OUTSIDE THE BOX
THE world is entering the next phase of the global financial challenge. It sounds like a new reality show and it is. There is a new reality coming and we are already in the first episode of the third season.
The first season of the “Global debt death race” meltdown began in 2008 where economies and conditions deteriorated rapidly. That was followed by Season Two that saw some stabilization and the illusion of financial recovery that ended in the fourth quarter of 2010.
Since the beginning of 2011, the situation has gotten worse up to the present point of the strong likelihood of a sovereign default in one form or another by Greece and a systemic change in the way the European Union functions.
The first quarter or two of 2012 will either see a false hope of things becoming better or a sad realization that things are going to be very hard for a fairly long time to come.
The bottom line is that even after several years of worsening economic conditions, an increasingly more fragile global banking system, and a devastating debt picture for too many nations, nothing substantial has been done to solve the problems.
The economic/financial system in the West is like a patient with blood poisoning and gangrene. At some point, the illness becomes so severe that the doctor says amputate the leg or you die.
In this case, amputation means allowing some major banks and financial institutions to fail, causing wealth loss by shareholders as well as lenders. It means countries like Greece must stop living on borrowed money and spend a generation rebuilding the wealth of the nation that was abused. It means for lenders to countries like Greece not being paid back in full if at all.
The policy of continuing to create false wealth from money backed only by promises will not work. That is what got the West into the problems and you cannot solve a problem by doing the same things that created the problem in the first place.
There is general belief that all nations will be burned by this fire enflaming the West. I do not buy into that. While the economies of the world are more “globalized” and connected, there are more centers of economic power than perhaps in the history of the world. Further, the economies of smaller nations are more diversified and less dependent on the majors than before.
For example, the Asian financial crises created an environment that forced banks such as in the Philippines to grow much stronger while the Western banks grew much weaker. A nation’s economy cannot be any stronger than its financial system.
However, the fear of contagion is growing and the fear itself may cause economic problems.
Business confidence in the Philippines is beginning to fall. Business confidence deteriorated to 31.8 in the second quarter of 2011 from 47.5 in the first quarter of 2011. Justified? Perhaps. Imports are growing at a much slower pace. As much of these are raw materials to be turned into exports down the road, we will see slower growth of exports in the months to come. There are a variety of other data that may signal a slower growth of economic activity.
Yet HSBC President Tony Cripps presented a forecast for the Philippines over the next two years that was optimistic despite bearish views for most of Asean and that Western conditions are going to get worse.
Perhaps the greatest danger to this country lies within each of us. A lack of confidence in the country’s ability to weather the storm may create the very problems that we are worrying about.
President Aquino has a leadership problem in the sense that many are not confident in his abilities. The next three months will prove that correct or false. The administration’s drive against corruption has been mostly all fanfare until now. The appointment of Rep. Ruffy Biazon to the customs bureau is the first tangible and concrete step to change the system. There are probably a few other Cabinet members who will be replaced by people of Biazon’s character and integrity.
The greatest problem in the West is that the people do not have faith in their governments to be problem solvers and not problem makers. More important, the people are losing faith in themselves. We must not do that.
On a personal note, I invite you to visit mangunonmarkets.com. Did your stock-market investments lose value last week? Are you prepared for profit openings that will come along? Now is the time to protect capital and get ready for moneymaking opportunities.
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