Oh, how November always makes me smile
What a beautiful month, a month where happy memories are always made, and when good news always come.
Suzy and Fran will be welcoming Sara Grace into their little family, anytime from now till next Tuesday, and looking at her baby shower photos yesterday, it was quite impossible to believe that in the last 6 months that I have not seen her, the little ball that was growing in her belly will now become a little girl, and yes, now that her beautiful name is revealed, I feel like she’s already here 
November two years ago was when Suzy first gathered all of us to have dinner at Sushi Tei to “announce some news”….and when she broke the news of Fran’s proposal to her in the Maldives, all of us were almost dying from happiness and envy! Knowing their love story from day one… it is amazing to know that she has made it through all the milestones, marriage, and now a little baby girl.
The month of November was when they released the news that Obama would be the first black president, that he was the bringer of change to an America ridden with debt. Not too sure how that news would have been reacted to had it been released again this year, but i remember listening to his speech that Feyi sent me, and being so touched by his words and expectant of change to the largest economy in the world.
Three years ago in November was also when Juan and I first got together, in Mannheim, Germany, and here I am now, writing from my desk in Buenos Aires. Never even knew where Argentina was on the map before I met him, and now life has changed completely. Both our birthdays fall in this month, such a coincidence.
What a lovely month to be in..Oh how I love November.
Bending, not bowing, in the Economist terms
A year ago, the dollar was probably not the currency you would want to invest in; alternatives like the euro were more highly sought after.
A year later on, today, the euro has fallen and taken a hard hit since Greece and its other south European neighbours started showing signs of trouble. In a state of panic, worries abounded that the global economy will not recover as quickly because of contagion between Greece and its southern continental counterparts. The dollar, which has almost always been a safe haven in times of trouble, started rebounding, and getting stronger.
And with Tim Geithner delaying the report to condemn China as a currency manipulator, will we be seeing China bending halfway to de-peg the Yuan? The Chinese mentality must be understood for anyone to play mind games or psychoanalyze any Chinese giant, country or person. As Sun Tzu said in his very famous quote – “Know your enemy and yourself, a hundred battles, a hundred won.” In a way, this ancient Chinese proverb is extremely apt in the currency conflict between USA and China. When USA tried to throw its weight around by threatening to impose import tariffs, the last thing China would do is to bow and give in to demands which would make the Middle Country appear subservient to the Land of the Free.
In Chinese culture, (I can say this because I am of the Chinese race), the concept of “face” is of crucial importance. Anyone dealing with Chinese for anything should always heed my word of caution – If a Chinese finds himself in a situation where doing something will cause him to “lose face”, or to look like he has lost and has to give in to another, the Chinese is probably going to find every way not to do it. Even if there might be some benefits to agreeing with another party and acting out in both their interests, if there is any way outsiders would see the situation and diagnose that the Chinese is giving in to the other, defences will be up and mighty sky-high. However, if there was a way to put the suggestion across without making it seem that the Chinese guy is conceding to demands of someone else, but in a way that makes it look like the Chinese has decided to do something out of his own accord and graciousness, the chances of a deal happening increase rapidly.
A lot of time is wasted, because the final outcome reached might be the same if they Chinese had just conceded in the first instance, or if the Chinese decided to act in his generosity. Yet, many non-Chinese, and perhaps Westerners particularly, fail to understand this pertinent concept. In my experience with talking to Western colleagues and first hand experience in seeing the way they handle situations, I understand the they are generally more straightforward and don’t beat about the bush. They want something, they say it directly, whether or not it makes the other party look bad. In a completely Western society, this would be the most efficient and quickest method to getting things done. But in a society where the Chinese are increasingly powerful and don’t need to kiss anybody’s feet anymore, this attitude will lead to plenty of time wasting and sour relations, as news reports on deteriorating US-Sino relations have clearly shown.
It appears that Geithner may have done some studying of Chinese attitudes and what is important to them and their “face” – he seems to have chosen the right diplomatic tool this time. Will the Chinese now give “face”? The saga continues….
