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Thread: As U.S. Sinks, Asia Unable To Swim

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    As U.S. Sinks, Asia Unable To Swim

    As US sinks, Asia unable to swim

    http://www.atimes.com/atimes/Asian_E.../IH24Dk01.html

    By Walter T Molano
    8/25/2007

    The US economy is down by the bow, and the prognosis does not look good. The final outcome is inevitable, and no one (outside the United States) is really surprised. However, how does Asia avoid contagion?

    At the current moment, the US represents almost half of global demand - which is disproportionate with its percentage of the global population. Unwilling and unable to help itself, the US is beyond repair. Asia tried to help out as much as it could, mainly by providing ample financing. However, Asia now has to live with the grim realities that lie ahead.

    From a non-Asian perspective, this is a perfect opportunity for the region to catapult ahead. Young, well educated and vibrant, Asia is poised to take the poll position of the global economy. The easiest way to do so would be for China to allow full convertibility of its currency, the yuan. With the stroke of a pen, the US dollar would collapse and the United States would become completely irrelevant.

    At the same time, China, along with most of Asia, would become the dominant sources of global demand. Unfortunately, there is reluctance in Asia to assume the global leadership position.

    At first glance, full yuan convertibility would be a win-win combination for China and the world. The massive appreciation of the currency would increase the purchasing power of hundreds of millions of Chinese consumers, along with many millions more in the surrounding countries. The Chinese economy would absorb much of the slack created by the deceleration in the US.

    It would also result in a dollar-denominated surge in commodity prices. Such a move would have an inflationary effect, since the dollar price of Chinese exports would also rise. Nevertheless, a steady-state equilibrium would soon be established as currencies around the world readjusted themselves to the yuan peg. The improved purchasing power of the Chinese consumer would allow the proliferation of services, producing employment opportunities for displaced workers.

    Of course, such a move would have a devastating effect on the value of China's international reserves - since they are mostly US-dollar-denominated. Yet this would be a small cost to bear for the accelerated development China enjoyed during the past 15 years. Although this scenario should be appealing, it is considered to be a political anathema.

    This is where China's political and economic systems conflict. Although the Chinese Communist Party (CCP) countenanced the nation's move to a market-based system, the two were inherently conflicted. Market systems are established on flexibility and choice, which is the reason they are accompanied by democratic political regimes. Communist systems are built on political control and direction. The party decides what is produced, and how it is done. It decides the allocation process.

    The move to a market-based economic system eroded the CCP's political base, but it retained one essential element of control - the flow of capital. Through the use of capital controls, the party retained influence and an overriding veto over all economic activity. Therefore, full convertibility would result in the party's irrelevance and eventual demise.

    To a lesser extent, this view is shared across the semi-authoritarian regimes of Southeast Asia, such as Malaysia, Thailand, Indonesia and Vietnam, where the use of capital controls is akin to political power. Therefore, what will Asia do to limit the fallout from the US debacle?

    Asia knows that it has to boost its level of domestic demand to offset the calamity that is unfurling across the Pacific. Although Asian economies are muscular and fit, sporting large current-account surpluses, hefty international reserves and low levels of debt, they are still dependent on external sources of demand to off-take their domestic production. A downturn in global demand would soon result in slower economic growth and higher unemployment.

    Nevertheless, full convertibility is not in the cards. Therefore, Asia will suffer from the US malaise. There are signs that the central banks will allow a faster appreciation of the regional currencies against the dollar. These measures will help commodity prices and alleviate some of the global slowdown. But they are not enough, and they still leave the region vulnerable to a cataclysmic event on the other side of the Pacific.
    No One Knows Everything. Only Together May We Find The Truth JG


  2. #2
    AuGmENTor Guest
    All part of the master plan.

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