Page 2 of 2 Deaf frogs and the Pied Piper
By Chan Akya
defaulted on in the Japanese market (so-called Samurai bond market) have now
helped to shutter the whole market itself.
This means that going forward, deleveraging of the American and European
economies is a structural necessity that calls for the shedding of billions of
dollars in assets across their banking systems as well as the ramping up of
substantial capital levels. Without willing lenders from the saving pockets of
the world, these banks will have to make do with leverage of 2:1 rather than
20:1. That in turn means fewer opportunities for speculative positioning within
those economies, greater reliance on expensive term funding and in general a
reduction of wasteful consumption.
(On a side note, this deleveraging of the US and other G-8
economies will mean a sharp decline in the consumption of oil, shipping of
goods half way around the world at throwaway prices, the use of raw materials
such as steel in the manufacture of motor vehicles and perhaps even a reduction
in food waste. In effect, these economies will see their global carbon
footprints shrink dramatically in years to come. By design or otherwise, the
financial crisis will do wonders for the environment.)
The alternative to the above, which is now being considered in earnest across
the US and other G-8 countries (see the next section for more on that subject)
is the nationalization of financial institutions with the idea that
government-owned and guaranteed institutions will fare better in the new world
financial order. The trouble with that logic though is that the long-term
prognosis for those economies needs to be positive, and unfortunately for the
G-8 this is simply not the case.
This is where the second point raised at the beginning of this section comes
in, as it concerns the demographic decline of the US as well as other G-8
countries. Leaving aside immigration from countries such as Mexico (which is
now in sharp decline due to the destruction, ironically enough, of the
construction industry) - US population characteristics are similar to those of
major European countries.
This means that the reduction of the profit potential of those economies will
also cause a situation of net emigration rather than net immigration - in other
words, more people will leave than will arrive in these countries.
Already, we have seen evidence of this in the parts of the US that benefited
the most from the expansion of illegal employment, for example the construction
industry - which has now imploded. There are anecdotal reports, such as one
from California, that point to strawberries rotting on the plants as not enough
migrant labor to pluck the fruits can be found.
The slowdown of net migration will impose substantial hardships on the European
economies. Many of these, like Italy and Britain, rely on the flow of migrants
to pay government taxes; this modern version of a Ponzi scheme depends on the
flow of increasing numbers of new players to keep up the cash flows of existing
members (citizens). The relative calm on the surface for European economies
thus hides a wider panic, namely that the replacement engine for growth is
being lost, and in most cases, inexorably so.
Market capitalism - better than the alternatives
Former British prime minister Winston Churchill, defending democracy, made a
point that is quite similar to the one I am about to make on market capitalism:
"Democracy is the worst form of government, except for all those other forms
that have been tried from time to time".
The major aspect of global capitalism's supposed decline of late that has to be
debunked pertains to the notion that interventionist Europeans somehow did
better than the laissez faire Americans. This is patently untrue when we
examine the record of declines in the European zone:
1. Firstly the massive liquidity support being provided by the European Central
Bank averaging well over 400 billion euros (daily) (US$574 billion) since the
beginning of last summer, that is, more than 13 months already; this is vastly
higher than the assistance provided by American authorities over the equivalent
period. This alone highlights the scale of investment exposure of these
institutions to troubled assets as well as the rather obvious point that other
banks aren't willing to lend to them anymore.
2. Frequent rescues of massive financial institutions ranging from various
German banks (IKB, a few of the state-owned Landesbanks and more recently
Dresdner Bank) to the Swiss banking giant UBS. These activities have generally
raised less headlines in the global financial press, perhaps because the
average reader in the rest of the world and especially Asia is less aware of
the existence of these banks in the first place.
3. In the past week alone we have seen European regulators circling their
wagons around Fortis, the Belgian-Dutch financial conglomerate that appears to
have come unstuck on the scale of fresh losses on its global asset-backed
portfolios. Fortis, the largest Belgian financial-services firm, at the weekend
received a $16.3 billion rescue from Belgium, the Netherlands and Luxembourg
after investor confidence in the bank evaporated.
4. Higher losses being absorbed by the European financial institutions on the
back of straight defaults and downgrades on their investment portfolio; this is
even higher when we consider the potential mark-to-market hits that these banks
are either not taking or not disclosing at the moment. At the very least, the
numbers will probably be double what has already been disclosed.
5. None of the above observations pertains to what will happen when European
banks start taking hits on their home-grown portfolios, which are often bigger
than their US exposures. The cratering of home prices in Ireland, Spain, France
and elsewhere all means that mortgage losses as well as those on derivative
securities will be immense for these banks.
6. The experience of Britain where similar accounting practices to the US are
adopted (that is, earlier recognition of losses) shows that European banks have
a worse time ahead. After the nationalization of Northern Rock last year, we
have seen this year the forced merger of banking giant HBOS with Lloyds TSB as
well as the forced acquisition of Alliance and Leicester by a Spanish bank
(which previously acquired another British bank, Abbey). British regulators
also on Monday announced the nationalization of Bradford & Bingley.
B&B's savings business, which represents its best assets, will be sold to
Spanish bank Santander, while its mortgage book will be nationalized, the
Treasury was quoted as saying.
Put simply, the European banking system didn't quite dodge the silver bullet of
mortgage losses by not following the precepts of market capitalism. If
anything, they have it worse due to lower capital bases supporting more
speculative asset categories, as well as the lack of regulatory oversight that
follows the absence of mark-to-market accounting.
Economies on a higher growth trajectory, like those of Asia, owe it to their
citizens as well as global investors to provide greater transparency on profit
generation. Market-friendly policies such as open capital flows and floating
currencies help to soften the likely impact of market extremes by effecting
ready changes in prices that help to change investment returns; thereby popping
asset bubbles quickly and efficiently.
Depending on a bunch of socialists or communists to deliver would be to ask
again for the sort of troubles that plagued those systems in the past: the
human mind tends to forget pain quickly and hence perhaps everyone has started
having nostalgic thoughts about communists. For those of you with such a
problem, here are a few reminders:
Let us recall the standard of living of Russians when the Soviet Union
collapsed under the sheer weight of lies imposed by communism in the early
1990s, their long bread queues, the low fertility and longevity rates and so
on.
What about those socialists? Think of the shortages of coal and fish in Britain
thanks to hare-brained socialist policies: an amazing achievement for an island
country surrounded by fish and bedded on coal.
Spare a thought for the millions of people in Zimbabwe who suffer from
hyperinflation, corruption and government oppression thanks to an
interventionist geriatric sporting a Hitler-style moustache and espousing
Leninist nonsense.
The income and wealth gap that opened up between India and South Korea from the
1950s to late-1980s, when the 3.5% annual growth of India left hundreds of
millions in abject poverty. This is by far the greatest statistical evidence of
the gap between capitalism and socialism in terms of trickle-down wealth
effects.
The opening up of the Chinese economic system to capitalist forces by Deng
Xiaoping, which ushered in one of the greatest periods of economic
transformation ever witnessed on the planet. As a communist state with Maoist
principles, it is unlikely that the Chinese economy of today would be even
one-third of the size that it is.
Any choice between the rough and tumble of the markets versus the quiet
desperation of corrupt government employees sitting in smoke-filled rooms
dreaming up the destinies of millions of people will inevitably lead me to
choose the former.
Global market capitalism works. Every time, and any time.
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