money out, bringing a country to a standstill). But although Argentina's debt deal sends a healthy signal, it still points to a problem in the way the international system works. The deal took too long to organize, unnecessarily hurting both lenders and Argentina.
This is why the world may eventually create something like a bankruptcy court for dealing with governments. If Argentina were a company, a bankruptcy judge would have taken control of the debt workout, cutting out the need for a three-year game of chicken between the country and its creditors. Once a proposed debt write-down had won the support of a majority of creditors, the minority would have been left with no option to reject the deal, whereas now creditors representing a quarter of Argentina's debt still refuse the offer. This delay and uncertainty serves nobody. Anne O. Krueger, the No. 2 official at the International Monetary Fund, put the idea of a sovereign bankruptcy mechanism on the table in 2001. She should return to the subject
For those interested here is a link to the original Krueger IMF report:
Argentina can be a great lesson for the rest of the world. 25% unemployment, debt forgiveness at huge levels, lots of pain and suffering. Is this what America has to look forward to when it's status as the world's largest debtor results in massive defaults?
Comments are always welcome.
Synthesizing Reader Input
February 25, 2005
READER SURVEY RESPONSES: EXTENDED PREDICTIONS ’05 SUMMARIZED
I’ve been slow getting to this summary, so apologies for dragging this in to the second month of the year! However, I think it is worth the wait, the results below are informative. I’ve read through all of the posts and then categorized them in to primarily “yes” or “no” answers where possible. This was inexact, so don’t hang me if you feel my interpretation of some answers was incorrect, I did the best I could to make sense of answers and to drop them in to one category or another. When an answer was too difficult to interpret I just didn’t count it. Next up I’ll be working on my predictions for the next 12 months, but for now enjoy this summary of reader input, I’ve repeated the survey question, followed by the results and then some of my own comments:
Comment: Seems that gold came out the winner in this race, which is not too surprising as we are a bunch of gold bugs on the www.Depression2.com site! No one seemed to think that ammunition was worth investing in, which I guess is a good thing – but some folks wanted food and land. In general people are harboring their wealth in metals, cash, foreign currencies and the stock market. I guess a good summation here would be to lean heavily on metals with some diversification out of dollar denominated financial assets.
2. Will planet earth be rocked by more record breaking "earth changes"
Comment: The majority here felt that we’d continue to experience the trend of the past couple of years where we’ve seen increasing global warming (whether as a result of the sun or mankind) and an up-tick in seismic activity, with more earthquakes and eruptions and resultant tsunami’s – perhaps with some more hurricanes, tornadoes and storms. A lot of folks felt these events couldn’t be predicted, some felt that what we’ve been experiencing lately was normal and wrote off the notion that this was much of an issue. Personally I believe this area is as big as war, financial crisis and other man-made disasters – it’s all one big boiling soup of potential upheaval!
3. Will humanity face an epidemic of some kind during the year that will cause massive loss of life?
Comment: I don’t know about where you live/work but there have been 2 large flu outbreaks at my workplace in the past 3 months and they were pretty nasty, of course this happens annually but it sure as heck seems like the incidence of outbreak has increased over the years. Globally there definitely appears to be an increase in animal epidemics and airborne viruses, etc. As a group we appear to be agreeing with that interpretation.
4. Will the US be struck by another terrorist attack on a scale greater than 9/11?
Comment: Some folks abstained from this as it was too unthinkable for them to think about. I must say that growing up in Britain during the IRA terrorist attacks we didn’t think about it because we knew it would happen again. To be honest we didn’t even worry about it much either, different times I guess. The attacks in Britain weren’t on the scale of 9/11 and weren’t on the same frequency of what the Israeli’s experience, but they were a constant threat and people just got on with their lives. It is now mid-February, so almost one sixth of the year has already passed us by. Earlier this week there were reports that there is a rising terror threat in the US, I’m expecting a Code Orange any day now, it’s been a while and the powers that be need to ensure the system is still working and still generating unnecessary fear in the masses.
