Asian Stock Market Crash Trigger?, Great Depression 2Economics / Great Depression II Jun 10, 2012 - 12:05 PM GMT
Logically, a more globalized economy should generate globalized depressions as well as growth surges, that is increased synchronization should be easy to identify in the data: to be sure and certain, the exact opposite reasoning, of compensating de-synchronized regional movements in the economy is used by defenders of globalization. Today, it is Europe which is leading the OECD downward, while in 2008-2009, arguably, it was the USA but at the time the emerging economies of China, India, Russia, Brazil, South Africa, Turkey, Argentina and other large or growing nonOECD economies were completely out of phase with the OECD group, and were growing strongly.
This is no longer the case. The global economy means what the two words mean; regional movement of the economy is therefore more synchronized as the global economy integrates.
The 2008-2009 crisis and near collapse in the OECD group was handled, and is still being responded to as a monetary, fiscal, debt and deficit crisis with other economic strings attached. Called "Keynesian" by some, the response produced keynesian results - the economy stayed down as the national budget deficits and the sovereign debts increased. Inside a globalized financial trading straitjacket, speculation ran wild against any economy judged as weak - starting with the debt of the PIIGS of Europe. Each time the attacked country's debt increased even more, producing the monstrous and unreal result of Greece, today, having a nominal national debt of about 350 billion euros, which relative to national population and GDP can easily be compared with the US or Japan.
THE EUROPEAN DISEASE
Showing that firewalls and bulkheads still exist in the global finance circus, but more in the mind and less and less on the ground, neither Japan's debt nor US sovereign debt are treated as out of control, and in the Japanese case this debt is heavily domestic-owned. Instead, the almost ritual daily task of central bankers is to prevent interest rates rising for the hyper-debt countries outside the "safe to attack" PIIGS, whose debt is now a plaything of bond traders from Moscow to Manchester, but with starkly gathering risk strings attached, as shown in the case of Greece and now Spain.
More discreet and much more real, the real background music is the transfer of economic power, and hopes for global economic recovery from West to East, from Euro-America to China and India, in a process that started well before 2007-2008, in fact from the 1990s. Stock exchange panics and les crises boursieres of the 19th century, and early 20th century, were nearly always European origin before they became American origin or initiated: 1929 marked a great turning point, underlining the dominant new power of the US economy. Simply due to the intensity of the European debt-and-deficit the crisis trigger has temporarily returned to Europe, but today and rationally, we should expect "Asian signals" to rival both the US and Europe in sounding the alarm bells and sirens, when the real crash starts.
Europe's stock market crises of the late 19th century played to the background tune of power moving East-West, from Europe to the US, while inside Europe the early industrial leader, the UK, lost out to Germany and France. This model can be applied to the European-American power exchange and transfer to Asia, today.
While the Anglosaxon power transfer from the UK to USA, from the former colonial power to its former and large colony had been peaceful, the power transfer inside Europe was the stuff of two world wars and more than 40 million dead in Europe. For the Europeans, this was a zero sum game spread over a near half-century: today's outright winner is Germany alone, easily explaining its reticence to print Eurobonds and play financial firefighter of last resort.
The European disease is simple to describe. Europe could not adjust peacefully, and preferred to drag everybody down with it in all out war, posing a hugely frightening question as to whether the USA's handover of economic power to China and India is going to run using the UK-USA handover template, or the internal European power transfer model ? The potential for a zero sum game, today, is at least as high as in any other past period.
Inside Asia too, Japan's handover of economic and geopolitical power to China, and to a lesser exten to South Korea was bloody and was drawn out for decades. Today's China-India border is still the May 1963 truce line from all out war, but the chance of Sino-Indian war is very low - for economic reasons which include Asian stock market and economic integration, and the likely or highly possible coming showdown between Asia and EuroAmerica.
IS ASIA READY TO LEAD THE CRASH ?
As recently as 2007, China, the largest economy by far among the emerging and developing economies with large stock market capitalizations had a smaller total stock market cap than India or Russia. Both Hong Kong and Taiwan were then close to China's nominal stock market cap. Still today a few large or mega cap companies like Apple, Microsoft or General Electric have capitalizations close to, or above the stock market caps of whole countries like Mexico - if not Taiwan, Hong Kong or India. Today China, Hong Kong, Brazil, India, Taiwan and South Korea figure in the world's Top Twenty, but their combined stock market capitalization is far below the OECD trio of either the US, or Europe plus Japan. http://eprints.soton.ac.uk/171483/
What counts are two usually neglected factors: Asian stock exchanges dance closer to ruling political leaderships in their home countries who are in a panic mode very similar to their Western opposite numbers, than exchanges do in "the West", defined as including the US, Europe and Japan. Secondly, financial integration of Asian stock markets is today arguably at least as advanced, or more advanced than in the West despite the apparent near-total integration of US and European stock markets.
