[PEN-L:294] Re: ASIA'S THREAT TO EVERYWHERE (fwd)

[Rosser Jr, John Barkley]

     Another not so subtle wiggle to all this is the 
outbreak of nuclear testing in India and Pakistan.  In the 
latter in particular a national emergency has been declared 
for economic reasons.  The reason is that the cutoff of aid 
from the US may trigger a major default and collapse of 
Pakistan's finances.  The emergency freezes accounts, among 
other things.  One more mess in the stewing pot.
Barkley Rosser
On Fri, 29 May 1998 09:26:18 -0700 (PDT) 
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> Date: Fri, 29 May 1998 09:22:35 -0700
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> The Globe and Mail    Report on Business      Friday, May 29, 1998
> 
> ASIA'S THREAT TO EVERYWHERE
> 
>       By Peter Cook
> 
> Let's start by sketching a truly global problem.
> 
> In an attempt to pump life into its banks and economy, the Bank of Japan
> feels it must lower the cost of money and lower the yen. As the currency
> moves toward 200 yen to the U..S. dollar, a chain reaction sets in.
> 
> First the South Koreans devalue. Then, the Chinese reluctantly let the
> renminbi go and, with it, end the Hong Kong dollar's fixed link to the U.S.
> dollar. Seeing this, other countries in the region feel that they must
> protect the competitive position of their economies, which leads to a
> number of forced, and unforced, devaluations and a renewed flight of
> capital. From there, we descend into the Asian Crisis, Part Two, a sequel
> that has many more spectacular special effects and disaster scenes than did
> Part One.
> 
> As one grim side effect, investors in the West's towering stock markets are
> forced to think again about whether the future is quite so rosy. The result
> of their reassessment is that the previously benign effect of Asia Part One
> -- less inflation, low commodity prices, huge capital inflows, a strong
> U.S. dollar -- turns malign. Investors cannot get out of stocks fast enough
> and, in the time-honoured way of Great Crashes, panic in one place produces
> panic everywhere.
> 
> What can be said about this "problem?" Not that it is fanciful because, in
> muted form, it has hurt Wall Street and European bourses and lifted demand
> for U.S. Treasuries in recent days. All that can be said is that it has not
> occurred yet.
> 
> For Asia to recover from its first crisis, a number of things had to
> happen. Japan had to successfully stimulate its economy and thereby raise
> the level of demand for Asian goods and services. The IMF rescue packages
> in Indonesia, South Korea and Thailand had to be fully complied with and be
> effective enough to restore confidence, not precipitate fresh political
> crises and social unrest. And, most important, confidence had to be rebuilt
> sufficiently quickly so that foreign capital would flow in and local
> savings would not flow out. Five months after Mexico crashed in late 1994,
> the stock investor who had stayed put would have been 70 per cent richer;
> that has not been true anywhere in Asia.
> 
> The result is that Asia is following an alternative scenario that puts it
> on course to go through all the unpleasant steps of deflation and
> devaluation listed above, but hopefully do it over enough time to avoid
> disaster.
> 
> Japan is on the way to a cheap yen. Its economy is moribund, its central
> bank is engaged in surreptitiously monetizing commercial debt. China is
> doing everything to support and subsidize its industrial sector except
> devalue -- for now. Hong Kong is set to announce gloomy economic figures
> for the first quarter after already announcing that retail spending went
> down by a record amount. Meanwhile, total capital flows out of Asia are
> running at a seemingly unstoppable annual rate of $120-billion (U.S.),
> twice as fast as in 1997. Nor are they likely to slow down when Japanese
> long bonds yield 1.4 per cent while U.S. Treasuries stand at 5.8 per cent
> and Canadian 10-year government bonds at 5.5 per cent.
> 
> These trends, and the overall deflationary track that Asia is on, suggest
> confidence will not come back unless and until currencies fall further. The
> only saving grace would be if they were to fall gradually, not suddenly.
> 
> Gradualism is, to an extent, in the interests of the West. Wall Street took
> fright when U.S. News and World Report magazine suggested that U.S.
> Treasury Secretary Robert Rubin was willing to see the Japanese yen go down
> if that was needed to save Japan's economy, and Mr. Rubin stepped in and
> denied it. But Washington does not mind a slowly depreciating yen or a
> stronger U.S. dollar because it is helpful at home. It is a painless way of
> slowing growth and cooling off a hot U.S. economy, allowing the Federal
> Reserve Board to hold off on raising rates. In Europe, much of the momentum
> behind this year's rally in stocks comes from the strength of the U.S.
> dollar and analysts' projections of what it will do to lift the profits of
> European multinationals.
> 
> So a gentle descent is to be encouraged, while the yen going over a cliff,
> and dragging China, Hong Kong and the rest with it, is clearly not.
> 
> Carry this message into financial markets and, unsurprisingly, it is a one-
> or two-day wonder. This week Wall Street got alarmed about Asia (and Mr.
> Rubin's alleged views) on a day when European bourses were in a happy mood,
> buoyed by news of a $12-billion Dutch-Belgian bank takeover and a record
> trading day in both Paris and Frankfurt. So Europe took a day to catch up
> with Wall Street's worries and only did so after Russia's ruble collapsed
> and Hong Kong's government warned its economy was in bad shape.
> 
> Until now, the Asian contagion has been a some-time thing. Yes, Asia
> suffers. But when Asian deflation comes West, it takes the form of lower
> prices, higher capital inflows and a strong U.S. dollar, none of them
> unwelcome. Is this about to change? In the past few days, financial markets
> have been warning that it is. 
> 
> 
> 
> 
> -- 
> Michael Perelman
> Economics Department
> California State University
> Chico, CA 95929
> 
> Tel. 530-898-5321
> E-Mail [EMAIL PROTECTED]
> 

-- 
Rosser Jr, John Barkley
[EMAIL PROTECTED]