Tuesday, 30 August 2011

Global financial update

JOHN MANGUN
OUTSIDE THE BOX
Business Mirror
http://www.businessmirror.com.ph/home/opinion/15814-global-financial-update

FAR be it for me to assume that I am the best source of information and analysis on the global financial mess. However, these last few weeks have seen movements in the markets that are almost unprecedented.
We are constantly going from periods of seeming calm to times of chaos. There is no way to stop from asking in a loud voice, what the heck is going on?

Is the US having any sort of economic recovery? Is the debt situation in Europe ready to explode? Are economies like the Philippines on the brink of falling off the cliff? What is going to happen next?

It is almost impossible to get a sensible explanation and a reasonable answer to these questions. I will try.

Federal Reserve Chairman Bernanke said this on Friday: “Although we expect a moderate recovery to continue and, indeed, to strengthen over time, the committee has marked down its outlook for the likely pace of growth over coming quarters.” Sorry. I promised a sensible explanation and Bernanke is not the one to go to for that.

The US economy has grown about 1 percent in the first half of 2011. That is so far below a “moderate recovery” as to make Bernanke’s statement a joke. I guess a “bad recovery” is when the US economic numbers go negative.

But growth is only half of the economic picture, the other being inflation. While Bernanke can say, “We expect inflation to settle, over coming quarters, at levels at or below the rate of 2 percent.” That may be a nice statement to make but it is unrelated to reality. The July 2011 US inflation rate was 3.6 percent. With 1 percent growth and 3 percent inflation, the US economy is going backwards. One heck of a moderate recovery you have there, Mr. Chairman.

But maybe there are some solutions. Not exactly. “I do not expect the long-run growth potential of the US economy to be materially affected by the crisis and the recession if—and I stress if—our country takes the necessary steps to secure that outcome.” And what are these “necessary steps?” “The quality of economic policy-making in the United States will heavily influence the nation’s longer-term prospects.” Game over, folks.

The only solution to the US economic problems rests in the hands of the politicians. Good luck. It was the “economic policy-making” of the government that created the problems and Bernanke expects them to solve the problems. The US will continue its downward spiral until the current policy-makers (read Obama administration) is thrown out of office in late 2012.

Europe has only two choices: selectively cut nations, such as Greece and Portugal, from the euro currency or collectively pay their bad debts. Nations can only use currency devaluation when foreign debt becomes overwhelming. With gold-backed money, countries ship out the physical gold to pay debts, reducing their ability to buy imports. Now it can only be done with devaluation. So, Greece and other problem nations must leave the euro and devalue their own currencies or Germany and the financially sound economies must pay the bills. German taxpayers are a lot upset about that final prospect.

The Western banking system is hanging by a thread because of these bad debts. Either choice, abandonment of the euro or Germany paying the debt, carries enormous risk and problems.

The Philippines must start instituting some long-range economic plans. The administration mindset is that if we wait long enough, everything will return to the way it was before. Nonsense.

We must have an Asian-oriented tourist business and that means tourism-related infrastructure spending. It means incentives for tourism projects funded by local companies. And it should be opening up and even privatizing Pagcor.

All those Filipino baby boomers living abroad need to be encouraged to come home to retire. It is better for them and better for the Philippines. The government spends millions encouraging foreigners to invest here. Why don’t they use some of that money to encourage overseas Filipinos to invest here?

There is a type of corruption that this administration is not worried about. It is the “corruption” of inaction. Talk to Filipino business people, particularly in the provinces, and you will hear story after story about government agencies sitting on their hands, not issuing government permits, not completing necessary studies, and doing as little as possible to help Filipino businesses to thrive, grow and prosper.

So what comes next? Sadly, expect more of the same in the West. And worry about the Philippines until this country disengages from the West and turns inward.



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

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