The daily Reckoning

verfasst von - ELLI -, 13.12.2002, 01:13

-->The Green Fields Of Asia

The Daily Reckoning

Paris, France

Thursday, 12 December 2002

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*** D's decidedly demonstrative as dollar drops...

*** How do you kick $1.3 billion a day habit?

*** The Fed confesses...hungry heifers...the market for
the next 1,000 years?...and more!


Debt, Deflation, Default, Deficits, Demographics...

The letter D seems to have ascended to one of the more, if
not the most, useful letters dominating descriptions of the
financial landscape this morning. In fact, if we were going
to play a game of financial Scrabble, rather than trying to
figure out what's going on in the markets today, we'd have
to re-assign the value of the D tile...and give it ten
points, in inverse ratio to its usefulness.

For example, the"deciduous dollar declined" yesterday
against the yen in anticipation of a report, due out today,
which is expected to show that the U.S. current account
deficit widened to a whopping $132 billion in the third
quarter.

At that rate, the U.S. must lure in $1.3 billion a day in
unsuspecting foreign capital just to keep the consumer
binge alive.

The dollar has dropped 1.3% since Treasury man O'Neill, the
administration's formerly vocal proponent of a strong
dollar policy, was shown the door on Friday. Is there more
where that came from? Probably, we suspect.

In fact, in a speech the press forgot, Fed governor Donald
Kohn all but announced on November 22nd that the dollar's
strong days are numbered. Despite verbose coverage of the
now infamous Bernanke anti-deflation speech of November 21,
our own double-D, Dan Denning, editorial sage at the helm
of the Strategic Investment, suggests that the Kohn speech
a day later may have even wider-reaching implications.

"For the most part," Mr. Kohn told listeners at the 12th
Frankfurt European Banking Congress,"the existing
distribution of the current account surpluses and deficits
among the countries of the world reflects market decisions
regarding the global allocation of capital. Evidently,
savers around the world have anticipated greater risk-
adjusted returns on their investments in the United States
than in surplus countries."

Foreign investors have effectively four choices for holding
cash reserves: the U.S. dollar, the euro, the yen, and
gold. Despite lower-than-expected returns on U.S. assets,
none of the latter three have given investors a compelling
reason to abandon the greenback.

"The surplus countries Kohn must have in mind are countries
like Japan and China," says Denning, attempting to unpack
the Fed governor's comments."China alone accounts for 21%
of the U.S. trade deficit, even more than Japan. And that's
after China raised its U.S. dollar reserves $62.4 billion
in the first 10 months of the year. Japanese dollar
reserves are up by over $60 billion in the same time. What
does this mean?"

"It means, despite acquiring huge amounts of dollar-
denominated assets," Denning answers his own question,
"these countries continue to run massive surpluses against
the United States. The U.S. current account deficit is now
5% of GDP. The rest of the world pours its savings into
America because American assets are better investments than
anywhere else in the world. But while creditor countries
send their savings to America, they neglect investment in
their own assets. Americans gorge. Foreigners scrimp.
Neither is economically healthy nor sustainable."
[See: Strategic Investment]
http://www.agora-inc.com/reports/DRI/ProfitGrow/

As we've noted in these pages, current account deficits of
this magnitude are rarely, if at all, sustainable."At some
point," Kohn admitted,"reflecting both the decline of
marginal returns as resources shift toward stocks of U.S.
capital and other durable assets and inevitable flagging in
the willingness of investors to place an ever-increasing
share of their portfolios in dollar-denominated assets, the
net flow of savings to the United States will taper off."

Your editors have been wont to ponder this very
predicament: how long, we ask ourselves day after day, will
foreign investors continue to send their savings across the
seas to be gluttonously consumed by hungry heifers in the
U.S. Now even governors at the most aggressive central bank
in economic history appear to asking the same question.

Mr. Kohn is perhaps right when he suggests there is a
dearth of alternatives to the dollar. Alas, we here at the
Daily Reckoning are always on the lookout for the
unexpected, the weird, the uncanny and the bizarre...and
so, purely for the entertainment value inherent in both,
allow me suggest two possible candidates: the Chinese yuan
and the gold dinar.

In a move bound to rival the 1985 Plaza Accords - in which
the then G-5 nations boosted the yen and European
currencies against a strong dollar - Bloomberg's William
Pesek, Jr. suggests that perhaps now is the time to boost
Chinese yuan. The yuan, pegged by Beijing at 8.3 to the
dollar since 1993, barely reflects China's ascending,
albeit deflationary, role in the global economy.

"A yuan revaluation," writes Pesek,"could catapult China's
economy past a number of the biggest. Overnight, China's
economy could arguably become larger than France's or the
U.K.'s and assume the number 4 position."

