Central Banks & Their Gold Strategy

We all know that the biggest demand for gold comes from central banks. Just how has their buying or selling strategy been over the last 12 months? Is their strategy influenced by the amount of USD being printed into circulation? Are they afraid of the dollar not being able to uphold its long term value? Will they ever regard holding US Treasuries as an option only? Is any of them seriously hinting of reverting back to the gold standard? By holding more gold and less USD does that mean more flexibility to their monetary policy?

• Reduced central bank gold selling and increased investor buying may have been helping to underpin high prices in 2008 at a time of turmoil in financial markets. The renewal of the central bank gold selling agreement with a lower threshold suggests that gold sales by central banks will be lower in the next five years, a move the could support gold prices.
• Gold's share in global foreign exchange reserves is about 10%, the third largest asset by value despite being unevenly distributed across countries. The U.S. and European central banks account for the highest amounts both in absolute terms and as a share of reserve holdings (about 50%). Emerging market central banks have a much smaller share. Gold's share in global reserves declined sharply since the 1950s -1960s.
  

Regulation of Central Bank gold sales


• In August 2009, the central banks party to the central bank gold agreement (CBGA), who collectively have a gold share of just under 60% in their reserves, agreed to renew the treaty but with a lower maximum sales threshold. Analysts suggest that the marginally lower threshold could provide a "mild support" for gold.
• The annual sales by the central banks party to the treaty will be less than 400 tons. The previous agreement had a cap of 500 tons per years. The IMF's planned sales of 403 tons are included in the overall cap of 2000 tons from 2009-2014. With the Swiss National bank suggesting it will not sell, only the European central bank and the Banque de France are likely to take advantage to sell. The Italian and German central banks have been reluctant to sell their gold holdings.
• In H1 2009, estimated net sales by official holders of gold were 39 tonnes, 73% lower than in H1 2008. Net gold official gold sales are expected to be only 140 tons in 2009, the lowest since 1994.
  
• In 2008, European central banks sold the lowest levels of gold in about decade, reversing the practice of recent years whereby official sales helped depress gold prices. Banks bound by the central bank gold agreement (most of the European central banks) sold about 343 tons of gold , the lowest since the first agreement was signed in 1999, and well under the 500 ton annual limit.
• In the fall of 2008, central banks stopped lending out gold to banks as they were afraid they would not get it back. This reluctance contributed to an increase in bullion borrowing costs to 2.649% for one month, the highest since May 2001 and high above recent levels (5yr average 0.12%).
  
• An asset allocation assessment would suggest European central banks still have too much gold. EM central banks have low gold holdings in part because of the rising cost of gold and worries about an inability to sell when forex liquidity is required.
  

Gold holdings of Emerging Market Central banks

• GCC private investors have much higher stocks of gold than its central banks do. However, Qatar increased its gold reserves in 2007.
• China announced early in 2009, that it had increased its total gold holdings by 75%, likely from shifting non-monetary gold to the central bank. Although that increase now makes China one of the top 5 official gold holders, gold makes up less than 2% of China's $2.1 trillion in foreign exchange reserve by value. On the margins, China is likely to keep adding slowly to its holding but it is unlikely to make purchases on the open market given the potential for disrupting prices and reducing the value of USD holdings
• Aside from China with 1054 tons, the emerging market central banks with the largest gold holdings are Russia (540 tons), Taiwan (424 tons), India (358 tons) and Venezuela (356 tons) as of May 2009. Aside from Venezuela and Lebanon, the gold shares of which make up 37.5% and 27.5% respectively of total reserves, most of the other large holders have a gold share of only about 4% of reserves.
  

Gold Sales by the IMF

• The IMF, the third-largest official holder of gold, intends to sell 403 tons (12%) of its 3217 tons of gold, pending approval from 85% of its members which will likely be given in the fall. Any sales are likely be gradual though and may be sold to central banks.
• IMF gold sales are unlikely to be disruptive for the gold market and could be positive if the gold is purchased by other official investors (like central banks).
  
• The IMF is likely to start selling in 2010, selling about 200 tons a year.

p/s photos: Aya Nakata

No Alternative Available For Now To Replace USD As Reserve Currency

Special Drawing Rights have captured the market's imagination in recent days. Behind the scenes, Chinese and Russian officials have harping on it, and the head of China's central bank posted a report suggesting that SDRs should have an expanded role in global finance, including as a super-reserve asset. In a presentation to the Council on Foreign Relations, beleaguered US Treasury Secretary Geithner appeared to some to initially be open to such proposals.