The key question of whether the Asian markets can both signal, and then lead a general downturn is already answered by history: yes. The Asian financial crisis of 1997 gripped most of Asia from July 1997, and raised fears of a worldwide economic meltdown due to financial contagion. At the time, the much smaller size of Asian stock markets, and lower integration prevented the crisis from spilling over to the west. This is no longer the case.
The crisis started in Thailand with a monetary crisis comparable with the threatened euro meltdown: the Thai baht collapsed after the Thai government was forced to float the national money, cutting its peg to the US dollar, after exhaustive efforts to support the baht's value - which had soared on the back of an unrealistic and unsustainable real estate boom. At the time, Thailand's high foreign-owned debt load made the country effectively bankrupt even before the collapse of its currency, exactly like several (a growing number of) EU27 states today, and in fact also the US, which is however saved by the sheer mass of dollar circulating worldwide. As the Thai-origin crisis of 1997 spread, it quickly triggered currency slumps, devalued stock markets, a collapse of asset prices, and a precipitous rise in private debt as institutional players shifted the pain to the public.
At the time, in 1997, the contagion effect was limited by two main factors: much lower stock market caps, and much lower financial (and economic) integration within Asia, and globally. In 1997, Indonesia, South Korea and Thailand, as well as Hong Kong, Malaysia, Laos and the Philippines were hurt by the slump but the PRC, India, Pakistan, Taiwan, Singapore and Vietnam were much less affected, although all suffered from the general economic blowback caused by the Thai crisis.
Obviously today, if the new crisis originates in China or India - which is highly possible - the spillover will be Asia-wide but we can argue, will also quickly and certainly go global.
The Thai crisis of 1997 drove up foreign debt/GDP ratios from 100% to over 180% in the four largest Association of Southeast Asian Nations (ASEAN) economies: applying this metric to either China or India, today, will be another Armageddon trigger, with a sure and certain tsunami panic wave engulfing the western exchanges - in part because of the surprise effect.
WHEN THE BUBBLE POPS
A major but yet another neglected factor driving real de facto Western - Asian stock market integration is the behaviour of western or 'global' hedge funds. Much more than the threat (or reaality) of American government debt being impossible to finance, or even the impossibility of servicing European sovereign debt (outside the PIIGS, where this is already impossible), the overstretched and underperforming, but overpromising hedge fund industry has committed itself to permanent Asian growth. Since 2008, it has blindly bet on the "Asian Locomtive" continuing to chug along on its steel rails, one way only. This growth trajectory is already over, but the liquidation of this bubble has only just seriously begun, and will continue.
One of the big reasons behind the recovery from late 2009 - for stock market players - was the flow of cheap money surging into the Asian markets from the 2008 crash on western markets. This huge financial stimulus was at least partly transformed into economic stimulus, using US dollar and European euros fleeing into Asian markets to back productive Asian assets. This time around, there is no rational prospect for that to happen: only debt can flow out of Europe, the US or Japan. One simple result is stock prices in Asia that are more tightly controlled and manipulated than any plunge protection team could ever hope for, in the West, but fundamentals are fundamentals and Asian stock markets will crack, one day soon.
For the Asian economies and completely the opposite of remaining and residual conventional wisdom in the West, the new economic fundamental is that the performance of Asian companies depends largely on the domestic demand inside their home countries - not their export performance. This is simply due to the slowdown in global (mostly western) demand since 2008, because the West is in recession and due to debt will stay in recession. At exactly the same time however, the Asian economies are themselves exposed to and grappling with slower growth, higher inflation and rising government deficits. These new brakes on Asian economic recovery and slowe Asian growth going forward are in no way simply cyclical "business cycle" problems, because the globalized economy is now a one-world structure on a likely multi-year trajectory towards slower economic growth and debt deleverage.
This time around, the crash signal can or will come from Asia.
FROM COLD WAR TO ECONOMIC WAR
Europe was the main theatre for the 1948-1989 cold war, which at many times could have gone nuclear. Instead, the Soviet Union was beaten by economic attrition, from inside and outside, heavily aided by the organized and planned collapse of oil and gas prices in the 1980s, by the 1986 Chernobyl nuclear disaster, and by Soviet defeat in Afghanistan in 1988. The defeat of EuroAmerica in the Afghanistan war which began in 2001 is now real if not publicly avowed and declared.
Today's Russia could be called a "rump empire", like the massively shunken Persian empire's rump state of Iran, but Russia is far too militarily powerful to mess around with - and is the biggest oil producer and gas exporter in the world. The Euro-American cold war, like the Euro-American war in Afghanistan, treading the same hostile plains and hostile valleys as the defeated Soviets, to the same defeat, is a stark reminder of the West's shrunken power and loss of purpose, showing that the Euro-American economic superpower started its descent - to what we do not know - from at least 15 or 20 years back in time. The symbolic role of global stock exchange crisis, this time beginning in Asia, not Europe or USA is highly suited to this backdrop.
