Issuu on Google+

STRATEGIC ISSUES FACING ASIA

Asia’s Century: The American Credit Crisis & the Re-emergence of China and India! Dr. Julian E. Gaspar, Executive Director Center for International Business Studies, & Clinical Professor of International Finance Mays Business School Texas A&M University College Station, Texas 1


The American Credit Crisis – What Really Happened? Understanding the Causes & Consequences

2


U.S. Structural Imbalances: Living Beyond Our Means U.S. private consumption binge (driven on credit) reached an all time high Correspondingly, U.S. personal savings (as a percentage of disposable income) was low (~0%) Excessive leveraging by U.S. hedge funds, private equity firms, investment banks and corporations Lax underwriting & credit rating standards, followed with massive debt (mortgage, credit card, autos, etc.) securitization. Prolonged “deregulation” initiated in 1980 during the Regan Administration under the disguise of encouraging financial sector “innovation” eventually led to the creation of a fragile financial system that was almost like a house of cards. 3


U.S. Structural Imbalances: Fiscal & Current Accounts U.S. budget deficit under the Bush Administration was alarmingly large caused by a combination of ill-conceived tax cuts on the revenue side and the “wages of war� on the spending side Massive spending, hence imports, contributed to unsustainable levels of current account deficits --in U.S. balance of payments The need to finance the twin imbalances (deficits) above has led to serious dependence on foreign savings (from Asia in particular) In summary, U.S. consumers, corporate America, and the federal government were all binging on credit and living beyond their means for a very long time. But, other countries (e.g., China, Japan, Taiwan, Germany, Saudi Arabia and other oil-rich Middle Eastern countries) were willing to finance such behavior 4


Financial Sector Shortcomings: Inadequate Regulations Deregulation of financial sector that began under the Regan Administration (Greenspan Fed) accelerated during the Clinton and Bush administrations with the repeal of Glass-Steagall Act Greenspan Fed’s prolonged loose monetary policy since the implosion of the dotcom bubble in 2000 increased the availability of cheap credit that encouraged excessive, non-transparent, and lax attitude toward risk taking [hedging?] by financial institutions Excess liquidity also compounded speculation (in the real estate and commodity markets), encouraged lax lending policies, increased leveraging, securitization (of US subprime mortgage loans sold domestically and abroad to banks, investors, and hedge funds), and unregulated growth of credit default swaps Consequently, inflationary pressures led to rising interest rates, resetting of adjustable interest rates mortgages, increased foreclosures, bursting of the housing bubble, CDS market, and start of the credit crisis 5


American Economy at Risk 72

U.S. CONSUMPTION BINGE

70

U.S. Personal Consumption Expenditure: % of GDP 1960-2010

68 66 64 62 60 1960

1970

1980

1990

2000

2010

2020

6


Scale Matters ($ Billions)

2000.0

Consumption Share of GDP

Private Consumption 2008

0000.0

80.0

70.6

70.0

8000.0

57.5

58.6

57.2

60.0

6000.0

50.0

4000.0

40.0

2000.0

30.0

0.0

20.0 U.S.

Euro Zone (16)

Japan

India

China

30.4

10.0 0.0 U.S.

Euro Zone (17)

Japan

India

China

Source: World Bank, World Development Indicators, 2011, Structure of Demand.

7


8


Wages of War

Tax cuts and military spending (for operations in Iraq and Afghanistan), bailouts and stimulus packages have increased the federal deficit.