5. Where will interest rates end the year, will the Fed raise them continually throughout '05?
Comment: This was easy; nearly all of us felt that rates would rise over the 4% mark during the year. This week Sir Greenspan has made noises that another increase is on the way – so we’re easily on target to exceed the 4% level by late summer. I guess the big question is whether something unexpected happens, like the Koreans pulling out of the US $$, or the revaluation of the Chinese Yuan, etc. that could really impact the current trend. All things being equal rates should rise for some considerable time.
6. If democratic elections go ahead in Iraq this year will a Shi-ite regime come to power?
Comment: Looks like a Shi-ite coalition with the Kurds and “moderate” Sunni’s is on its way in to power in Iraq. I find it massively ironic that we supported puppet Saddam against the radical Iranian Shi-ite’s for a decade because he was a secular Sunni. Now we’re supporting the supposedly secular Shi-ite’s against the now “fundamentalist” Sunni’s who are now known as insurgents! I know, it’s confusing – and we all know this president is easily confused. Just how a “democracy” is supposed to work in any current Middle Eastern country is beyond me, so the future of this issue will be interesting to watch. Kuwait, Sharjah, Dubai, Abu Dhabi (UAE) appear to be stable and somewhat democratically run principalities – freedom abounds for everyone, almost, in those small, massively oil rich countries. But therein lies the rub. Almost any nation on earth can be “moved” in to the western sphere of influence, and the western materialist lifestyle, if there is endless wealth and a tiny population! Unfortunately the large Muslim states have large populations and local wealth is for the ruling class only, so religion is the opium of the masses, which pits the more radical, Muslim poor against us western secularists. So, it’s really about economics at the end of the day, but that is not what the corporate-owned media want American’s to understand. We need these people as our enemies, so we can justify our actions – for economic reasons!
7. Does Hugo Chavez of Venezuela survive 2005?
Comment: I hope the majority of readers are right on this, the world needs a few outspoken voices of dissent. I don’t pretend to know Chavez’ politics – I hear he is a Commie! Frankly his politics don’t matter to me, he is the leader of a small inconsequential South American nation that is not a threat to anyone. Of course, they have oil – so that makes Venezuela “strategic” – which means we have the right to mess with him and the people there. Bottom line for me is that the Venezuelan people deserve to choose their own direction, even if it’s not ours! Now if they become a threat to our physical security then that may change my perspective, after all we have the right to defend ourselves, but last time I checked the Venezuelan navy, army and airforce could probably be defeated by one US Navy aircraft carrier! Lets leave Venezuela to the Venezuelan’s and see how they do!
8. Will Osama be caught some time during the year?
Comment: Intriguing result here. Seems we’re all a bunch of cynics who believe that OSB is really a construct of the Western money power, or somehow a puppet of the current US regime!? If that really is the case then do we collectively believe that 9/11 was also a fabrication? These are taboo questions in almost any other environment. I know what I believe; I’ve believed it since I saw the first plane hit the first tower. There is a criminal element within the US government that is complicit in these events – at the very least. When analyzing the history of the world it is best to do so from the perspective of “who benefits.” Major events in history are rarely purely accidental, life just isn’t like that. Cause and effect is at work in the world. To me 9/11 looks like another Gulf of Tonkin or Pearl Harbor incident – there is a body of evidence now that suggests that these events were instigated by the West to enable the prevailing geopolitical agenda to be fulfilled. This is very Hegelian in construct: Thesis, Synthesis, Antithesis – if you are unfamiliar with this Machiavellian approach to population manipulation then go Google “Hegelian Dialectic” and read up on just how events are engineered to produce specific outcomes in the minds eye of society in order to manage the consent of the masses (while you are at it look up “managed consent” and learn how the media is being used to shape how society reacts to anything of importance).
