Stability for the Wealthy: Responding to the Global Economic Tidal Wave
United Daily News editorial (Taipei, Taiwan, ROC)
June 16, 2008
Global inflation continues to arrive, wave upon wave, increasing uncertainty about the propects for continued economic growth, and leading to recent shocks in international financial markets. The US, mainland China, and Hong Kong market indices have fallen to new lows over the past year. A 25-day losing streak in Vietnam's Ho Chi Minh Stock Index triggered renewed concerns about a repeat of the Asian financial crisis. Even though warming cross-strait relations are providing some support, Taiwan has not been spared. The TAIEX has fallen over 10% since the new administration took office less than a month ago This betrays investor uncertainty. This year, beginning with the U.S. subprime mortgage crisis, the world economy has endured swiftly increasing oil prices and steadily increasing grain prices. Under their combined impact, the economic challenges are formidable, and the watchword in political policy is "stability."
The current wave of economic changes and market corrections can be traced back to early summer last year. Until last April the world's major economies were still intoxicated by the longest and strongest economic expansion in post-war history. The large scale crisis in the housing industry led to bankruptcies in the financial industry. The first shot fired, the subprime mortgage crisis, failed to alert the market. Only the Bear Stearns hedge fund collapse in July touched off a chain reaction. The market has experienced an across the board liquidity crunch. Central banks in Europe and America have joined hands in an attempt to save the market by means of capital injections. Only now has the market become aware of the seriousness of the problem, and made a series of corrections in asset valuations, policy, and regulatory structures. At the same time, high oil prices and high grain prices, long a hidden concern behind the economic boom, have reared their ugly heads. But the sense of crisis remains less intense than during the previous financial storm. Therefore it is not receiving the attention it deserves.
Problems have remained unsolved, and myopic policies have fueled inflation. For example, in order to solve the liquidity crisis European and American central banks have injected massive funds into the market. This may temporarily quench the market's thirst, but it will also delay the healing process. It will aggravate inflation. In order to forstall a recession, the U.S. Federal Reserve Board has repeatedly lowered interest rates. This may slow the slide into recession, but at the cost of higher inflation. It delays the response to changes in asset prices. In Asia, Japan was on track to raise interest rates. But now business loan considerations have put this on hold. The economy has not improved, but inflation has already increased. Among the emerging economies, mainland China's overall prospects remain the same, but already seems more tentative. Crude oil prices are controlled. Grain prices are subject to short term speculation. Unrelieved increases can easily cause significant distress. Others countries such as India, Vietnam, and Indonesia, adopted similar policies. But were forced to cancel them due to increasingly negative results.
The attention of financial market investors has turned from when the United States' subprime mortgage crisis will end, to whether global inflation is worsening and how the major economies are responding. Emerging economies in Asia kept their distance from the subprime mortgage crisis. Can they withstand this acid test, and survive catastrophic inflation? Developed countries experiencing across the board slow downs are paying particular attention. Emerging countries in Asia have been the most powerful driving force in global economic growth in recent years. Their forward momentum directly affects the performance of the global economy, especially because they are export-oriented economies. Asian countries today face difficult economic policy choices. When they began economic development they were heavy on growth and light on inflation. Now however, the bill has come due.
Theoretically speaking, the standard method for controlling inflation is raising interest rates. Countries dependent upon energy imports may even require currency supports. But no matter whether they raise or lower interest rates, they may increase their industrial overhead. This may affect their export competitiveness, reduce their corporate profits, and undermine their economic growth. Countries that suffered through the Asian financial crisis understand the importance of foreign exchange reserves. They have aggressively accumulated foreign exchange reserves and have actively encouraged domestic investment. As a result, the effectiveness of efforts to control inflation have been seriously diminished by more fundamental policy countermeasures. But if one allows inflation to worsen, not only will it impact current economic performance, it is likely to change a short-term correction into a long-term recession. It is likely to increase political risk, causing social unrest, leading to unpredictable consequences. Therefore the market is watching discreetly from the sidelines. Stocks in Asia have fallen even more than in Europe and America, reflecting investor concern.
Under such circumstances, many nations are changing their economic policies. The most important task now is controlling inflation. The US has ceased lowering interest rates. European central banks have indicated that they will hike rates. Asian central banks have also substantially increased their prime rates in order to stabilize their economies. The US has successively cut interest rates. Taiwan, by contrast, has slightly raised interest rates, demonstrating a steady hand. Judging by this, Central Bank CEO Peng Huai-nan has lived up to his reputation as a first class chief executive. One hopes he will maintain a steady course, and do what must be done.
2008.06.16 02:52 am