The Economy: Australia risks being left out in the coldby Patrick J. ByrneNews Weekly
, October 21, 2000
Japan's former top finance official, Dr Eisuke Sakakibara (known as Mr Yen), recently said that "the basic problem of this globalised and virtualised economy ... is huge amounts of money, highly leveraged, moving across borders very quickly.
"The US right now is the centre of global capitalism, and if the centre collapses, the world system could collapse. And the situation in the US is not sustainable."
Recently retired Managing Director of the International Monetary Fund, Michel Camdessus, gave a chilling warning on his last day in the job after 13 years: "I am ringing the alarm bell to our member countries to tell them that we run the risk of a new financial crisis." The world economy had entered "a dangerous period of twilight", he said.
The world economy rests on the health of at least two of its main economic engines - the US, Japan and Germany.Japan's recession
Japan has been in recession for a decade following the collapse of its city property market by 80% and its stock market by 60%. Huge government expenditure has kept people in jobs, but consumers keep using their wages to pay off large household debts rather than spending on consumer goods and stimulating growth.
The US economy is staring down the barrel of a recession, potentially deeper and longer than it has experienced for decades, due to an overvalued stock market. Wall Street guru, Henry Kaufman, recently said in his memoirs, "For the last 60 years the value of the stock market has averaged half the size of the national economy. Today the market has blown out so that it is worth not half but one-and-a-half times as much as the total economy."
According to US Federal Reserve Bank data, a decade ago Americans held one dollar in every seven of their personal wealth in the form of stocks; today it is one dollar in three. Americans now have more money in stocks than real estate. US households now hold more money on the stock market through the mutual funds than the total capital value of all the US banks.
US Federal Reserve chairman, Alan Greenspan, has made it clear that monetary policy is going to be used to curb the "irrational exuberance" of the market. Probably, he'll shift that policy into high gear after the US presidential election in a few weeks.
Should the US economy goes into recession and with Japan still unable to crank up its economy, Asia, Latin America and Russia look like teetering dominoes.
For example, Asian banks were carrying large bad debts after the 1997 crisis. Their debt burden has eased but they have loaned heavily again to the same companies that got them into trouble in the first place.
A world economic downturn could well hasten the emergence of three large economic blocks, as recently predicted by the Director of Asian Studies at the US Council on Foreign Relations, Robert A. Manning. He predicted that the Americas would be dominated by the US and the US dollar, Asia would be dominated by Japan and the Yen, and Europe would have the Euro and Germany at the helm.
Half of Australia's trade is with Asia. About 40% of our imports are from Europe and the US, although only about 20% of our exports are to those two big economies because we can't get access to their markets.
Australia toed the US and IMF line in opposing Japan's proposal for an IMF-like Asian monetary fund to provide long-term financial stability in the Asian region, in the immediate aftermath of the Asian economic crisis. The ten ASEAN nations plus Japan, South Korea and China are now revisiting the proposal. This time it is with the tacit support of the IMF.
But for Australia, the chickens are now coming home to roost. At a recent meeting of ASEAN nations, Australian Trade Minister, Mark Vaile, was pushing for an ambitious plan to merge the ASEAN nations plus Australia and New Zealand into a single free-trade market with almost $2 trillion in annual output.
Led by Malaysia, ASEAN rejected the issue so effectively that there is no guarantee it will return to the agenda.
Australia doesn't look like being accepted into any of the major trading blocs, at a time in our history when we are particularly vulnerable to a world economic downturn.
The falling dollar was not the result of our interest rates being lower than in the US, or the falling Euro, or our poorly performing high tech and communications sectors. "These issues were a mere distraction," was the comment of the Australian Financial Review.
A series of major financial institutions - Salomon Smith Barney/Citibank, HSBC, UBS Warburg, and BNP - have all concluded that the dollar's drop is the result of our inability to curb the growing foreign debt, now $268 billion.
If the financial markets have woken up to our vulnerability, then we are set for a rocky ride if the US goes into recession and we are left out in the cold by our Asian neighbours.