U.S. Budget Surplus / Deficit ($ Billions and % of GDP)

9


10


11


The Dollar has Fallen most against the Euro... €/$ 120

1.20

110 0.90

100

90

Real Effective Exchange Rate

0.60

Dollar exchange rate and indices (rebased)

0.30 80

70 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

0.00

Source: International Financial Statistics, Yearbook 2011 ‐ IMF

12


... with no sign yet of reductions in global trade imbalances

500.0

Current Account Balances In Billions of Dollars

China Germany

300.0

Japan 100.0

-100.0

UK

-300.0

US -500.0

-700.0

-900.0 1995

1998

2001

2004

2007

2010

13


United States:  Gross Federal Debt ($ billion and % of GDP) 

14


U.S. Gross Federal Debt by Administration ($ Billions and % of GDP)

15


16


17


18


19


20


21


The Credit Crisis and Corporate Bailouts Concern over financial sector systemic risk and its impact on the real economy Public outrage over financial sector’s privatized profit and socialized risk Introduction of prudent financial sector regulations and supervision (back to basics?): lending standards, leverage, securitization, corporate compensation, and proprietary trading Corporate bail-outs: commercial banks, investment banks, insurance companies, and auto manufacturers? Too large to fail? Lessons for Emerging Market Economies: Financial sector liberalization should be gradual and well thought out with enforcement of prudent regulations that prevent excessive risk taking by financial institutions. Mimicking developed economies may not be appropriate nor will “open� financial systems be appropriate for emerging market economies in Asia.

22


Consequences of overindulgence in the U.S. Over dependence on foreign savings to maintain U.S. economic growth Gradual move away from the dollar to euro, yuan and gold as choice international reserves Private capital will flow to emerging markets and propel growth Inflation potential and rising interest rates could lead to economic stagnation in the U.S. Income inequality in the U.S. is likely to continue rising Asia’s economies could emerge as strategic competitors to U.S. as our investment in higher education and health care deteriorate along with the shrinking size of the middle class. 23


Capital is flooding into emerging markets‌ Emerging market equities (rebased in local currencies, 2001=100)

‌forcing countries with dollar pegs to increase reserves International reserves rebased (2000=100)

24


Currency composition of developing countries’ reserves 80%

70%

% U.S. Dollars

60%

50%

40%

30%

% Euros

20%

10%

0% 1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

25


Income Distribution 

26


Income Distribution  1990 ‐ 2006

27


Financial Times: April 13, 2012

28


Financial Times: April 13, 2012

29


Tax Loopholes: The High Cost of U.S. Tax Breaks

The Economist, The high price of tax breaks, April 28, 2012, p.32

30


What Next? Structural Adjustment Policies (Austerity)!

31


32


APPRECIATING ASIA’S DIVERSITY A.

Political Systems

1.

Authoritarian/Military Regimes

2.

Benevolent Dictatorship

3.

Communism

4.

Democracy

33


APPRECIATING ASIA’S DIVERSITY B.

Social Systems

1.

Closed Societies

2.

Controlled Societies

3.

Open Societies

34


APPRECIATING ASIA’S DIVERSITY C.

Religious/Cultural Spectrum

1.

Buddhism

2.

Christianity

3.

Hinduism

4.

Islam

5.

Shintoism

35


APPRECIATING ASIA’S DIVERSITY D.

Economic Systems

1. Command Economic System 2. Free Enterprise System 3. Micro-managed Economic System 4. Transition Economic System & State Capitalism

36


E.

Demographics (2009)

Pop. (m) World 6775 Asia 3724 Japan 128 China 1331 South Korea 49 India 1155 Indonesia 230 Singapore 5 Kazakhstan 16 United States 307

GNI ($T) 59.2 15.0 4.9 4.9 1.0 1.4 0.47 0.19 0.11 14.2

GNI (PPP$T) 71.8 23.6 4.3 9.2 1.3 3.8 0.86 0.25 0.16 14.0

37


World’s Ten Largest Economies: US $ 2009 Country United States

GNI (billions)

% of World GNI

Population (millions)

GNI per Capita ($)

14,234

24.1

307

46,360

Japan

4,857

8.2

128

38,080

China

4,856

8.2

1,331

3,650

Germany

3,476

5.9

82

42,450

France

2,751

4.7

63

42,620

United Kingdom

2,558

4.3

62

41,370

Italy

2,115

3.6

60

35,110

Brazil

1,564

2.6

194

8,070

Spain

1,476

2.5

46

32,120

Canada

1,416

2.4

34

41,980

59,162

100

6,775

8,732

World

38


World’s Ten Largest Economies: PPP Basis World's Ten Largest Economies: Purchasing Power Parity (PPP) Basis* (US$2009)