Governor Zhou Xiaochuan. In it Governor Zhou argues that the world needs a new and better reserve currency, one not dominated by a single country, and that it is in the best interest of the world that this reserve currency be created by a body like the IMF.

Many people are unfamiliar with SDRs. Special Drawing Rights were first issued by the IMF in 1969, as Bretton Woods was straining and fears there was not enough gold and dollars, the main reserve assets, were growing. SDRs are a basket of existing currencies. The basket gets reset every 5-years. The last reset was in November 2005. The US dollar accounts for 44% of the SDR basket. The euro's share is 34%, while the yen and sterling's shares are 11% each. The SDR is a basket of existing currencies not a single currency like the euro, but rather more like the old European Currency Unit. The value of the SDR is calculated and posted by the IMF daily. It is currently worth about $1.51.

There have been two allocations of SDRs. The first was in 1970-1972 for 9.3 billion SDRs and the second one was in 1979-1981 for another 12.1 billion SDRs. In 1997, there was a proposal to double the SDR issuance to 42.8 billion (roughly $64 billion). One hundred and thirty one members endorsed the proposal and they had a weighted vote of 77.7%.

Approval requires 85%. The US has a 16.75% vote share, and has not approved the proposal. If there was a signal in Geithner's remarks is was that the Obama Administration may reconsider the US stance. Here is why it is necessary: Roughly the fifth of the IMF members which have joined since 1981 have never received an SDR allocation. Of course that inhibits their ability to participate in the SDR system. Moreover, given the depth and magnitude of the financial crisis and economic downturn—anticipated to be the first time in more than half a century that the world economy will likely contract—an new allotment of SDRs may be compelling.

We have heard these kinds of arguments many times before over the course of the 20th century, and usually in response to a global balance of payments crisis. Is there anything new about this proposal? It looks likely to be a purely political move.

A number of people including Columbia University’s Joseph Stiglitz, are supportive of the idea, arguing that the status of the US dollar as the world’s reserve currency creates unnecessary problems for both the US and the rest of the world.

Most importantly for the US it means that it is very difficult for the Fed to manage domestic monetary policy because the US financial system must accommodate not only conditions in the US but also distortions introduced by the use of the US dollar as a reserve currency, and these distortions can be massive. The most obvious example is the way over the past decade systematic industrial policies mainly in China and East Asia aimed at running trade surpluses and the accumulation of reserves meant that the US economy and its financial and monetary systems were forced to adjust in ways that created large and serious imbalances, which only now are we resolving.

At least four months ago George Soros (and others) proposed an increase in SDRs to help provide sufficient liquidity to arrest the deflationary forces that were growing. Ironically, China and Russia, apparently inspired the by famous speculator, have gone even further.

For one thing liquidity is key, and I think not even the euro – and certainly not SDRs or alternatives to the SDR – can ever hope to achieve anything like the level of liquidity implicit in the US dollar market. For another thing, for a currency to achieve reserve status there must be some systematic way of delivering the currency to central banks and other players who want to acquire it, and the US does so by its ability and willingness to run persistent trade deficits. How will the IMF or whoever controls the SDR create and assign reserves?

A new issuance of SDRs is not the same thing as diluting the role of the dollar. The sums are a pittance, especially given the magnitudes of world trade, cross border movement of capital or the holdings of currency reserves. SDRs have been around for 40 years, but they are not really money. Money, as economists understand it, is a means of exchange, a store of value, and a unit of account. SDRs are not a means of exchange. As a basket of already existing currencies, it might appear more stable and hence a better store of value, but what is the metric? The purchasing power of fiat currencies individually and collectively has generally been eroded by inflation. The SDR is not a fiat currency, but a basket of fiat currencies. For the most part SDRs are relegated to a unit of account for the IMF and a few other international organizations.

Some observers suggest that SDRs are the IMF's money (sometimes referred as paper gold), but that reflects a misunderstanding. Issuing SDRs is not the same as the IMF printing money. The IMF doesn't do that. An increase in SDRs simply boosts each member’s claims on the composite currencies. The IMF is not a central bank.