9. Does the US go to war against another adversary during '05, Iran, N. Korea, etc?
Comment: I think the majority here have it wrong (but I hope not), in the past few weeks it has looked more and more likely that the US is gearing up for phase II of the neo-conservative, global domination plan – also known as the New World Order. Most likely the next action with be some kind of an attack, or “accident,” on Iranian nuclear installations. Whether the Mullah’s (or Moolar’s as the president calls them) should ever be allowed to have nukes is probably a real good question for public debate. I would conjecture that the western public would vote overwhelmingly to block Iran from gaining nuclear weapons – the idea of some half-crazed religious zealot having his finger on the button is abhorrent to most of us, but of course Iran isn’t the only nation with religious zealots in control now is it!?
10. Does the Chinese bubble burst in '05?
Comment: Well the vote was pretty evenly split on this. Interestingly no one questioned whether the Chinese economy was a bubble, just commented on whether it would burst in ’05 or later. If it bursts soon then I hope you’ve all stocked up on those cheap Chinese imports, because the materialist, mass-consumption party will definitely be over if their economy catches pneumonia. There is a symbiotic relationship between China and the US, trash and trinkets for fiat dollars – it works and it’s energizing the world’s largest population and keeping us consuming westerns doped up on cheap stuff. But just how long the US can afford to consume Chinese exports, and just how many US dollars the Chinese are able to store for a rainy day, and whether the Chinese economy can be self-sustaining without the US market, are the big questions. If the music stops in ’05, who gets the last chair?
In conclusion, I hope readers have had a great time with this little experiment in predicting the outcome of 2005. I have a feeling the vast majority of answers are correct and that collectively you are seeing the future quite clearly. Stay tuned and we’ll track just how close these predictions are over the next 12 months.
Next up, I’ll be publishing how I see the rest of 2005.
SUMMARIZING 2004 PREDICTIONS
February 15, 2005
Summarizing 2004 Predictions - Rich Lancaster
Frederick Nietzsche once wrote that people "on the approach of severe pain, hear the very opposite call of command, and never appear more proud, more martial, or more happy than when the storm is brewing."
How prescient Mr. Nietzsche was! We contrarians marvel at this psychological quirk in humanity. Just how does Joe Consumer remain so defiant in the face of so much evidence of the coming financial storm? The collective subconscious is astonishing in its stoicism, fortitude, delusion and denial. Perhaps humans share certain inherent traits with the Lemming?
In 2004 I titled my predictions, The Lull Before the Storm, and I still believe that title is appropriate today. The storm is still forming just over the horizon, but society is blissful in its interpretation of events current and future.
However, without the necessary flushing of our debt-burdened system (like some kind of financial colonic) we are just stalling the required adjustment and increasing its ultimate impact by layering more debt on top of existing debt. I believe that the debt-based money system foisted on us by the international bankers through the Federal Reserve Act of 1913 is ultimately responsible for the predicament we’re in – and until that entire philosophical approach to monetary control, supply, fraud and manipulation is deconstructed we are really never going to be safe from financial thunder and monetary lightning strikes. But lets save the rest of that debate for another day.
Here is my analysis of how my 2004 Predictions performed:
1. Bush re-elected. For me this was a no-brainer. Once I discovered that Kerry was another (Skull &) Bonesman it was all over. The media did an amazing hatchet job on Howard Dean and the people just took it in the shorts and said/did nothing - - again. Of course the election was rigged with rampant fraud, especially in Ohio, but lets sweep all of that under the carpet. The American governmental system has devolved in to the status of a banana republic with a junta in control. Get used to it, and be grateful and thankful for the freedoms we still have – who knows how long we’ll have them?!
2. China revalues Yuan. Wrong! They didn’t, they should have but they didn’t. It seems inevitable to me that this happens, so I’ll mention this again in my 2005 Predictions.