Country United States China Japan India Germany Russia United Kingdom France Brazil Italy European Union (27) World Total

PPP GNI** (billion US$)

% of World PPP Population GNI (million)

PPP GNI/capita (US$)

14,011 9,170 4,265 3,786 3,017 2,599 2,217 2,191 1,968 1,919

19.5 12.8 5.9 5.3 4.2 3.6 3.1 3.1 2.7 2.7

307 1,331 128 1,155 82 142 62 63 194 60

45,640 6,890 33,440 3,280 36,850 18,330 35,860 33,950 10,160 31,870

15,590 71,774

21.7 100

497 6,775

31,368 10,594

Source: The World Bank, World Development Indicators 2011, pp.10-12. *PPP conversion factor is the number of units of a country's currency that is required to buy the same amount of goods and services in the domestic market that a U.S. dollar would buy in the United States. **GNI is the total value of goods and services produced by a country plus net receipts of employee compensation and property income from abroad.

39


World's Ten Largest Economies: PPP Basis (US$2009)

1 2 3 4 5 6 7 8 9 10

Country United States China Japan India Germany Russia U.K. France Brazil Italy European Union (27) World TOTAL

Real GNI PPP GNI Growth PPP GNI (billions) 2009-2020 (billions) 2009 p.a. est. 2020 14,011 2.20% 17,800 9,170 8.00% 21,381 4,265 1.50% 5,024 3,786 7.00% 7,969 3,017 2.00% 3,751 2,599 5.00% 4,445 2,217 2.00% 2,757 2,191 2.00% 2,724 1,968 5.00% 3,366 1,919 2.00% 2,386

Population (millions) 2009 307 1,331 128 1,155 82 142 62 63 194 60

Population PPP GNI Growth Population per Capita rate 2009- (millions) ($) 2020 2020 2009 0.9% 338.8 45,640 0.6% 1421.5 6,890 -0.3% 123.8 33,440 1.3% 1331.3 3,280 -0.3% 79.3 36,850 -0.3% 137.4 18,330 0.5% 65.5 35,860 0.3% 65.1 33,950 0.7% 209.5 10,160 0.1% 60.7 31,870

PPP GNI per Capita ($) 2020 52,540 15,041 40,568 5,986 47,284 32,356 42,087 41,840 16,069 39,332

15,590

2.00%

19,384

497

0.30%

513.6

31,368

37,738

71,774

2.70%

96,215

6,775

1.10%

7641.4

10,594

12,591

Source: The World Bank: World Development Indicators, 2011, pp. 10-12 and 36-38.

40


41


Asia’s Challenge: Stability and Sustainable Growth Will the fall out of the American credit crisis and European Union sovereign debt crisis continue to encourage economic reforms (privatization, governance, market liberalization, transparency and rule of law) in Asia? Will Asia encourage domestic consumption, strengthen social programs and middle class growth or focus on savings and manipulating (weakening) currencies (like the Chinese yuan)? Will long term political stability (move toward functioning democratic institutions) prevail? What are the prospects for social unrest (caused by high unemployment, widening wealth gap between the rich and poor, lack of social safety net) and religious harmony? What is the potential for regional conflicts? Will Asia (China, India, Japan, and South Korea) decouple from the U.S. to create a multi-polar world? 42


Quotes on China and India Recalling how the Soviet Union changed, the Dalai Lama thinks for a moment how China is developing. “China is communist without communist ideology --only power,” he declares. “So logically, no future!” The “only future” for China is “democracy, rule of law, free press, religious freedom, free information. China’s future depends on these factors.” Wall Street Journal, Sep. 22-23, 07. “China is a sleeping giant. Let her lie and sleep for when she awakens she will tremble the world” Napoleon Bonaparte “(India) A billion people and it’s a democracy. Ain’t that something?” President George Bush (during 2000 presidential campaign) 43


Academy presentation 2011%20asia