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ray | 2nd Nov 2008, 16:21 PM | 謝國忠 | (483 Reads)
The world must unite to tackle the financial crisis, with Asia and Europe at the fore, or we'll all go under
Updated on Oct 30, 2008

中文譯本 - 謝國忠:同舟共濟

There is a Chinese saying that people in the same boat must help each other. The global economy is a boat. We are all in it. If the US economy capsizes, so will everyone else's. Asia and Europe must take action now to save the global economy. The Asia-Europe Meeting in Beijing missed a golden opportunity to tackle the crisis. Instead of focusing on the urgent task of stabilising the global economy, it wasted time on longer-term issues like a new global financial architecture.

Next month's global summit in Washington state must focus on the urgent task at hand and not waste time on who is to blame and what the future should look like. Unless we all work together now, we will all sink.

The market is talking about a great depression, bread lines and war. That pessimism could be self-fulfilling if left unchecked. The problem that the world faces is not as big as the market believes: the loss of paper wealth is 100 per cent of global gross domestic product - and in the US, the epicentre of the crisis, the loss is about 100 per cent of America's GDP. When Japan's bubble burst, the wealth loss exceeded 300 per cent of GDP.

Compared to Japan's problem a decade ago, this crisis is unfolding much faster and spreading wider, due to financial globalisation, and a big chunk of that paper wealth had already been consumed through borrowing against it. Japan's bubble was able to deflate gradually over a decade because it had been financed by local banks that could control the pace of asset deflation.

The decentralised nature of financing the Anglo-Saxon bubble makes its bursting uncontrollable in terms of the speed of asset deflation. This is why it looks so frightening.

The speed and scope of today's crisis threatens to reverse globalisation and cause a great depression along the way. Recession makes protectionism appealing for hoarding demand at home. When everyone does it, the economic pie shrinks even faster. The political instability that results from depression makes war an attractive option to divert attention.

Wars shrink the pie even faster. Such vicious cycles have destroyed the world many times before. The global community can and must stop the process. Asia and Europe should first implement fiscal stimulus of 5 per cent of their GDP and, second, convert their foreign exchange reserves into stocks, especially in the United States, from government bonds. The benefits of such actions far outweigh the costs. If these two measures are implemented, the global economy will stabilise quickly. Only afterwards can we focus on reforms to prevent future crises.

This is an Anglo-Saxon debt crisis. As I have argued here before, the other side of the excessive debt in Anglo-Saxon economies is the US$10 trillion forex reserves in emerging economies. The asset bubble in the Anglo-Saxon world gave them the equity capital for borrowing. Their excessive consumption resulted in their US$1 trillion annual trade deficit.

The financing for the deficit came from surplus countries in Asia and Europe - in short, every major economy is part of the bubble. We should not point figures only at the US. The blame game won't solve the problems; everyone is guilty.

The Anglo-Saxon economies will experience a huge downturn as they unwind the bubble. A byproduct will be the massive contraction of their deficits, probably by more than half, through import reductions. While Anglo-Saxon economies can alleviate their pain temporarily through cutting interest rates and boosting fiscal spending, the main theme of the story won't change.

Hence, the rest of the world will suffer massive reductions of trade surpluses, regardless of their policies. Unless they increase domestic demand, they will also suffer big recessions.

An alternative perspective is to look at the wealth effect of asset deflation. A US$50 trillion loss in paper wealth may cut demand by US$2.5 trillion to US$3 trillion or 4 per cent to 5 per cent of global GDP. Taking into consideration trend growth, the negative growth would be half as much.

But, the contraction in demand will have a large multiplier effect, exacerbating the damage. If the global economy adds US$2 trillion of fiscal stimulus, this still won't stop it contracting and minimising the multiplier effect.

The stimulus must take place mainly in Asia and Europe to allow the Anglo-Saxon economies to decrease trade deficits. Asia and Europe, with GDP of about US$25 trillion, are capable of implanting US$1.5 trillion (6 per cent of their GDP) of fiscal stimulus. Many governments in Asia and Europe already have high levels of debt. But, this is not the time to worry about it. The house is on fire. Even if there is a water shortage, you must use what you have to put the fire out now.

In addition to demand stimulus in Asia and Europe, there is an urgent need to increase risk capital, especially in Anglo-Saxon economies. Otherwise, their deleveraging will happen too fast. The best way to do it is for countries with big foreign exchange reserves to buy index funds and sell their government bond holdings, especially in the United States.

Lack of capital in Anglo-Saxon economies and massive foreign exchange reserves in the developing world are two sides of the same coin. Unless China, Japan and the oil exporting countries act, the Anglo-Saxon economies could contract excessively, which would deepen the trade downturn, causing pain for everyone.

Besides, stocks are cheap enough for investors to make money in the long run. This is what Warren Buffett is doing. It is time for the Bank of Japan, the People's Bank of China, Kingdom Capital, and others, to do the same. They will help themselves and the world, too.

The global economy is on fire. Every government must pitch in to put it out. The time for action is now.

Andy Xie is an independent economist -






















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