3. Europe struggles. They did, but they also made large gains in terms of the Euro being seriously considered as a replacement for the Dollar. The EU is a net creditor with a new fiat currency, whereas the US is a net debtor with a tired old fiat currency. Seems to me that Petro-euro’s could really help improve the EU economy over time with net inflows in to EU countries/companies that are less debt burdened than their US counterparts, and more fairly valued.
4. US Dollar stabilizes around 80 through the election. Right on the money, so to speak. The dollar has traded just above 80 since the election; it was hovering around at 81 as the New Year broke. The dollar will continue to decline in my humble opinion – but that’s not rocket-science anymore as the mainstream media arrived at this conclusion in the third quarter of ‘04.
5. Consumer prices deflate somewhat. Well we have stagflation or disinflation or really some inflation and deflation concurrently. Basically goods that deflate do not show up in inflation figures, but for sure we’ve seen prices going down on all kinds of items from cars and appliances to electronics and goods coming from China. Oil, natural gas, stocks and housing have all been inflating.
6. Gold rises to $450 by year end. This was easy. Gold moves in the inverse to the USD, so if you pick one you just do the math for the other. The coupling of gold to the USD is a bit of a mystery to me, although of course I understand the store of value issue with gold all too well. I’m just not sure why the coupling and the inversion of the two remains so absolutely rock solid. I wonder if they may decouple at some point in 2005? Anyway, my gold trades didn’t exactly rock this year as the junior mining stocks performed badly, so even being right in the big picture hasn’t helped me a great deal financially.
7. Oil continues to move upwards ending the year at close to $40 per barrel. Well I didn’t imagine oil going to $55, or the debate about Peak Oil being pushed so far to the forefront. I think it is amazing to watch CEO’s of some of the largest companies in the world start to suggest that all is not well in Denmark (or should I say Saudi, Venezuela, Nigeria, Somalia, Iraq, Iran, most of the “Stans” etc?). Even the new TV ads from British Petroleum suggest that the company is now planning its future beyond oil extraction. Oil makes the world go round (or it that electro-magnetism? I don’t know!), along with money and gold!
8. Interest rates rise towards the end of the year, but not massively. This was easy. The Fed has accurately and consistently signaled their intentions with rates now for some time, and they really haven’t deviated at all from their course, yet. What is interesting in this space is watching the central banks of other western democracies (banana republics) – they ratcheted up rates earlier than the Fed and their economies, especially housing, are starting to show signs of stalling – I’m sure this trend will continue and catch up with the US shortly as rates continue to rise.
9. Real estate drops in value and slows by end of 2Q. Real estate is all about location, so I guess I’m part right, depending on where you are talking about. As mentioned above, in the UK housing has started to stall and quite noticeably, they are the proverbial canary in the coal mine when it comes to asset deflation as a result of increasing rates. I was wrong about US real estate, my timing was wrong
10. Whiffs of deflation by Q3. I’ve covered this above more or less, it’s a mixed bag, I’ve vacillated between believing in a hyperinflationary depression to a deflationary depression that then devolves in to a hyperinflationary depression - - I guess either way I believe in hyperinflation being the outcome, but deflation does seem pretty intuitive given the monetary roulette the Fed has played for so long. Sooner or later consumers will not longer be able to consume more debt, the merry-go-round will begin to slow and deflation will start to spiral out of control. Then I see the Fed opening the flood gates in a last ditch effort to stall complete collapse – which will precede the rolling out of a new global currency that will be introduced by the BIS, IMF, World Bank and the Fed - - with the very vocal and public support of JP Morgan Chase and Citigroup and the central banks of the world’s leading banana republics (like Britain, the EU, Australia, Canada, Russia, Japan, China & assorted other aligned countries).
11. The American population remains blissfully ignorant amidst the biggest meltdown of a global financial system in the history of this Universe. Bingo, the people are on the whole absolutely clueless – or worse, willingly & enthusiastically deluded. I must say though I do detect that people in general know that something is absolutely fundamentally wrong, but they are too distracted to follow through on their suspicions, and lets face it….life is just too good to mess around learning the truth or reality!
