Posted on 01/18/2004 12:45:18 PM PST by Beck_isright
If confidence goes, lenders will pull loans and cause dollar to crash
By William Choong
TECHNOLOGY REPORTER
YEARS before the Asian financial crisis of 1997, many Asian countries had become hooked on a dangerous concept - credit.
Economic growth was chugging along nicely, and in countries such as Thailand, the middle-class was indulging in a consumer frenzy, buying branded goods, holidaying abroad and sending their children to overseas schools.
But Thailand's trade deficit - the amount by which imports exceed exports - was growing, financed by massive short-term loans from foreigners.
When investors lost confidence, however, a sudden flight of capital brought the kingdom to its knees.
The odd thing is, this year, the United States - once the world's biggest creditor nation - is also experiencing a credit- fuelled consumer spending spree.
There are fears the American appetite for Japanese cars, Chinese clothing and Malaysian electronics could cause a global financial crisis sparked by a run on the US dollar.
This has led to a massive current account deficit of more than US$500 billion (S$850 billion) - a far cry from 10 years ago, when the US enjoyed a trade surplus of US$82 billion.
Its budget deficit could hit US$450 billion this year - another record, and a dramatic turnaround from 2001, when government coffers were in the black.
This has led commentators to lament how America's twin deficits could grow into a 'full-blown, Third World-style financial crisis'.
The logic is simple.
Like Thailand, America's deficits are financed largely by foreigners, particularly Asian central banks that want to keep their currencies weak against the greenback to boost their country's exports.
Any crisis of confidence would see them withdrawing their loans, triggering a fall in American financial markets and then a run on the greenback.
The writing is already on the wall.
In the past year, the greenback has racked up losses of more than 20 per cent against the euro - falling to a seven-year low of around 80 US cents to the euro. Against the yen, it has shed 11 per cent to hit a three-year low of 105 yen to the dollar.
'On a scale of one to 10, for (the chances of) a dollar rout against the euro, I'd say we are at eight,' Mr Peter Morici, a business don at the University of Maryland, told Dow Jones.
A weaker dollar reduces America's debt, gives a leg-up to US exporters and slashes the current account deficit.
But a weaker dollar is a double-edged sword: It could lead to dearer imports and raise inflation - the bugbear of industrial economies.
This would hamper the world economy's preeminent engine of growth - the average American's propensity to spend.
Abroad, a weaker dollar would lead to competitive devaluations as other countries find their US-bound exports relatively expensive.
There is a growing chorus of voices stressing the possibility of a greenback plunge.
The International Monetary Fund has lashed out at the US, arguing that its massive debt could wreak havoc on the US dollar and global exchange rates.
In a paper presented earlier this month, three analysts - including former US treasury secretary Robert Rubin - argued that Washington's twin deficits could amount to what some have termed a 'full-blown, Third World-style financial crisis'.
Mr Paul Krugman, a prominent economist who foresaw the 1997 Asian financial crisis, drew the conclusion as early as last October.
In a New York Times column, he said the US economy was approaching a 'Wile E. Coyote' moment - when the coyote in the famous Road Runner cartoon runs off a cliff, only to realise at the last minute - too late - that it is about to plunge to the bottom.
'What will the plunge look like? It will certainly involve a sharp fall in the dollar and sharp rise in interest rates,' he wrote.
'In the worst-case scenario, the government's access to borrowing will be cut off, creating a cash crisis that throws the nation into chaos.'
Such views, however, have been derided by members of the Bush administration, who have pledged to halve America's budget deficit in five years.
What is probably high on their minds is how, in the 1980s, the world's largest economy under former president Ronald Reagan managed to grow despite similar deficits.
That was thanks - again - to a weak dollar and booming demand in Germany and Japan.
But the raising of US interest rates will affect Europe, the exports of which have become more expensive, just when the region is showing signs of faster growth.
Compared to Europe, Asia looks set to be hit harder - simply because the region is more dependent on exports to the US.
There have been calls for the Chinese yuan, which has been pegged, or fixed, at a constant rate to the US dollar, to be revalued to a stronger level, perhaps by as much as 20 per cent.
For a long time, market watchers said the unit was undervalued at around 8.3 to the US dollar, leading to a massive US$100 billion trade surplus with America - a quarter of the US' total trade deficit.
'It's not a question of if, but when,' Mr Craig Chan, head of Asian research at Forecast, a London-based research firm, told The Straits Times.
The effects of a yuan appreciation, however, would be fairly significant.
Close to 200,000 state-owned enterprises, which are less efficient at producing exports than private firms, would suffer, leading to heavy job losses.
Its financial sector - still in the midst of reform - would also take a hit, said analysts.
In Japan, a falling dollar would derail a recovery that only started kicking in last year.
For the rest of Asia, a plunge in the US dollar would spell trouble.
In the second half of the 1980s and the late 1990s, the greenback's strength fuelled exports from Thailand, Malaysia and Singapore.
A weak dollar, however, would affect American purchasing power and slam the brakes on Asian exports, lowering growth all round.
This can be seen in Japan's experience in the early 1990s, when the economy tanked after the Plaza Accord of 1985.
Under the accord, a group of developed countries engineered a sustained fall in the greenback along with rises in the German mark and Japanese yen.
Speaking at a regional conference in Singapore last week, respected Malaysian economist K.S. Jomo noted that there have been calls for a second Plaza Accord.
The world's three currency blocs - Europe, Japan and the US - were carrying out competitive devaluations, he said.
'This would lead to an inability to coordinate exchange rates and monetary instability at a global level.'
There is, however, not much hope going forward that there will be enough global coordination.
Last September, the G-7 group of developed countries called for 'more flexibility' in exchange rates. This, however, was interpreted by markets to be telling the Japanese and Chinese to let their currencies rise, thus allowing the US dollar to fall.
Ultimately, whether the US dollar would, in Mr Krugman's words, suffer a Wile E. Coyote moment depends on investor confidence.
For a long time, Asian central banks had, through the purchase of low-yield US Treasury bonds, been the key financiers of America's deficits.
Currently, the US Federal Reserve holds US$1.1 trillion of such debt for foreign central banks, many of them Asian.
Therein lies what could be called the Harvey Norman effect - whereby a seller makes credit readily available to a buyer so the latter can buy more.
As French economist Jacques Rueff said: 'If I had an agreement with my tailor that whatever money I pay him returns to me the very same day as a loan, I would have no objection at all to ordering more suits from him.'
The key: When another crisis of confidence hits US markets, foreign lenders - particularly Asian lenders to the US - might pull the plug on their US loans.
And that would be the crucial tipping point which brings the whole house of cards that is the world economy crashing down, just like the unsuspecting coyote.
So you don't believe the major Asian economies are actively participating in America's de-industrialization to their own benefit?
this isn't argentina, toto. does everyone think in extremes?
The people in Wiemar Germany didn't...for a time. Got wheel-barrow?
Yep, that's how they do it. Add Taiwan and South Korea to your list. Bush's response to this stonewalling was telling.
ooookay. i gotcha.
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