More specifically, if the SDR is indeed a true reserve currency, and not simply an accounting entry that allows central banks to pretend that they are not holding dollars but whose value ultimately rests on its convertibility to the US dollar, who will determine the global money supply and how do we prevent this from becoming a horribly politicized process? After all the Fed has an interest in seeing stability in the value and use of the dollar, and so it can be counted on more or less to act in the best interest of the reserve currency, but why should anyone care about the value of the SDR over the long term and, more importantly, how can prudent behavior be enforced? More worryingly, if Europe has had so much trouble managing monetary policy among a group of neighboring countries with fairly similar social and economic conditions, how do we manage monetary policy on a global scale?

Perhaps the SDR is a covert way of getting back to something resembling the gold standard by creating a fiat currency with very strict rules about its expansion. If that is the case, the SDR almost certainly won’t last long.

Final thoughts:

a) the ramblings by China was interesting but its an airy-fairy idea at best, its motive is likely to "scare" the US officials to think harder about their macro and monetary policies going forward

b) the move will never happen unless IMF becomes more representative of the global financial system, that could take years of appointments to change the racial and country mix of IMF

c) there are a lot of countries that does not agree with IMF's policies

d) SDR needs to get liquidity to a substantial level before it can be an alternative, that is like asking Malaysia's economy to move into the global top 10 biggest economies in 5 years, possible but improbable

e) a saner proposal will be akin to the Euro currency - it can be started by getting ASEAN members to throw all their currencies into the hat together with HK, China, Japan and India... the rest can join later and the new currency can be called AZO... but even that proposal will be extremely difficult, in fact many times more difficult than for the the European Union/ Euro Currency to be formed because of the various differing political platforms each country has, and that each country basically have to give up on having their own monetary policies - if your country unemployment is very bad, but the rest are OK, there's nothing you can do to your monetary policies to loosen the purse, etc...

So, SDR, a pipe dream...

p/s photos: Lara Dutta

European Union Financial System Might Be Even Worse Off

The media tend to focus on the credit crisis too much on just the US and maybe the UK. Even the secondary focus was largely on how China would figure in being a catalyst for recovery. There are pockets of the world that are facing the crisis with more devastation, and urgency for help. In a sense for them, its should be called a debt crisis rather than a credit crisis. We are talking of Eastern Europe, Western Europe, Russia and Ukraine... hey, basically the EU. Most of what's written below was taken from The Telegraph, UK.

In much of Western Europe, things are nearing boiling point. Austria's finance minister Josef Pröll made frantic efforts last week to put together a €150bn rescue for the ex-Soviet bloc. Well he might. His banks have lent €230bn to the region, equal to 70pc of Austria's GDP.

"A failure rate of 10pc would lead to the collapse of the Austrian financial sector," reported Der Standard in Vienna. Unfortunately, that is about to happen.

The European Bank for Reconstruction and Development (EBRD) says bad debts will top 10pc and may reach 20pc. The Vienna press said Bank Austria and its Italian owner Unicredit face a "monetary Stalingrad" in the East. Mr Pröll tried to drum up support for his rescue package from EU finance ministers in Brussels last week. The idea was scotched by Germany's Peer Steinbrück. Not our problem, he said. We'll see about that.

Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay – or roll over – $400bn this year, equal to a third of the region's GDP. Good luck. The credit window has slammed shut.

Not even Russia can easily cover the $500bn dollar debts of its oligarchs while oil remains near $33 a barrel. The budget is based on Urals crude at $95. Russia has bled 36pc of its foreign reserves since August defending the rouble.

In Poland, 60pc of mortgages are in Swiss francs. The zloty has just halved against the franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story. As an act of collective folly – by lenders and borrowers – it matches America's sub-prime debacle. There is a crucial difference, however. European banks are on the hook for both. US banks are not.

Almost all Eastern bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. En plus, Europeans account for an astonishing 74pc of the entire $4.9 trillion portfolio of loans to emerging markets. They are five times more exposed to this latest bust than American or Japanese banks, and they are 50pc more leveraged (IMF data).

Spain is up to its neck in Latin America, which has belatedly joined the slump (Mexico's car output fell 51pc in January, and Brazil lost 650,000 jobs in one month). Britain and Switzerland are up to their necks in Asia.

