I had a great week in the altruistic dimension of my life this week as I had the good luck of spending time with 2 persons of considerable intellectual capabilities but none of them are ladies not that I am a sexist. On a more serious note, we spoke about many things that does not interest most Singaporean which are chasing after their noble 5 Cs of which I am not at the moment. As I watch the turbulence on Wall Street gyrating up and down on both sides of the Atlantic, I begin to ask myself are there certain patterns or attributable causes and my simple mind began to wonder into dangerous water and I thought I hit on some ideas that could be novel in my limited knowledge but might have been professed by someone else before me.
The first trend is on the eastern end of the Atlantic, we began to see failures on the corporate front starting with the CDO and cumulating into the meltdown of Lehman Brothers and government funded rescue using the TARP funds as the too big to fail maxim took charge and Captain Obama even said that "...at this hour, it is not possible for the government to do too much." in his state of the union address and rallying support for the TARP scheme into
FEDS. FEDS have been pursuing a inflation targeted monetary policy since the days of Greenspan and thereafter onto Uncle Ben insisting that this is the right long term move. However, when Wall Street failure hit Main Street and the population at large like the 2 of the 3 biggest auto makers; General Motors and Chrysler sparing Ford into likely bankruptcies if no rescue plan was in place. However, on the western seaboard of the Atlantic, Europe seems to have an easier time until the PIGS ( Portugal, Italy, Greece, Spain ) suffered a sovereign debt issue.
The stark difference could perhaps due to the nature of the retirement funding. In USA, retirement is generally funded privately by companies whereas in more socialistic Europe, it is generally funded by the government. With a rapidly aging population, retirement IOUs are beginning to experience their first few years of negative cash flow as there are less taxpayers in Europe while retirement funding by companies is eroding their competitive edge in USA. I shall stay quiet on the intentions of the Singapore government but look at the trend of policy changes with regards to
CPF and also read our PM May day address more carefully and you will hear something said about CPF ordinary, special and retirement accounts. (
The Great Singapore CPF (pension) Discussion) With the post war baby boom generation hitting retirement, we have a definite Economic Tsunami at hand whether you are of monetarists or fiscal persuasion. At the end of the day, input must equal output in the long run. My view is that USA is now buffered against a sovereign debt crisis but it could be a matter of time if Obama does not practice more budgetary discipline. China is already the largest holder of American T Bills displacing Japan.
The second is the velocity in which government aid has been administered. In USA, there 9 regional Federal Reserve Banks together with the FEDS in Washington, they can make monetary policy independent of executive and political influence. In fact, The Economists once had an article on who the FEDS are accountable to. Such a mechanism, though not the most consensus seeking allows for quick and independent decisions to be made. Over in Eurozone, the
ECB is an animal with a very different DNA from that of FEDS. Decisions are made by consensus and voting by the member states whose representatives have to watch their back as they cast their vote because of the need to ensure they make the correct populist move which might not necessarily be the right for Europe as a whole. German voters are asking why must they pay for Greece's ill fiscal discipline of not keeping deficit to less than 3% of GDP if they themselves swallowed the bitter pill that followed the fall of the Berlin Wall. The Greek voters are against cut in government budgets as they feel that fiscal discipline in this economic climate is equivalent to swallowing a cyanide pill that will kill the country. Since history of money, only Argentina has defaulted as a nation and I do not think any country want to have hold the title of being runner's up chronologically. Oops, some are of the opinion that when USA axed the exchangeability of US$ for gold during Nixon's watch, it is technically a country default but I would not argue this point here.
Thirdly, US$ has existed for a long time and in my limited knowledge however the Euro was only created in recent history in 1999. The US$ was created out of necessity because of the political amalgamation of the states whereas the Euro was created as one of the many milestones that proof that a truly single European Union (EU) coined in Maastricht is attainable. Thereafter, there were some progress with two notable signs which are the creation of the Euro sans without the participation of some countries like UK and the increasing membership of EU. A monetary union without a political union is like putting the cart before the horse and it is only a matter of time before it crashes as predicted by many even before the 1999 inauguration of the Euro.
Fourthly, there has been speculation in two of the largest Euro countries why not get out of the burning house of Euro instead of trying to doze the fire. If the creation of the Euro is analogous to scaling K2, its reversal would be a taller order than scaling Everest. Although there are some automatic mechanism in place like the PIGS countries are finding it more costly to raise money through government bonds that are still denominated on the Euro, their higher CDS price would make it comparatively more expensive for Greece than for Germany to raise money using bonds. However, the spill over effects of the strength or weakness of the Euro against the major currencies will also mean that countries outside of PIGS in Euro zone are impacted by the actions or inactions of the PIGS. My prediction is that the monetary union tension would spill into the political and perhaps later the military arena with dire consequences. Although the first two world wars can be attributed to many reasons but economic tension has never been absent from this platitude of reasons for the start of both world wars.
Last but no least, the twin deficits that Obama is faced with will not disappear into thin air and it is only a matter of time before it hits American shores and pockets in a more drastic manner even if Obama believes that the entire world will share in its burden as US$ is widely held and transacted. Sanity,justice or rule of quantification (if I may borrow from my friend) will prevail finally.
Cheers,,,,,Peter Lye aka lkypeter
Safe Harbor. Please note that information contained in these pages are of a personal nature and does not necessarily reflect that of any companies, organizations or individuals. In addition, some of these opinions are of a forward looking nature. Lastly the facts and opinions contained in these pages might not have been verified for correctness, so please use with caution. Happy Reading. Peter Lye
