OUTSIDE THE BOX
The 1997 Asian financial crisis is distinctly different from what the world is experiencing today.
Interest rates in countries like the Philippines were high in comparison with rates in the West. Crude oil was trading at less than $20 per barrel. The average price of gold was just over $300 per ounce. In an effort to harness their economies to the West, countries like Thailand fixed their currencies to the US dollar.
Companies and individuals took advantage of the fixed exchange rate and lower offshore interest rates to borrow in dollars and spend in local currency. The problems came when it was time to service and repay those dollar loans. There was a shortage of foreign currency in all these countries because of overborrowing (not the Philippines) and they were bankrupt. Foreign lenders were not willing to, in effect, take local currency at the fixed exchange rate to pay the loans because they knew the Asian currencies were overvalued.
Note something important. The Asian financial crisis was not the result of a particularly defective system. It came because of specific policy decisions made by governments fixing currency rates and decisions made by Asian borrowers taking advantage of fixed exchange rates and lower international interest rates.
By contrast, what we have in 2011 is completely flawed economic system that is and will continue to change the global financial and economic structure.
Jason Hsu, chief investment officer at Research Affiliates, a US investment management firm, writes about the three deadly D’s at www.johnmauldin.com.
“Debt, deficit and demographics is heading to the shores of all developed economies. It threatens to derail the lukewarm economic recovery and to alter forever the heretofore path of robust growth for the developed world. In a sense, debt, deficit and demographics will reset the world to a ‘New Normal,’ an extended period of lower economic and return expectations for the aging and debt-ridden developed world.”
The three D’s have created a new economic world order. The results have been a long time in coming, are totally a systemic failure and, therefore, are impossible to correct in the short term.
The demographic issue has created the debt and deficit problems. The “baby boomers” of the last half of the 20th century in the West and Japan made two mistakes. Rather than work hard for future prosperity, they voted for governments that promised and gave instant financial gratification through deficit spending. “Deficit spending gives an instant and immediate boost to gross domestic product, which can feel like prosperity and good government stewardship.” It is like using your credit card to buy something you cannot afford.
Carrying on with this “financial plan” over decades, governments were forced to borrow, incurring a staggering debt burden. And like the individual who only pays the monthly minimum on his credit card, debt repayment is continuously kicked down the road into the future.
Deficit spending and debt is not inherently a bad idea. It is a bad idea when both deficit and debt grow
faster than the economy. Government spending does not create economic prosperity or wealth. And when both government deficit and debt grow too large, they squeeze the private sector out of the financial markets as is happening now. The private sector loses access to capital, limiting business activity and economic growth. At some point you are forced to use food money to make the credit-card payment.
The demographics created the problem and the demographics are also the reason there is not a good solution.
“Boomers, who have controlled the elections and politics, have rationally chosen a path of more consumption today at the expense of the future generations. Voters and politicians alike would simply misinterpret the economic literature and assume more consumption today will drive more growth tomorrow. In other words, and as scientific as one can put it, the Boomers have screwed Generation X.
“It is projected that the support ratio in developed countries will decline from 3.5 working-age adults per retiree [now] to below 2 to 1 by 2050. In comparison, in 1970, the support ratio was 5.3 to 1. By 2025, at the height of Boomer retirement cycle in the United States, there will be 10 new retirees for each new entrant into the work force.”
During those years of building a massive debt burden, the Boomers did not create enough children to support their spending spree. “Not only does the future appear inevitably poor in aggregate, it also appears predictably unproductive.”
Countries like the Philippines will continue to grow and prosper as the developed economies decline.
“In contrast, emerging economies with healthy government and household balance sheets, responsible fiscal policies, and young labor forces will be the drivers for global growth and will compete with their developed counterparts for economic and political leadership.”
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Thursday, 30 June 2011