12. Upon the conclusion of the election we start to accelerate towards the inevitable collapse of our monetary system and all of the necessary, but very painful, adjustments in our lives that comes with it. And that is what my 2005 predictions will all be about.
I meant to get ’05 predictions out by Chinese New Year, but just couldn’t pull it off. So stay tuned for the next installment. If you have comments on any of this content go ahead and add it below. I will be summarizing the 2005 Prediction Blogs shortly in another article.
PREDICTIONS FOR 2005
December 27, 2004
OK folks, it's that time of year again when the Predictions for the following year come together. We should reflect on the past year, look in to the crystal ball for the following year and then share what we feel is going to happen next. If you've got a minute how about sharing your perspective on the following items [ending 2005], I'm sure all readers would benefit from seeing diverse perspectives:
1. Where will the dollar index end the year?
2. What will be the Price of Gold?
3. What will be the Price of Oil?
4. Where will the DOW end the year?
5. Will the Yuan decouple from the Dollar in '05, YES or NO?
6. Do you see a major Economic Collapse in '05, YES or NO?
Then add any general statement about 2005 which you feel is key to the coming year. There is no doubt in my mind that 2005 will be an important year for all of us.
The latest from Stephen Roach at Morgan Stanley
December 01, 2004
Roach is possibly the best contrarian economist within the established order, as Chief Economist for Morgan Stanley. Over the weekend he made his, already "now famous," remarks about the US having a 1 in 10 chance of surviving economic catastrophe in the years ahead.
This is his first column since his weekend lecture. Here he is discussing US Consumers and what a dangerous bunch they are. I think a good debate about exactly how the average Joe Consumer will react to a rapid credit tightening, rapid inflation and basic "pay-back" scenario's might play out would be useful for all D2 readers.
Here is Stephen Roach (from New York)
Global rebalancing has quickly turned into the global blame game. “It’s the other guy,” exclaim Asians, Europeans, and Americans, when the issue of responsibility comes up. America’s Bush Administration views the rest of the world as suffering from a growth deficiency, largely brought about by under-consumption and excess saving. Conversely, Asians and Europeans view the United States as suffering from a saving deficiency brought about by over-consumption and government budget deficits. Who’s got it right?
The truth is, they probably all do. There can be no mistaking the extraordinary disparities in the global consumption dynamic in recent years. Over the 1996 to 2004 period, annual growth in US personal consumption expenditures averaged 3.9% -- nearly double the 2.2% pace recorded elsewhere in the so-called advanced world. Americans, for their part, have spent well beyond their means -- as those means are delineated by the US economy’s internal income generating capacity. Over the 1996 to 2004 period, annual growth in real disposable personal income averaged 3.4% -- fully 0.5 percentage point slower than average growth in consumer demand. As a result, the personal saving rate plunged from an already-depressed 4.6% level in 1995 to just 0.2% in September 2004. At the same time, the consumption share of US GDP surged to a record 71% by mid-2002 -- an extraordinary breakout from the 67% share that prevailed, on average, over the 25 years from 1975 to 2000. Never before has an advanced economy taken consumerism to such excess.
There’s no deep secret as to how the American consumer pulled it off. It’s all about the emerging power of the asset economy -- namely, how US consumers have turned increasingly from income generation to wealth creation in order to sustain current consumption. At work since 1995 has been the strongest and most sustained surge of above-trend growth in real household sector net worth of the modern-day, post-World War II era. American consumers were quick to make use of this windfall as an increasingly important supplemental source of purchasing power.