Another possibility?"The gold dinar," writes International
Forecaster Bob Chapman,"now circulates since 1992 in
Spain, Scotland, South Africa, and Germany."

In late October, Malaysian prime minister Dr. Mahathir
Mohamad agreed with an Iranian proposal to set up a
secretariat in Malaysia to use the gold dinar among central
banks of world Muslim countries. Of course, there is an
existing International Monetary Fund (IMF) prohibition on
the use of gold as a medium of payment. But"Iran is keen,"
said Dr. Mahathir,"so we might do this with them,"
effectively re-inserting gold into the world monetary
system.

The gold dinar is still a flaky proposition. Likewise a
"China Accord" forcing the yuan to float freely - thus
becoming the target of speculators - would appear to be a
net negative for politicos in Beijing. But in either case,
these possible alternatives represent the buying power of a
combined 2.4 billion people... some 30% of the world
population.

"With a total Muslim population of 1.1 billion," writes Jay
Taylor of the Gold Letter,"if even a small percentage of
Muslims begin to demand Islamic Dinars as their medium of
exchange instead of paper, it could have a dramatic effect
on the price of gold." And an equally dramatic effect on
the value of the U.S. dollar.

And on top of it all...even the Fed and the President seem
prepared to admit that the dollar, having allowed the U.S.
to live beyond its means for 57 years, has been the world's
reserve currency for far too long. Hmmmnnn...


Regards,

Addison Wiggin

P.S. You may have noticed that Daily Reckoners Bill Bonner
and Eric Fry are in absentia today. The former is on a
plane bound for Baltimore, the latter is likewise on his
way to surf and sun in Nicaragua. Not to fear, there's
always more to come...as the Daily Reckoning continues.
Marc Faber sheds a little light on Asia emerging...below...

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The Daily Reckoning PRESENTS: China, whose exports of
cheap-o gee-gaws jumped 33% last month, is already exerting
an enormous influence on the world economy. But what of the
rest of Asia? Is it the market for the next 1,000 years,
like so many seem to believe? Marc Faber, a resident of
Hong Kong for more than 20 years, suggests there's a little
work yet to be done...but the potential is enormous.


THE GREEN FIELDS OF ASIA
by Marc Faber

In the early 1990s, Asia entered a period of economic,
social, and political transition, which, in my opinion, has
begun to change the face of Asia.

In the same way that a visitor to Asia today who had last
visited the region prior to the Second World War would be
stunned by its progress and by the changes that have
occurred in the balance of power, a visitor to Asia in the
year 2010 will find a totally different economic, social,
and political landscape than the present one.

By then, a number of countries that until recently
hibernated economically under a totalitarian or
socialist/communist ideology - Myanmar, Vietnam, Laos,
Cambodia, North Korea, and China until the late 1980s - or
under policies of self-reliance and hostility towards
foreign investors - India and Bangladesh - will have caught
up with the rest of Asia, or may even have overtaken some
of today's centers of prosperity in terms of economic
development.

Conversely, some of today's"successful" Western countries
facing intense competition from these"newcomers" will
likely under-perform, or may even succumb to absolute
declines in their fortunes. This is what changes are all
about: they inevitably produce not only winners, but also
losers.

Following the Second World War, several major trends became
apparent in Asia: the end of colonial rule, the formation
of sovereign nations, and the rise of communism in
countries such as China, Vietnam and Burma. The end of
colonial rule was initially accompanied by hostility
towards the former colonial powers and a reluctance to
allow foreigners to participate in the development of the
Asian economies. The priority was to build nations, not
economic growth. Furthermore, foreign investments were for
a long time perceived as potentially destabilizing.

The end of colonial rule also shaped the political systems
of Asian countries. Since independence had frequently been
gained through guerrilla warfare or after a period of civil
strife, very close ties remained between political leaders
and the army. In order to gain independence, the opposition
armies were usually organized into some kind of a feudal
system, with each army unit having the right to collect
"taxes" from the region in which it operated. Not
surprisingly, after independence was gained, this system of
privileges remained in place, so that we still find in some
Asian countries these feudal-style political systems.

The leader of a country will assign some privileges
(monopolies, tax concessions, state loans, etc) to some of
his trusted followers (leading businessmen, influential
local politicians, and army generals), and they in turn
will give full support to the ruling party. This system
functioned quite well from 1950 up to the mid-1980s because
it guaranteed peace and stability (although at the expense
of some freedom).

Domestic stability, in turn, fostered economic growth.
Until the late 1980s, this feudal system, which
incorporated political, economic, and military power at the
top, was well accepted by the people because of the
communist threat in the region and the memory of the"evil"
colonial powers.