Whether it takes months, or just weeks, the world is going to discover that Europe's financial system is sunk, and that there is no EU Federal Reserve yet ready to act as a lender of last resort or to flood the markets with emergency stimulus. The European Central Bank already needs to cut rates to zero and then purchase bonds and Pfandbriefe on a huge scale. It is constrained by geopolitics – a German-Dutch veto – and the Maastricht Treaty.

It is East Europe that is blowing up right now. Erik Berglof, EBRD's chief economist, said that the region may need €400bn in help to cover loans and prop up the credit system. Europe's governments are making matters worse. Some are pressuring their banks to pull back, undercutting subsidiaries in East Europe. Athens has ordered Greek banks to pull out of the Balkans.

The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan – and Turkey next – and is fast exhausting its own $200bn (€155bn) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights. Its $16bn rescue of Ukraine has unravelled. The country – facing a 12pc contraction in GDP after the collapse of steel prices – is hurtling towards default, leaving Unicredit, Raffeisen and ING in the lurch. Pakistan wants another $7.6bn. Latvia's central bank governor has declared his economy "clinically dead" after it shrank 10.5pc in the fourth quarter. Protesters have smashed the treasury and stormed parliament.

In almost every way, this is much worse than the Asian financial crisis in the late 1990s, as indicated by the table below. There are accidents waiting to happen across the region, but the EU institutions don't have any framework for dealing with this. The day they decide not to save one of these one countries will be the trigger for a massive crisis with contagion spreading into the EU. The governments and ECB cannot risk NOT saving any one country or banking institution, but that strategy is drawing almost all the reserves and ammunition these institutions have.

Europe is already in deeper trouble than the ECB or EU leaders ever expected. Germany contracted at an annual rate of 8.4pc in the fourth quarter. Germany will have shrunk by nearly 9pc before the end of this year. This is the sort of level that stokes popular revolt. The implications are obvious. Berlin is not going to rescue Ireland, Spain, Greece and Portugal as the collapse of their credit bubbles leads to rising defaults, or rescue Italy by accepting plans for EU "union bonds" should the debt markets take fright at the rocketing trajectory of Italy's public debt (hitting 112pc of GDP next year, just revised up from 101pc – big change), or rescue Austria from its Habsburg adventurism.

Hungary’s forint fell to an all-time low in recent days, and Poland’s zloty slumped to the lowest in five years on plunging industrial output. Half of all loans to the private sector in Poland are in foreign currencies so borrowers face a severe debt shock after the 40pc fall of the zloty against the euro since August.

There are contagion worries for Western banks that have lent $1.74 trillion (£1.22bn) to the ex-Soviet bloc -- split between $1 trillion in foreign loans and $700bn in local currency debt through subsidiaries. Austria’s banks are the most exposed with the share of risk-weighted assets tied to the region reaching 54pc for Raffeisen and 38pc for Erste Bank. The exposure of Germany’s Bayern Bank is 48pc, Italy’s UniCredit is 45pc, and Swedbank is 29pc.

The region needs to roll over $400bn in foreign debts this year, equivalent to a third of total GDP, raising concerns that it may need a massive rescue programme from the International Monetary Fund and the European institutions.

p/s photos: Elva Hsiao

Best Business Book For 2008

I read a lot of business related books, and I can say this was the best I have read for a long time. Easily the best business non-fiction for 2008. Many might have come across this book already as it was published in the early part of last year. I bought it a few months back, and only just managed to get around to reading it. It is all the more important when compared to the hugely popular The World Is Flat by Thomas Friedman, a tome on the benefits of unstoppable charge of globalisation. Professor Chang, currently with Cambridge University, is also an economist and a leading expert on development economics, which focuses on issues related to economic growth in low-income countries.

Chang's Bio

Professor Chang insists that historically, high tariffs were largely responsible for the economic success of both the United States and Britain. In theory, he argues, the world's wealthiest countries and supra-national institutions like the IMF, World Bank and WTO want to see all nations developing into modern industrial societies. In practice, though, those at the top are 'kicking away the ladder' to wealth that they themselves climbed. Why? Self-interest certainly plays a part. But, more often, rich and powerful governments and institutions are actually being 'Bad Samaritans': their intentions are worthy but their simplistic free-market ideology and poor understanding of history leads them to inflict policy errors on others.

