An economic prespective

I have read a very interesting article recently by Professor M. Pettis(Beijing University) that touches on the economic conditions leading to the Great Depression and the similarity that he found with the situation we are in right now. He says the trade imbalances are the main culprit and this has lead to the current economic crisis which is similar to that of the 1920s but stopped saying we are going into the 1930s scenario. He also discussed what went wrong then and what countries can do now regarding economic policies and management. His conclusions may be thought provoking and at best for his own consumption and is subject to further discussions/arguments.

I have basically summarised his article as follows(hopefully I have covered his findings/conclusions exactly what he means):-

Great Depression- US(and Latin America) vs. Europe

Current ----------- China vs. US

In the pre-Great Depression era, US has been increasing its current account surpluses and central bank reserves. It has excess savings and and production capacity and is also a big net exporter. Europe on the other hand are directly the opposite, with hugh current account deficit resulting trade imbalances which according to economists need to rebalance and adjustments.

During this period, the US instead of expanding aggressively via fiscal spending has decided (in 1937) going against it. It did not follow what Keynes demanded ie "industrial overcapacity requires save less and consume more" and "high savings reduced the multiplier effects of investment on the economy".

Also during this period, as countries having current account deficit try to stimulate their own growth to stay afloat, barriers of trade were imposed in Europe (especially in Germany) resulting countries with current account surplus eg US suffered far worse than the deficit ones, ie the Great Depression.

In the current economic situation, China has replaced the US in terms of current account surplus, reserves, production capacity, net exports and savings. The US in fact has become the direct opposite of what it was during the Great Depression era. China as we all know is trying to simulate its economy fiscally with the proposed RMB4T plan but accordingly, only 1/4 of the amount will be real fiscal expenditures while others will come from banks, companies and municipal government spending.

The professor proposes the onus is on China now to resolve the global demand problem by expanding its market domestically. (this is exactly what China is trying to do now). He felt that what China is doing now egs giving export rebates or market rumouring about depreciating its currency to boost its exports will not help to solve the world's trade imbalances. He also added that the high saving rates must decline amongst the Chinese but acknowledges it will be quite impossible. He felt that the US can carry on with its fiscal expansion but the risk is it will be further be in debt. He concluded that if the excess-savings countries do not boost domestic demand aggressively, the political and even economic argument for a rise in trade protectionism could become irresistible. The economic pain may not be "so much" for the US but for China!

* picture from The Malaysian Insider: I did not even bother finding out further what this guy have to say.

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* Bloomberg: Deflationary worries on the table again! Deflation-"prolonged declined in prices, hurting the economy by making debts harder to pay off and lenders reluctant to extend credit" Japan is the only country to suffer this phenomenon in modern times.

* Strong. The HKMA bought USD300m in New York on Wednesday night(Thursday morning in HK) and inject HKD2.325b(USD300m) into the local interbank market to defend the peg system. HKD hits its upper limit band several times today of 1USD :HKD7.75

* Weak: Indonesian Rupiah hits a decade low today 1USD:12,350 Rupiah. Ringgit at its 2 year low 1USD: RM3.605

* Also week....oil price nearing USD50 per barrel, a 22-month low. (This was Merrill Lynch's earlier prediction).

* TheStarBiz: YTL's Boss (with a war chest of RM12b), "we have an army of people combing through deals".

* Shah Rukh Khan not coming to receive his Datukship?