How long can the dollar remain on its pedestal?
It’ll be a long time before the dollar will be phased out as the world’s reserve currency. According to IMF data, allocated world holdings of the USD in 2008 totalled USD2.7 trillion, and with its nearest competitor, the Euro, only at a total of USD1.1 trillion in world holdings, it seems the USD still has a strong lead in the race.
However, if we noticed that USD holdings in 2000 was only 1.1trillion, it goes to say that in just 8 years, total world holdings of the dollar almost tripled, particularly in the period 2002-2007. before 2004, most of hte increase was attributable to advanced economies, but from 2006-2007, it was emerging and developing economies that ramped up dollar holdings. China must have played a large part in this, as it rapidly increased its holdings of US debt in those years, with at least USD1.3 trillion woth of foreign reserves, a large increase over the years in its effort to intervene in keeping its RMB currency cheap.
An intriguing point to note is the fact that after from 2007 to 2008, USD holdings by emerging and developing economies practically plateaued; while their holdings of EUR kept increasing, although at a slower pace. It was also during that period of time when China started to be more proactive in diversifying its FX reserves protfolio, and started entering into currency swap agreements with its major trade partners. In these swap agreements, China allows its the countries to which it exports to pay it in Renminbi instead of dollars.
China has made rather explicit remarks that it the dominance of the dollar as a worldwide reserve currency should and will end soon, yet there is a peculiar dilema that China is facing. As much as China would like to deviate from being overly reliant on the dollar, so much of its assets and foreign reserves consist of the dollar that dumping it suddenly and heavily will be China kicking itself in its foot. So rather than dumping, what is more sensible is exactly what China is doing – increasing reserves of other currencies by taking up debt other than from the US.
So, the shifting away from USD as the world’s reserve currency will be gradual, not overnight, but certainly inevitable. If China were to continue diversifying at at accelerating pace, then it’s uncertain how long or how quick it will take for the another currency to replace the dollar.
Gross external debt – How scary is it?
According to IMF’s guide to External Debt, “Gross external debt, at any given time, is the outstanding amount of those actual current, and not contingent, liabilities that require payment(s) of principal and/or interest by the debtor at some point(s) in the future and that are owed to nonresidents by residents of an economy. Generally external debt is classified into four heads i.e. (1) public and publicly guaranteed debt, (2) private non-guaranteed credits, (3) central bank deposits, and (4) loans due to the IMF. However the exact treatment varies from country to country.”
The US and UK come in top 2 in the competition of biggest gross external debt among selected countries. The US has been for the l2 years constantly hovering around US$14 trillion, while the the UK external debt position has decreased over the last 2 years, staying roughly at US$9 trillion since mid Q209. Further down the line are Germany and France, moving almost in tandem with each other, and since Q109 have been on the slow increased upwards, and around US$5.3 trillion as of Q309.
The next close cluster of countries in this data set is made up of Italy, Spain and Japan, which have been up and down since Q407 but staying mostly within the range of US$2-3 trillion. In the lowest rung, countries with less than US$1 trillion of debt as of Q309, in descending order are are Australia, Canada, Hong Kong, Greece, Russia, Korea, Brazil, India, Indonesia, Argentina, South Africa, Thailand.
Suddenly it appears that the most developed countries (US, UK, EU nations and Japan) have relatively alot more gross external debt than the less developed nations, which also form the emerging markets. This is an interesting observation as I had originally expected that the poorer nations would be the ones sinking in debt, and not the other way round.
Yet looking at the absolute values of gross external debt may be a biased argument. A country may have alot of gross external debt, but if measured as a proportion of GDP, it may tell us a different story. As a measure of sustainablity of external debt, this might provide some insight on the ability of a country to finance its debt and how unhealthy its external debt position really is.
