| Dollars printed on rubber, not cotton |
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| Written by Daniel Steinmann | ||||
Page 2 of 2 As an important producer of primary products, our national
economy is massively dependent on the welfare of the Asian economies, which in
turn, exist because there are large consumer bases in Europe and the US. So
when the wheels are not turning smoothly in the US every link in the supply
chain is under strain, and that includes us.Then there is also the issue of fall-out or the so-called contagion effect. America hosts the world's largest capital markets. These markets are not bigger by degree; they are completely overwhelming in terms of the value of wealth captured in and through them. When a specific segment in the US economy hits a snag, like the mess in housing loans, then it has a direct and immediate effect on business confidence, and in particular on investment confidence. If, worse, some of the companies are significant players in equity markets and they have to write off investments and write down book valuations, then shareholders lose money and that is where severe long-term damage occurs. Once confidence in the market is lost by the small investor it takes a long time, and very positive results, before it returns. Invariably it always does, but this may take years rather than months. Therefore, it is just as important to us as to Mr Bernanke that everything possible is done to prevent the US economy from entering a recession. The problem with conventional solutions is that they often tend to postpone the day of reckoning and not to avert it. As I have stated often, the resilience of the US economy escapes conventional description, certainly in our terms. Where a consumer pool of 300 million people has reached the depth and sophistication constituted by the US as a whole, the ability to weather storms and survive difficult times cannot be captured in some cleverly designed economic graph. Yet, when a substantial number of that consumer pool is technically bankrupt, then there is the remote possibility that a recession may appear, and given the levels of indebtedness, that such a recession may spark a prolonged period of risk adjustment. This is not unthinkable. We have seen it in the Japanese economy, the world's second largest, where for more than 10 years, so-called stagflation was just the market's way of re-adjusting the risk in the Japanese banking sector. Personally, I do not think bringing US interest rates down is the right medicine. I would rather suggest they stay where they are, let the riffraff go under, and work from a healthy base in two years from now. However, my medicine will never even be considered. Why? Every four years, the Americans elect a new president, and higher interest rates for longer, is a guarantee to start a voter backlash. The stakes are simply too high to apply common sense. |
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