Lost in the pointless debate about Asia decoupling itself from the US is a discussion about how the region is really going to do it.
The way in which markets rocked back and forth in recent months dispelled any hope Asia could stand independent from events a world away. How can anyone keep spinning that myth when Asian markets are getting slammed by news from the US municipal bond market? The muni market!
Asia’s failure to decouple reflects a lack of political will. Plans following the 1997 Asian crisis to create thriving domestic markets and rely less on exports were shelved once growth returned. With the US booming in the 1990s and holding its own in the 2000s, Asia opted against messing with success.
Now, the US is on the verge of recession and sending financial contagion Asia’s way—just as Asia sent it to the West a decade ago. The US is even resorting to the kinds of easy money, bailouts, government largesse and denial it long told Asia to avoid. Enter the US election, which will toss a new wrinkle into the decoupling issue. Whoever wins in November will either usher in a change in US policies that have made the global economy a riskier place—or offer more of the same. Economic continuity is the last thing many Asians want, and that’s what they may get if Senator John McCain, the Republican front-runner, becomes president.
Cutting the cord
A victory by Senate Democrats Barack Obama or Hillary Clinton hardly means smooth sailing for Asia. Yet, a McCain White House might continue policies that have the US living perilously beyond its means and Asia hanging in the balance. That spectre should have officials in Asian capitals wishing they really had cut the US cord.
Japan’s economy is losing altitude along with the US. That belies months of reassurances by Prime Minister Yasuo Fukuda and Bank of Japan governor Toshihiko Fukui that Asia’s biggest economy doesn’t rely on the US so much anymore. From Seoul to Jakarta, there are signs that waning US demand is crimping growth. China’s 11%-plus growth is a long way from offsetting slowing US demand. Besides, China needs to slow down to tame inflation. Economic uncertainty is spreading to the point where challenges seem to be coalescing. “What do the US, Saudi Arabia and China have in common?” asks Brad Setser, a fellow at the council on foreign relations. “One answer: All have a significant population worried about how to make ends meet.” China exports lots of goods, but imports oil and grain, which are rising in cost. The Saudis are net exporters of oil, yet not everyone is sharing in the oil windfall. Those living on a constant salary are facing ever rising prices and a currency pegged to the sliding US dollar.
In the US, polls show rising prices of basic necessities are households’ biggest economic concern, Setser points out. Not the credit crunch, not the budget deficit, not falling housing prices. Rather, it’s the rising price of things like takeaway pizza and basic groceries.
Accelerating inflation is complicating global turmoil that began in the US subprime market. None of this will change if the US doesn’t rein in its deficits and learn to rely less on foreign capital. That also means avoiding a Japan-like funk caused by government denial and a compliant central bank that cuts interest rates to paper over economic cracks.
It’s raising eyebrows in Asia that the man who helped get the US into this bind, former Federal Reserve chairman Alan Greenspan, favours McCain’s economic policies, while criticizing Obama for taking “anti-competitive” policy positions.
So, let’s get this straight. Voters are supposed to care what the man who helped create the bubbles wreaking havoc in global markets and essentially gave the Bush administration the green light to push through massive tax cuts the US couldn’t afford says about the election. By putting his weight behind McCain, Greenspan is merely supporting more of the same debt-and bubble-fuelled excesses behind today’s problems.
Few policymakers would welcome a situation where wages lag behind productivity gains. In their efforts to boost demand, the temptation will be great to keep interest rates excessively low, enabling households to spend more. That’s just treating the symptoms of the US’ problems—with gimmicks such as tax rebates—not the underlying sickness.
Clinton, McCain or Obama may also be tempted to cave in to pressure for a trade war with China. Its undervalued currency, tainted goods and worsening pollution are valid complaints. Yet, the bigger issue is American complacency.
The US needs to work harder to prepare its workforce for a global economy in which developing nations are now competing with the West. That’s the best way to narrow the widening gap between the haves and have-nots, not slapping tariffs on China.
With investors turning sour on the dollar, oil prices surging, and markets in turmoil, the US should get its economic house in order. Whether it does or not, Asia needs to get serious about distancing itself from the fallout. Bloomberg
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