Moreover, there has been an important shift in the asset economy that took the US consumption dynamic to excess in recent years. The first wave came from the stock market, as household equity holdings surged from about 13% of total assets in 1991 to 35% at the peak in 2000. During the final stages of the equity bubble, individual stock portfolios supplanted real estate as the US household sector’s most important asset. By early 2000, residential property had fallen to less than 25% of total household sector assets, more than ten percentage points below the equity portion. It was only after the equity bubble popped that the asset economy took its most extraordinary twist. The increasingly wealth-dependent American consumer never skipped a beat. In large part, that was because the equity bubble immediately morphed into an even more powerful strain of asset appreciation -- a sustained burst of US house price appreciation that has continued to this very day. As a result, the real-estate share of total household assets rose back to 30% -- recapturing its role as the consumer’s leading asset class. According to Alan Greenspan, American households currently own some $14 trillion in real estate -- almost double their total equity holdings (see his February 23, 2004 speech, “Understanding Household Debt Obligations,” at the Credit Union National Association 2004 Governmental Affairs Conference, Washington, D.C.).
This multi-bubble syndrome was largely an outgrowth of the Federal Reserve’s aggressive post-equity-bubble damage containment tactics -- some 550 bp of monetary easing from early 2001 through mid-2003. Housing markets benefited handsomely from the support of 45-year lows in interest rates. And consumers, who had first discovered the joys of asset-driven wealth effects during the stock market bubble of the late 1990s, quickly put their newfound skills to work in reaping the gains of the housing bubble. Not only did they benefit from the psychology of feeling wealthier, but US homeowners were aggressive in taking advantage of breakthroughs in the technology of home mortgage refinancing. It wasn’t just the reduction in interest expenses, but the so-called cash-outs from rapidly appreciating housing assets enabled consumers to uncover a new and important source of incremental purchasing power. Freddie Mac puts the peak rate of equity extraction and second mortgages from residential property at $224 billion in 2003 -- almost 3% of the total value of home equity investments. Over the 2001-04, annual cash-outs appeared to average around 2% of aggregate home equity -- suggesting that households may have liquidated as much as 8% of their equity in real estate in order to fund current consumption. For an aging US society that needs to build saving in order to fund the not-so-distant retirement of some 77 million baby-boomers, even this partial liquidation of asset-based saving is disturbing, to say the least.
The asset economy does not just have its origins in America. It is very much a by-product of support from global investors and policy makers. One of the outgrowths of an increasingly asset-dependent economy is a shortfall in income-based national saving. America has taken this shortfall to an unprecedented extreme. The net national saving rate -- the combined saving of consumers, businesses, and the government sector after deducting for the depreciation of worn-out capacity -- fell to a record low in the 1-2% range in 2003-04. Lacking in domestic saving, American has had to import foreign saving from abroad -- and run massive current account deficits to attract that capital.
This is where the global enablers enter the equation. First, it was private investors seeking to share in the returns of the world’s greatest productivity story. Then, when doubts surfaced on that front, foreign central banks rushed in to fill the void. Over the 12 months ending September 2004, the “official sector” accounted for 28% of total purchases of long-term US securities -- nearly double the 15% share over the prior 12 months and about four times the portion during the 2000-02 period. This was only the latest chapter in a foreign-inspired dollar-support campaign. Dollar-denominated official foreign exchange reserves surged from $1.1 trillion to $2.1 trillion over the 1998 to 2003 period (as estimated by the BIS at constant exchange rates). That left dollar-based assets with approximately a 70% weight in official reserve portfolios -- more than double America’s 30% share in the world economy and, quite possibly, the biggest overweight in world financial markets today.
Nor is it difficult to discern the motive behind this foreign dollar-buying binge. It’s all about the lack of internal demand in Asia and Europe and the related need to draw support from export-oriented growth strategies. And, of course, central to such growth tactics are cheap currencies that underwrite export competitiveness. Asia has led the way in that regard -- with hard currency pegs in China, Hong Kong, and Malaysia and soft currency pegs in Japan, Korea, India, Taiwan, Thailand, and Indonesia. Asia’s official foreign exchange reserves surged to $2.2 trillion by mid-2004 -- more than double the holdings of early 2000. With the bulk of that incremental surge going into dollars, Americans enjoy a subsidy to domestic interest rates that is very much made in Asia. It’s hard to quantify the exact magnitude of that subsidy but my guess is anywhere from 100 to 150 bp at the intermediate and long portions of the yield curve. That means, in the absence of this foreign support campaign, yields on 10-year Treasuries would have been in the 5 to 5.5% zone -- implying a rate structure that would have been far more problematic in providing valuation support to US asset markets and concomitant wealth-driven support to America’s asset-dependent consumer. With the dollar appreciating over most of the past decade, this was a win-win strategy for Asia -- providing the region with competitive currencies, as well as portfolio gains on dollar holdings. Now that the dollar is going the other way, that calculus suddenly looks very problematic.
