I was in Jakarta this week attending an IMF-Bank Indonesia conference on the Future
of Asian Finance, the title of an International Monetary Fund (IMF) book launched last
week with essays by IMF experts reviewing the lessons from the past and sketching
how Asia can build its future, with a supportive financial system.
This is a very useful book, because it contains massive amount of helpful data and
analyses for Asian policymakers to strategise how to respond to the current
turbulence.
This weekend, the G20 Finance Ministers and central bank governors are meeting in
Ankara, as Turkey takes the chair of G20 Presidency for 2015, with the key
objectives of: strengthening global recovery and lifting potential; enhancing
resilience; and buttressing sustainability.
Unfortunately, the current environment is heading in the opposite direction.
In the IMF Note for the G20 Meeting assessed that global growth for the first half of
2015 was slowing; financial conditions for emerging market economies have
tightened; and risks are tilting towards the downside.
My interpretation is that basically what the IMF is saying is that if we are not careful, a
perfect storm may be looming.
Understandably, the fund called for strong mutual policy action to raise growth and
mitigate risks. The real problem is that G20 members’ policy actions are likely to pull
in different directions.
Sept 15 will be the seventh anniversary of the failure of Lehman Brothers, a landmark
event, which triggered efforts to prevent global collapse that set up the greatest
financial bubble in recorded history.
In the first half of 2015, almost every country witnessed record peaks in their stock
markets, bond markets and real estate prices.
Given the fact that most countries are still slowing or having modest recoveries, this
bubble has been pumped up by advanced country central banks in an activist
monetary gamble called quantitative easing.
Indeed, the McKinsey Global Institute has warned that global credit and leverage is at
its highest ever, and despite much soul searching about the need for macro-
prudential regulation to prevent bubble risks, there has been not much deleveraging.
We have the odd situation whereby the governor of the Bank of England, currently
chairman of the Financial Stability Board, warns about real estate bubbles, but hasn’t
dared so far to raise interest rates in his own country.
The Fed has also anguished over whether to raise interest rates this month or in
December. The polarity of debate is astonishing.
There are those who say that the US economy is now strong enough to take a 25
basis point interest rate increase, whereas authoritative figures like former Treasury
Secretary Larry Summers have argued that another round of QE4 may be necessary
to prevent “secular stagnation”.
When the Chinese authorities intervened in the A share market in August, the
Financial Times and Wall Street Journal revelled at China’s debacle, only to wake up
after their own markets, Dow, Nikkei and German Dax, witnessed the largest drops
since 2011 after the announcement of the yuan devaluation of only 1.9%.
People in glass houses should not throw stones at each other, forgetting that other
people’s misery, mistakes or misfortunes rebound on oneself.
The markets are not wrong to be nervous. The current global slowdown and
turbulence is not the fault of any single country, but the result of a highly fragmented
international financial system (IMS) being buffetted without a single monetary
authority, fiscal authority or regulatory authority.
We have moved from a unipolar world to a multipolar casino where no one is fully in
charge.
The IMS fragility stems from the fact that its inherent trade and debt imbalances,
swing periodically to excesses without a coherent or single mechanism to control or
moderate them.
Remember, the IMF is not the world’s central bank – that power was assumed by the
leading sovereign central banks, particularly the US Fed.
In 2005, then chairman Ben Bernanke complained that the Fed was losing monetary
policy effectiveness because of excess savings by the surplus countries, notably
China and Japan.
The United States can run ever larger trade deficits, because surplus countries are
more than willing to hold dollars in their foreign exchange reserves.
The 2007/2009 crises erupted when the trade imbalances generated a second order
imbalance with the United States and European banks expanding credit both off-
balance sheet and off-shore in dollars and euro.
The complacency of their regulators allowed these banks to be excessively
leveraged. Threats of raising interest rates caused a market reversal and illiquidity,
leading to a crisis of confidence and collapse.
Seven years later, the advanced country central banks and regulators again crow
that they have “fixed” the problems, but the markets are as fragile as ever.
They are held together because the central banks have emerged as not only lenders
of last resort, but buyers of first resort at any sign of market tantrum.
The stark reality was that it was China’s massive reflation in 2009 that reduced its
current account imbalances, increased commodity prices and pulled the world out of
recession.
But that was at a cost of a huge internal credit binge. Now that China has taken a
pause in growth and attempted to correct its internal imbalances, the rest of the world
is taking fright.
When the underlying imbalances are correcting as is happening now, there are no
excess savings and no excess credit – only the prospect of higher interest rates. And
higher interest rates mean the pricking of the global asset bubble.
In short, before 2007, the world was a four-engine jet, propelled by the United States,
Europe, Japan and the emerging markets, led by China.
After 2009, when Europe and Japan slowed, it was a two-engine jet, with China
helping the United States sustain growth and currency stability.
Since the United States and Japan are hesitant to want China to join the special
drawing rights club, that second engine is being recaliberated.
The world is now flying on one engine, the United States and US dollar.
With a strong dollar and growing fiscal and trade deficits, small wonder that the
markets are debating whether that engine is flying on empty.
And what is the Future of Asian Finance? Watch this space next.
Andrew Sheng comments on global issues from an Asian perspective.
A version of this article appeared in The Star Online, 5 September 2015
|
|