He won the Gunnar Myrdal Prize for his book “Kicking Away the Ladder: Development Strategy in Historical Perspective” (2002), and he shared the 2005 Wassily Leontief Prize for his contributions to “Rethinking Development in the 21st Century.” This book is remarkable as it almost go against all the perceived benefits of globalisation, and even the standard economics syllabus currently being taught at most universities.

The Korean Experience

The author gave one of many examples of how "total free trade" was not necessary and at times not even conpatible with economic success. South Korea back in 1961 has a per capita income of just $82 per person, less than half the $179 per capital income in Ghana at that time. fast forward, South Korea is today a manufacturing powerhouse, with a 2004 per capita income of $13,980. It did not get there by NOT having tariffs or promoting free trade.

Bashing The Unholy-Trinity / Mahathirism / Look East Policy

The powerful “ladder-kickers” working in the “unholy trinity” include the International Monetary Fund (IMF), the World Bank, and the World Trade Organization (WTO) - this statement will make Mahathir very pleased, but as persuasive as Chang's book is, Mahathir's economic strategy is still largely mis-directed. It was obvious that some of the mega projects Mahathir implemented was taken from the copybook of Japan and South Korea, indirectly listening too much to the mostly hotbag of air in Kenichi Ohmae. (this entire section was not part of the book, but I am sure some would see the book as supporting of Mahathir economics, hence I felt it was relevant to put in some pertinent points relating to the issue)

What Mahathir missed out on :
a) both Japan and South Korea had huge population which translates into a critical domestic economy;
b) both countries spent ferociously on education (our Malaysian universities keep dropping out of relevance over the years);
c) both countries practice a more meritocratic society;
d) while corruption and abuse of power are about the same as in Malaysia, so no difference there I guess;
e) both countries are from a homogenous race, not like Malaysia having to contend since independence till today how to slice the economic pie in racial terminology;
f) Japan and South Korea are resource poor nations, they have to move into manufacturing and services, while Malaysia always have a ready tap on resources thus promoting easy-way outs - Japan and South Korea being resource poor had very little room not to succeed while Malaysia will always give entrepreneurs/selected CEOs chances after chancs to prove their ineptitude;
g) Japan and South Korea will always imitate and copy the best and then try to overtake the prototype with better and cheaper design/product, while Malaysia mainly just is piss poor in execution and corporate management strategy;
h) Japan and South Korea companies will plan for the long term, while some of us try to get as much as they can for their self-interest while they can...

In summary, it was OK to do the mega projects, I don't even mind subsidising Proton's profits for the first 5 years, but show la something, show that we are actually building a better car every year, get the better design minds and engineers on board, have a long term strategy from day one ... after so many years, is Proton even able to produce one patent or a better way to even just make one part of the car? No, we are still struggling with inferior power windows till today.

You want to look east, its not just turning your head eastwards... you must change the entire fabric of society in terms of education, meritocracy and corrupt politics/business. But, we all know that already... in fact most Malaysians know that already, this is not something new. Its a dangerous place when more and more of the general public think they can run the country better than the government, and whats even more dangerous than that is that the public are not wrong about that.

The Free Trade & Globalisation Movement

All universities and textbook economics preaches globalisation and free trade, what that means is promoting the following ideals:
a) privatizing state-owned enterprises
b) maintaining low inflation
c) shrinking the size of the state bureaucracy
d) balancing the national budget
e) liberalizing trade
f) deregulating foreign investment
g) making the currency freely convertible
h) reducing corruption
i) privatizing pensions
These are allegedly the only route to economic success. Especially if you ask WTO, IMF and World Bank. That is also why the only thing i salute Mahathir for is not to take the IMF funds and go about solving the Asian financial crisis via his own way. Taking aid/loans from any of the unholy-trinity would always come with conditions cited from (a) to (i).

Not Just One Route To Economic Success

The wonderful truth about Chang's book is that free trade and globalisation movement are not the only route to economic success. In fact, there are strong arguments that countries can also achieve economic success if they had some tariffs and protection to nurture some industries till they are strong enough to compete. Forcing absolute free trade and deregulation in actual fact may keep many poor countries locked into a sub-serviant economic position for an even longer period... yes, they may get more trade and more jobs but they will still be making and export products at the primary level, and not be able to move appreciably up the ladder of economic development. Thus Chang's often used phrase that the bad samaritans keep "kicking away the ladder" after they have climbed it themselves.