Using this measure instead, we see that the UK is now right at the top (421% at end 2009), followed by, but not closely, Hong Kong at 316%. Trailing further behind is France at 200%, then Spain, Italy and Germany at 176%, 165% and 130%. So far, the results tally with the gross observations.
However, it is now surprising to see that the US, whose absolute gross external debt at Q309 was a towering US$14 trillion, has a gross external debt to GDP ratio of only 96% (compared to the UK, which was just 2nd behind the US in gross terms but as a proportion stands at 421%.) Canada is also not too far behind at 68%. The other countries in the data set (Argentina, Brazil, Chile, Greece, India, Indonesia, Japan, Korea, Malaysia, Russia, South Africa, Thailand) fall in the seemingly healthy range of 25-50% range.
The sheer magnitude of the US economy, first in the world and unrivalled even by its closest competitors, is perhaps the reason why proportionally, US external debt looks less scary than the absolute figures. However, that means the external debt from just the US alone is almost as huge as the entire American economy – Now maybe that’s something to worry about.
There is electricity in the air
What a terribly exciting month; so many things have happened in just the span of the last 5 days; the first African-American to have pushed the Americans into a land brimming with the promise on which the hopes of their forefathers banked on; candidacy that was never expeced to run among the leading; least of all to win. Yet all over the world, there has been a sigh of relief; the Asian stock markets abounded with a new life; perhaps there is hope for the economy and world politics at large?
Blame it on my lack of interest in politics in previous US elections, or blame it on my youth; but this isto me definitely a point of history in the making. Never before has globalization bonded continents across in the anticipation of one common outcome, for a country that isn’t even theirs. Africa’s heartbeat can be heard across the news wires; their celelbrations for their much supported representative Obama evident so blatant and stark; bulls reserved specially for feasting upon when Obama would eventually clear the tiles and declare a landslide victory; this was a magic moment; the one which Martin Luther King would have been so proud of he would cry tears of joy; the day of fulfilment of his dream “that one day this nation will rise up and live out the true meaning of its creed: ‘We hold these truths to be self-evident, that all men are created equal.’” and “that my four little children will one day live in a nation where they will not be judged by the color of their skin, but by the content of their character.”
There is an excitement in the air; his youthful energy and charisma seems to have charmed voters and observers in the USA as well as across the shining seas. America’s economy may be down in the dumps, and may have chain-dragged everyone else (participants and passers-by) worldwide, but the extent of the ripple effect of this historic elections has proven one thing– that America is still so tremendously important that we are all banking that we made the right decision in supporting a young, inexperienced senator with what currently seems like little more than many theories and assured calmness that he will not only weather through the stormy ride but emerge victorious. In this present time; he is a symbol of hope that many are deep down praying will not be a mirage.
Further away from the political scene, November is also a month where I rejoice for my friends around. I can’t say it till I hear it for myself, but I believe wedding bells will be ringing soon; a joyous occasion is bursting to arrive. There is a spirit of festivity in the air; an electricity to light up the world that just a little while ago seemed stale and depressed. Trust me, the world is currently less preoccupied with crazy christmas shopping that will eventually manifest towards the month’s end; right now, there are more and greater things that are happening, and all I can say is, life is for the living.
Oh oh, we’re in trouble; Is someone going to burst our bubble?
In 1997, I was in Primary 6, didn’t give a hoot about the world, nor the fact that the Asian Financial Crisis was hitting all the Asian countries in full force, wrecking havoc whose effects on certain countries like Indonesian have left them still recovering from the shock.
This year its 2007, I’m in University, and through my readings and courses as well as of course, my new interest in the world whose effect on all of us I can no longer deny, I read over and over again, about the 1997 crisis. It’s weird to read a Caucasian’s reports on the effects of the Asian Crisis, and weirder to find that it seems in the field of Asian Monetary Policy, there are more good writers from the Western part of the world than from Asian. Even my Asian Monetary Professor is American.