However, in the 1990s, cracks began to appear in Asia's
feudal systems, for a variety of reasons. More and more
countries were liberalizing their economies and moving
towards a capitalistic system with the participation of
many foreign investors in the form of direct and portfolio
investments. Free markets, capitalism, and foreign
investors undermined the power of the privileged class, as
capitalism lead to more structured political, legal, and
economic systems. In addition, as political and social
tensions eased in the Asian region - peace between
Indonesia and Malaysia following President Sukarno's"crush
Malaysia" policy in 1963, the end of the Vietnam war and
the demise of communism - governments could no longer
justify their tight controls over the economy on the
grounds of domestic security issues.

As a result, in the 1990s, Asia entered a transition phase
characterized by significant changes in the political
sphere - away from a feudal system and towards more
pluralistic societies where the rule of law was
increasingly challenging absolute state or military power.

I might add that Western countries, especially the U.S.,
supported totalitarian rule or military dictatorships in
Asia, as long as the threat of communism existed. But when,
in the 1980s, the communist threat receded and the Western
powers developed a strong interest in opening up previously
closed markets for exports, economic reforms in Asia became
a priority for the industrialized countries because feudal
systems based on monopolies and privileges were simply not
conducive to free markets and free trade. Therefore, by
pushing the Asian countries to carry out economic reforms,
the Western countries encouraged their ongoing transition
from ad hoc feudal hierarchies to more liberal and more
constitutional systems.

So far, we have seen that the demise of communism in Asia
has had a favorable impact on the region, as it has defused
much of the tension that existed as long as communism was
perceived to be a threat.

Although I am highly skeptical of the forecasts of
futurologists who write thick books, I also think it highly
probable that in ten to twenty years' time, Asia will be
far less dependent on exports to the West than it is today.

Trade within Asia will dominate, as Asia requires few
products that are manufactured in the West. Exports to the
Western industrialized nations, however, are here to stay
because of the competitiveness of Asian manufacturing and
IT services. In addition, I should like to debunk myth that
is widespread among Westerners. I am frequently told that
China and the rest of Asia still rely on Western knowledge
and technology, and that Asians aren't capable of
innovation and invention. When I hear these arguments, I
always have to smile.

The number zero was invented in India, without which
science in the West could never have progressed at the pace
it has, since Roman numbers were unsuited to complicated
calculations. Francis Bacon thought that three inventions -
paper and printing, gunpowder, and the magnetic compass -
had done more than any religious conviction, astrological
influence, or conqueror's achievement to bring about the
modern world and mark it off from the Middle Ages and
antiquity. And guess where these inventions came from?

Moreover, if I look at the achievements of Japan in the
manufacturing sector over the last 30 years or so, there is
simply no doubt that Asians can be great innovators as
well. Furthermore, in most Western high-tech companies and
leading research laboratories, we find Indian and Chinese
scientists.

All that Asia needs to do in order to really take off in
terms of its own innovations is to create a more favorable
social and political environment, which Western Europe
enjoyed from the Middle Ages and the U.S. from the 19th
century on, and which was one of the main reasons for the
rise of Western civilization.

In other words, what is really required in Asia is the
creation of the social environment and the institutions
that catapulted Western Europe from the Dark Ages to the
Industrial Revolution.


Sincerely,

Marc Faber,
for The Daily Reckoning

P.S. The demise of feudalism in Europe during the 15th and
16th Centuries was precipitated by two major events.
Innovations in the art of warfare (especially the invention
of the cannon) led to a decline in the military
effectiveness of armed cavalry - fielded by noblemen - and
to the obsolescence of feudal castles as a military
stronghold.

In addition, the rise of the merchant class along with a
money-based economy in the city-states displaced the
feudals, whose income had come principally from bartering
agricultural products and from all kinds of other
privileges. The rise of the merchant class came as a result
of technological changes which promised commercial and
industrial advantages, and the rapid expansion of overseas
trade in the 15th and 16th centuries.

Overseas trade increased very rapidly after the opening of
all water trading routes to the Far East and the discovery
of the Americas. And, over time, the rise of the merchant
class replaced the feudal political and economic system
with a free market economy and a capitalistic system.

The origin of progress and economic development in Western
Europe is extremely complex, but in essence, it highlights
what Asia still lacks to a large extent. However, I am
hopeful that the transition from the 'Asian' feudal society
I described above to a well-structured market economy and
an institutional capitalistic system, as opposed to a
feudalistic capitalistic system - such as we still find in
many Asian societies, including China - will get under way.

In this respect I am particularly impressed by developments
in Taiwan over the last decade. In 1996, the then acting
President Lee Teng-hui proved that the Chinese are not
unsuited for democracy, as was then and is still claimed
today by most of Hong Kong's leading businessmen, including
some Westerners. The elections that took place in Taiwan at
that time were a milestone in Asia's political history
because they were truly free.

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• The daily Reckoning - - ELLI -, 13.12.2002, 01:13