Highly readable, highly accessible and enhances our understanding and clarity of the routes to economic success. While it bashes some of the utopian beliefs on free trade and globalisation, we must be reminded that there are a lot of "good" in promoting free trade and encouraging the globalisation movement, but we should also think deeper on bringing up countries up along the economic curve. It also manages to debunk the biggest myth of all, that free trade and deregulation are god-given economic tablets.

p/s photos; Zhou Wei Tong

Morgan Stanley Asia Not So Bearish

Probably still the best strategic house in Asia, Morgan Stanley Asia said Asian stock markets and economies can escape the worst of the global downturn, with China, Hong Kong and Taiwan best placed to ride through the turbulence. Equity strategists at the brokerage added to their ``overweight'' position in Taiwan in their model portfolio of stocks and raised South Korea to ``equal-weight'' from ``underweight,'' a report today said. Malaysia was cut to ``underweight'' from ``overweight.''

``Asia's fundamentals are far stronger. A combination of easier monetary and fiscal policy and lower commodity prices should enable Asia to avoid the worst of the global downturn.''

China and Japan have slashed borrowing costs in the past two weeks to ease the economic fallout from the global credit crunch that is pushing some countries into a recession. The turmoil has frozen credit markets and triggered a worldwide rout for equities, wiping out more than $25 trillion of market value this year.

``If the worst of the global liquidity crisis is behind us, macro strength is probably going to become a key market driver,'' the report said. ``This should favor Greater China. A key difference between Asia today and in 1997-98 is the emergence of China as a key driver of growth.'' China's growth will slow to 9.3 percent in 2009, from 9.7 percent this year, the World Bank last month, predicting that the country is well positioned to withstand financial market turmoil. The central bank cut interest rates for the first time in six years on Sept. 15, following up with two more reductions since. On Oct. 29, the key one-year lending rate was cut to 6.66 percent from 6.93 percent. China is the ``strongest'' to cope with the global slowdown while Australia, Malaysia and India ``face challenges,'' Morgan Stanley said.

Malaysia's ``external macro exposure and limited policy flexibility'' makes it vulnerable to the global slowdown. South Korea's upgrade comes as Morgan Stanley added Samsung Electronics Co. to its portfolio, saying Asia's biggest maker of chips and handsets is ``best positioned'' to ``enjoy earnings growth into 2010.''

On Oct. 7, the International Monetary Fund said the world economy would expand by 3 percent in 2009, paring the 3.9 percent forecast made in July. Emerging markets will account for 100 percent of the global economic growth next year, mainly Brazil, Russia, India, China and other Asian economies including South Korea, the IMF said yesterday.

p/s photos: Warattaya Nikulha

Credit Frozen & Cuban Missile

Don't ask me why or how, but there was an IMF meeting a couple of days ago in Washington DC, and me being still in New York, I had the opportunity to talk to a very senior, influential gwailo friend ... I asked for his assessment of just how bad the whole crisis had been over the last few days. His comments shocked me.

Like the rest of the world, we were shaking our heads over the daily dips of 5%-10%, but we also thought that things would stabilise once the central banks of the world got their act together. He said that on Friday, he had never been so "hapless, resigned to fate in a bad way". Mind you, my friend is on the board of two top 1,000 companies and has been on select committees on banking oversight committees. He has access to influential board members of the Federal Reserve and many of the top guys at IMF.

He said things were so ON THE EDGE last Friday, he felt the same way when the Cuban missile crisis was at its peak fervour. During the latter period, he was resigned to either side sending the nuclear missiles to each other and knowing in his heart that there is a very real chance that life as he knows it may evaporate in a matter of hours. Can you imagine a person comparing that to the the situation last Friday. He said that things were so "open and shut" that the central banks were in real danger of not being able to come up with the deposit guarantees and buying of stakes in banks. There was a real chance that all markets was going to continue to collapse further. He added that if people knew how bad things were behind the scenes, they would wobble at their knees. He said on Friday, he was willing to take a bet that the Dow Jones may hit 6,000 in the coming days.