Since the cold war finished in 1989, the world's population has increased by about 1.6 billion. Since that time, the GNP of China and India has increased about 16-fold, vastly outdistancing the now anemic and debt-crippled economic growth of the US, Europe and Japan, floundering in debt, disillusion, deindustrialization and mass unemployment. Today's commodity story is China and India: their demand sets prices at least as much, and increasingly more than the US, Europe and Japan. The simplest of figures show it: when or if China and India attain the car ownership of the Old Powers, around 450 - 700 cars per thousand population, their oil demand will literally explode. Everybody knows this, but nothing happens. Chindia's import demand for coal, metals, minerals and food can only likewise explode - unless their economies collapse or an East-West war ensues. Already today however, both China and India have geostationary satellite launch-capable missiles, able to place their ample stocks of atomic weapons on any Western capital that dared to attack them: the Opium War and the Amritsar Massacre were a long way back in history, but perhaps not in the fumbling minds of war-happy Western leaders able only to oppress the Afghan people.
The cold war between the Russian soviets and capitalist Westerners was above all manageable and predictable, except at times of near-nuclear crisis. Russia is above all a western-type caucasoid majority society and culture, with a long history of relations with Europe and America. This is not the case for either China or India, nor the cold economic and financial war that is raging, ever stronger since 2008. In no way do either China or India owe the west any favours - when the west had the whip hand on them, they were demeaned, denigrated and exploited "in the name of civilization". Their economies were put down and held down. When they have the whip hand, they may return the compliment.
THE NEXT MOVE
To be sure, the financial press - of the west - is stuffed with Asian Locomotive talk extolling the virtues of intense economic growth in emerging Asia, and other emerging countries entrained and bolstered by the world's unstoppable demand for energy, food and raw materials, industrial products, shipping, transport and heavy engineering. The industries that New Economy neoliberals, in their so-brief period of being able to grab the limelight following the west's harbinger crisis of the late 1970s, gayly called Sundown Industries: les industries crepusculaires. Exactly the industries which build and fuel the cars and airplanes they ride in, and manufacture the iPhones they babble idiot slogans into.
The lesson of keeping a tight ship was well learned and applied by China and India, although in no way can we imagine they are exempt from internally-produced economic meltdown. Sitting on either immense foreign exchange reserves, in the case of China, or large ones for India they are able to be much less than amused, and increasingly alarmed at the West's refusal to do anything about its debt-and-deficit crisis. This, through the perverting and economically degenerating power of the New Economy, is now a major business activity. Thousands of bond traders are employed each day to work their playstation gambling consoles, using the "underlying asset" of Greek, American, Italian, Spanish and other debt instruments, as well as corporate debt instruments. For the Chinese and Indians this is pure degeneracy and must stop. They have all the means - economic, financial, trade and military - to enforce this.
Much as Japan, using military force attempted to create the Asia Co-prosperity Sphere in the 1930s and until 1945, when it was hit by two atom bombs, China and India may well see themselves as forced to create a new non-Western economic alliance, of course including the Middle East and its oil resources. Above all, this new move, with sure and certain monetary handles to exclude the Toxic Moneys - the dollar, euro and yen - would seal the fate of the child-like slogan used by American and European leaders, to reassure themselves and anybody foolish enough to believe them: "China and India need us as much as we need them". Bankrupts and fraudsters issuing worthless money are needed by nobody.
They can take a look at Europe's failed single money union and walk away from it. Building a monetary union on failed economies guarantees only one result: failure. They can look at what preceded this failure - the European economic community and customs union - and see real solutions to their increasing risk of being cheated by European and American monetary deciders "pulling the plug" and devaluing much faster than their present one-only stealth mode of creeping devaluation, behind a smokescreen of bluster that fools nobody.
Installing a customs union in a non-Western prosperity sphere will avoid the impossible political hurdles that make the European sovereign debt bailout game a born loser. Today's ongoing attempt by the Merkel-Sarkozy duo to patch up a lasting solution, apart from its pathetic lifelessness, demands nearly total political union - that nobody wants. To be sure, they want German cash, but they do not want the rest, and average Germans do not want to pay for Merkel-Sarkozy grandstanding. The reality of German banking integrity and liquidity is so far from the propaganda version aired, round the clock, on government friendly TV stations in Germany and France that this basic reality barrier to European political, economic and monetary union also torpedoes the child-like notions peddled by the Merkel and Sarkozy duo, which may soon pass into the history books, on Sarkozy's re-election defeat.
Moves initiated by Chindia to stop the rot in the world's finances are now overdue. The normally subdued and insipid results of G20 meetings may soon start to show this - and sharply underline the West's lost power. Power that was lost in main part due to the West's own flirt with degenerate New Economy doctrines, and its refusal to accept that non-Westerners also want prosperity and will buy the same energy and raw material commodities that are basic to economic growth.
By Andrew McKillop
Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights
Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012
Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.
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