Apart from that brief digression, I really want to talk about the possibility of another crisis, another crash, but this time, perhaps not just involving Asia, but perhaps America (very likely) and maybe also Europe. I’m not advocating that such a scenario is good; but looking at the news everyday that mark yet another all time high on the stock exchange, in Singapore, China, and many other places, where the prices of goods are going atrociously high. In a time and age where the economy is booming, everyone is busy swiping out their plastics to make use of more and more credit, it seems the stage is set for a market correction. Maybe Crash is a word too harsh; corrrection may be more correct (pun intended).
As I mentioned a few posts ago, hedge funds are taking on dangerous amounts of debt, and together with the package, risks that they may be unable to handle. Everywhere, it seems the press is screaming with news about inflation curbing, in the USA, Thailand, China; all the Central Banks are scratching their heads over whether to maintain or increase interest rates. If you were to keep up with the news everyday, you’d realize that every country seems troubled by any news that may hint at increasing inflation, yet at the same time, investors with money to act on these news are moving capital in and out of countries, hedging their bets that these interest rates increases or decreases will move currencies and bond prices in the direction of their favour.
Everything happens so fast, many are pumping in much money and taking on leverage to accelerate the growth of their wealth. Suddenly it feels like we’re trapped in an air tight bubble that keeps getting larger and thinner. Will it be another bubble that bursts? How can we identify it? Someone wise one said that you can never identify a bubble until it bursts, but by then it would have been too late.
Alas, writing the history of the future is harder than writing the history of the past (in Eichengreen’s beautiful words). Only time will be able to unravel the mystery that has left so many worrying about.
Why America spends no end, and Asia keeps on lending
Let me be more positive: if I had an agreement with my tailor that whatever money I pay him returns to me the very same day as a loan, I would have no objection at all to ordering more suits from him.
—-Jacques Rueff (1965)
America, america,the land of shining seas?
Virtually everything has been Americanized; the TV shows and the movies that we watch, the style we dress in, the foods we eat (think Big Macs, fries and milk shakes), the songs we so easily hum to, the way we speak or have at least accustomed ourselves to, even the way we think, our culture, our tastes. The land of equal opportunity apparently didnt leave any stone unturned in its quest to revolutionize the way the world worked.
America, with its iconic Statue of Liberty as a boast of freedom and independence, and equality, of chances to start a new clean slate, has dominated every part of our lives. The US Dollar, though not as strong as it used to be, is still one of the hard currencies that everyone(almost) recognizes.
It is no wonder that Americans really believe that they can survive without the rest of the world. Generally, the impression they give is one of snobbishness, which they proclaim is innately American, because they are proud of themselves, proud of their culture, proud of any thing American, maybe, with the exception of their President.
The United States of America is one heck of an interesting nation. They advocate freedom of everything, use their flags as underwear, spend like there is no tomorrow, and borrow from their bondholders (think the Dragon of the East, China) so that they can buy from who they borrow. It’s almost impeccable that they continue to be arrogant and disregard the emerging markets of India and China.
Although, they have been aware of outsourcing to India of telephone operater’s jobs and the likes of such, Americans geenrally still look down on Asians. As biased as this sounds because I am Asian, I find it hard to contain my surprise that a nation that is practically sinking in its debt is still hard at work spending whatever they borrow away. They have to be contained by exogeneous factors such as revaluation of the Yuan to curb their unconstrained expenditure, a very worrying sign that goes deeper than just a burgeoning trade deficit.
Undoubtedly, America’s news affects all capital and financial markets in the world, and everything they do is closely watched by the world around the clock. Every word spoken by the Fed Chairman, by Bush, by Rice and every other person that is important in the States, is closely analysed and deeply pondered over by the rest of the globe. Their impact and influence throughout Asia and beyond cannot ever be denied.
Yet, with the turn of the century, and the chugging economies of Asia puffing away at an exponentially non-stop rate, the question that remains to be answered is not whether the falling Greenback will lose its grip to the Rising Dragons and Taj Mahals, but, when?