His view has improved now. Now he thinks there is a good chance that things will work, that liquidity will return, but sees thing only returning to normal after 6 months.

p/s photo: Yuri Ebihara

What A Difference 10 Years Make

Asia Times / Shawn Crispin - A decade ago, Western-led free marketeers derided Asia's lightly regulated economic and financial models for being riddled with corruption, cronyism and overall mismanagement. The only way out of the financial crisis, they argued, and on what the IMF predicated its bailout packages, was greater foreign participation and management in their economies through asset sales and privatizations.

Governments in the region resisting IMF neo-liberal orthodox prescriptions and market-determined asset fire sales to foreigners were widely derided in the Western press. Many rang the "moral hazard" alarm bell, warning that unpunished profligate borrowers would be prone to return to their risky behavior on the expectation of future government bailouts.

Thailand's (and Malaysia) interventionist move in 2001 to establish a state-led rescue facility for non-performing assets held at banks, known as the Thailand Asset Management Company (and Danaharta), was likewise derided for being too little, too late, and ultimately a doomed-to-fail interventionist attempt to put off market-led asset price clearing.

And when Asian countries raised the idea of establishing an Asian Monetary Fund, to rival the IMF and stave off future regional financial crises without the perceived pro-Western conditions imposed by IMF-led bailouts, the US balked at the concept and lobbied against it until it was finally scrapped.

Ultimately Southeast Asia emerged stronger from its financial collapse, seen today in its low sovereign and corporate debt profiles, high levels of foreign reserves and reformed and recapitalized banks. That restoration was led mainly through market-driven depreciated currencies, improved terms of trade and eventually renewed capital inflows.

Now many of the same pro-market stalwarts who criticized Asia's half-market, half-interventionist response to the 1997-98 financial crisis are among the strongest proponents of the US government's proposed US$900 billion Wall Street bailout package. Rather than advocating for a market-price clearing of distressed assets and foreign buyouts of homegrown assets, as they did for Asia, many Western commentators have taken Wall Street's side in its plea for a government bailout of banks and bankers on the grounds that the US is simply to large too fail and without government intervention the entire US - if not global - economy is at risk.

The hard truth America is now so desperately trying to avoid is that US economic, financial and human resources - once considered the cream of the global capitalist crop - are in the new market reality worth a fraction of what they were previously priced. US policymakers deliberating the proposed interventionist bailout would be wise to revisit their economics text books and the historically overlooked but now highly relevant factor-price equalization (FPE) theorem.

Simply put, as the world economy becomes more integrated, free trade and capital flows tend to equalize relative prices and real wages across the world. Astronomically high US asset prices and wage levels have long represented the biggest pricing distortion in the global economy, one that until now has allowed Americans to consume a far greater percentage of the world's resources than their Asian counterparts.

Financial services were perhaps the US economy's chief value-added comparative advantage in the global economy and with their demise the US's overall terms of trade will inexorably decline. Regardless of how much good money the US Congress eventually throws after bad to restore confidence, Wall Street's debt-driven meltdown will inevitably lead to a lower US standard of living. That spiral will intensify if and when Asian and Arab investors opt for suddenly safer investment options closer to home rather than committing their capital to underwrite US government-propped, artificially high-priced US assets. A debt-ridden US can also expect to lose out to cash-rich China and others in the mounting global competition for the scarce natural resources and commodities needed to fuel and feed their domestic economies.

Others, reflecting on past Western criticism of Asian crony capitalism, wonder why the US media has not asked harder questions about a potential conflict of interest in former Goldman Sachs investment banker turned US Treasury Secretary Henry Paulson's lead role in devising a bailout package for his former Wall Street associates. They suspect it could be partially explained by much of the US media's reliance on investment banks for their advertising revenues.

With Wall Street's collapse, the global capitalist order has reached a watershed moment, one that will fundamentally affect how the US engages with Asia. US trade policies that previously promoted, above all else, opening markets for US banks and financial institutions in Asia's developing markets will now shift in a new and potentially more protectionist direction. That the US is opting to bail out its bankers rather than allowing the market forces it championed during the Asian financial crisis to determine the value of its debt-ridden assets represents more than an extreme case of moral hazard. Rather, it undermines global faith in the capitalist model the US once promoted, and from a Southeast Asian perspective, marks the end of what now seems a highly hypocritical US-led era.

p/s photos: Sonja Kwok Sin Ney