"You can lead a horse to water but you can't make it drink". This old
English proverb sums up the current situation with the US economy. The
government is intending to throw in yet more budgetary stimulus but it
seems a better than even chance that neither consumers nor corporates
will respond. One consequence: a continuing high – and maybe further
increase – level of unemployment as the US moves towards its mid-term
elections in November 2010.
In turn that suggests that the scope
for some very direct measures against China is in the offing if Beijing
persists with a mercantilist trade policy rooted in a cheap,
dollar-linked currency. The US administration will need some scapegoats
and China's intransigence makes it an obvious target.
weakness of the US economy is based on the simple fact that no amount
of monetary and fiscal stimulus can avoid forever the repair of
household balance sheets after a decade of over-spending. Easy money
amounts to delaying and easing the process of adjustment – but also
making it much longer. Obama would have been wiser to have accepted 18
months of truly dire conditions, which could have been mostly blamed on
Bush and bankers, than attempt a too-early recovery. But Obama is not
only inexperienced but overly influenced by the likes of US Treasury
Secretary Timothy Geithner and Lawrence Summers, the director of the
president's Council of Economic Advisors, whose focus has been on
rescuing the financial sector rather than re-balancing the broader
Consumer reluctance to spend is absolutely necessary to
restore equilibrium but inevitably worsens unemployment. Higher savings
outruns official stimulus – particularly when a large chunk of the
budget gets spent in Iraq and Afghanistan. Eventually, US manufacturing
will revive, helped by a shift in exchange rates. Eventually, fiscal
stimulus will focus on useful projects, like rebuilding infrastructure.
But these things do not happen overnight in a service-oriented economy
with government budgets boxed in by entitlements.
for Asia in all this is that it looks increasingly unlikely that, with
the possible exception of China, domestic stimulus will be sufficient
to offset continuing weak US demand. Yes, government outlays have
increased but private investment and consumption have showed very
limited response. Exports have held up better than many had feared but
in large part due to currencies, like the Korean won, which have been
weak compared with the euro and the yen. Meanwhile many are suffering
from increased competition from China's weak yuan policy. Commodity
producers have also been helped by price rises which seem more a result
of easy money and re-stocking than of end-user physical demand.
continued fast growth – assuming we believe the figures – shows the
short term impact that state-directed (through the banking system)
spending can have. However, even Beijing is beginning to rein in what
looks suspiciously like a new bubble not just in housing and
higher-income sectors such as autos, but has involved massive outlays
on infrastructure and other projects with little or no return. China's
size and foreign exchange reserves are a buffer against global
weakness. But an easing in official stimulus combined with pressure on
exports – whether from a yuan rise or sanctions by the US (and possibly
the EU) if it fails to free up its currency, suggest that 2010 could
end where 2009 began. Meanwhile inflation pressure is beginning to be
felt and will make economic management more vexing than ever.
around Asia, the only country which appears to have genuine
consumer-led demand strength is India. Despite a poor monsoon, spending
has held up well and the economy may no longer need the fiscal stimulus
applied earlier in the year. But even India may flag as its old
problems of current account deficit and excessive government borrowing,
constrain its potential.
In other countries where there are
signs of consumer sentiment recovering, much of the improvement can be
attributed to the pick up in asset prices. That may continue for a
while longer given that interest rates are near zero almost everywhere.
But stocks and house prices in many countries are now looking
vulnerable to the rise in interest rates which is not only inevitable
but desirable if the gold bugs are to be proven wrong and paper money
to have some long term value.
So far very few countries have had
the courage to start raising rates. Of those, Australia has been most
prominent but its case is exceptional due to the remarkable rebound in
commodity prices and strength in mining investment which have driven
the Australian dollar from US63¢ in March to 93¢ last week. Other
commodity currencies such as the Brazilian real have done much the same.
movements in commodities and their currencies appear extreme and very
vulnerable to reversal. Meanwhile the non-commodity Asian currencies,
other than the yen, now a favored safe haven, look set for
appreciation. That means the yuan, NT dollar and won in particular and
maybe the baht and Singapore dollar as well. If the dollar recovers
they will not decline much. If the dollar remains weak, and the
commodity currencies come off the boil, they are the obvious targets
That may be good for the global economy – and
for Asian consumers. But it could prick some asset bubbles which have
been driven by money supply increases caused by a weak dollar and easy
The only forecast that can be readily made is that the next nine months will be very different from the last nine.