Tuesday, 16 June 2009

The new economic reality

Outside the Box
John Mangun
Business Mirror

Actions have consequences; for individuals and for nations. Sometimes, the consequences are so severe that the person is changed forever. The same can happen with the world.

I am astounded that virtually all of our political leaders, even the smart ones, have not woken up to the fact that it will never be economically “business as usual” again. It scares me and it should scare you, too.

I receive e-mail constantly telling me that I am overly concerned or simply crazy in my belief that we are entering a new, uncharted world. Just wait, they say, and the crisis will be over; it is just a normal bump on the road. The “smarter” ones even point to the 1997 Asian crisis as an example. Oh, you think so, do you?

My Fil-Am mother-in-law and her husband will retire next year. They intend to sell their big house in Los Angeles and use the money to move to a rural, cheaper area of the USA. They will use the money from the house sale also to open a small business to supplement their income. She says they will now wait a couple of years for the economy to recover so their plans can progress. Just a bump on the economic road, she tells me. Not a chance. It is a new world out there, and this is why.

The 1997 Asian crisis was a forerunner to 2009. South Korea fell in 1997 doing exactly the same thing as is being done in the USA now; bailing out, public funding of bankrupt companies. As a result, Sokor’s budget deficit skyrocketed, forcing it to borrow unprecedented amounts from the International Monetary Fund. Their economy died as money was diverted from useful purposes to paying the debt caused by diverting public and private funds to bailouts. The Korean won fell from 867 to 1,695 to the dollar in one year, 1997-1998.

Thailand went on a massive borrowing frenzy in the early 1990s, borrowing dollars from foreign sources to fund its economic expansion. Remember Thailand’s “Tiger economy”? Eventually those loans had to be repaid. But all that dollar borrowing did not create dollar revenues. So the borrowers had to sell Thai baht to buy dollars to repay the loans, thus causing the baht to move from 26 to the dollar on January 1, 1997, to 52 to a dollar in January 1998.

Back to normal? The baht now trades at 34 and the won at 1,247. Further, note this important fact: The 1997 price of crude oil was $20; in 2009 the price is $71. In January 1998, the US dollar index was over 100; now it is at 80.

The exact same scenario is playing out in the USA with the current budget deficit rising from $162 billion in 2007 to $1.7 trillion in 2009. US government debt: from 54 percent of gross domestic product (GDP) then to over 100 percent of GDP now.

As we learned from the 1997 Asian crisis, it takes a long time for things to return to “normal” and they never go back they way they were, when the consequences of policy and action are severe enough as they are now.

The Obama stimulus plan is a total failure. All the budget deficit and all the government debt has not revived the economy even a little. In fact, the unemployment, consumer-spending and economic-activity numbers are growing more negative. But all that debt has to be paid back. Further, the stimulus money combined with a falling dollar is raising prices, inflation, in the USA.

The USA must either 1) raise taxes, which will hurt economic activity even more, or 2) “monetize” the debt by printing new dollars to pay the debt, which will cause dollar devaluation. There are no other choices available. Next comes inflation fueled by excess cash in the system and a devalued dollar, which will be met with a rise in interest rates, reducing economic growth even more.

It is a global meltdown even now. Japan’s manufacturing capacity is running at 50 percent and falling, and GDP is falling at a negative-15-percent annual rate. The world air-travel industry is forecast to lose $9 billion in 2009, revised from a $4.7-billion loss just two months ago. India’s credit growth is shrinking and credit is vitally necessary for their economic growth. China’s consumer spending, despite government pump-priming, is stalling, reducing the hope that their domestic market could offset problems in the export sector. International ocean cargo shipping is operating at below break-even.

The world’s investing cash will flee from the West to countries like the Philippines just as the opposite occurred in 1997. We will read more headlines like this; “‘Hot’ money inflows surged in May,” “Remittances hit record high in March” and “Philippine call centers ring up business.” And this headline yesterday tells the truth about the Philippine economy: “GMA 7 profit up by 22 percent in January-May.” Recession? Sure. Right. Whatever you say.

Why should you be afraid of the “experts” and ignorant leaders? Because any policy based on believing that there has not been a fundamental change in the world economy, a belief that things will soon return to “normal,” will be disastrous for this nation.

And I told my mother-in-law to sell the house now because any future increase in the price will be more than offset by dollar devaluation and a $100 oil price. Then come back to the Philippines, which is one of the few places left where wealth creation will be possible in the next five years.

PSE stock-market information and technical-analysis tools were provided by CitisecOnline.com Inc. E-mail comments to mangun@email.com.

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