As the world now grapples with the imperatives of rebalancing, it is important that all parties understand the roles they have played -- both in creating the problem and in forging the solution. Asset-dependent Americans truly have an excess consumption problem. It is still astonishing to me that the bursting of the equity bubble didn’t spawn a culture of prudence that weaned US consumers from the perils of an all too fickle wealth effect. With US house price inflation now at a 25-year high of 8.8% and with 15 states now experiencing double-digit house price inflation, this voracious appetite for risk is all the more disturbing. Similarly, Asian and European financiers -- be they private investors or central banks -- need to accept responsibility for the important role they have played in keeping the music going for saving-short, over-extended US consumers. They have taken the easy way out -- putting off the heavy lifting of structural reforms needed to unlock domestic demand and choosing, instead, to recycle foreign exchange reserves into dollars and rely on currency manipulation as a means to sell everything they can to America. In my view, America, Asia, and Europe are all equally guilty of opting for an extraordinarily reckless way to run the world.
Financial markets have an uncanny knack in restoring a sense of order to a dysfunctional world. The dollar is now center stage in this global wake-up call -- as well it should be, in my view. But dollar depreciation is not the endgame of global rebalancing. It is the means toward the end -- a potential trigger for a long overdue realignment in the mix of global saving and consumption. By failing to face up to the imperatives of rebalancing, the world has collectively created the ultimate moral hazard -- a US consumer that is now “too big to fail.” This is a serious warning sign. The key to a successful global rebalancing, in my view, hinges critically on facing up to the risks of the world’s most serious excesses. The over-extended American consumer is at the top of that list. And a weaker dollar could well be key in forcing the interest rate adjustments that might well temper the asset-driven excesses of US consumption. This is a shared responsibility that the world must now collectively redress.
Long ago, I learned that most of the time it doesn’t pay to bet against the American consumer. There are rare occasions, however, when that rule doesn’t apply. That was the case in the early 1970s in the aftermath of the first oil shock. Back then, as a young staffer at the Federal Reserve Board, I was chastised by Fed Chairman Arthur Burns for being too negative on the US consumer. He argued that I didn’t appreciate the unflinching cyclical resilience of the US consumer -- a resilience that, ironically, was about to give way to America’s first consumer-led recession. A lot has changed in the ensuing 30 years. But for very different reasons, I now believe that another exception is in the offing. The American consumer is an accident waiting to happen. The sooner the world comes to grips with this problem, the better the chances of a successful rebalancing.
One of the first things that jumped in to my head after reading this was the need to characterize the average Joe Consumer - what do they look like in terms of their consumption, what are they likely to do when the dance stops and what are the ramifications for all of us?
Of key importance is the psychology of it all, for instance; is Joe Consumer, because of his undisciplined ways, more likely to panic early or resilient to impending disaster and likely to sit it out? The mass psyche is going to be the curve ball in future events, no amount of planning or strategizing can accurately predict the fall-out from economic meltdown - so based on what we know do we collectively spin out of control or do we enter an orderly disarray whereby common decency revails?
KARACHI ON WALL STREET?
LESSONS FROM ARGENTINA
Synthesizing Reader Input
SUMMARIZING 2004 PREDICTIONS
PREDICTIONS FOR 2005
The latest from Stephen Roach at Morgan Stanley
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