Getting Excite

Excited Over the Growing Russian and Chinese Economies?

Russia and China’s economies are on the rise, and it certainly will become much more significant to the global economy with each passing day. It surprise me when I hear that people are getting excited about a more dominant Russian and Chinese economies because it can then take up more of the global burden held by the US. Consider this, what is different between Latin America and the US economy that allow the US to have deficit of up to $8 trillions dollars, and not crumble? The US is a unique market in that it is a strong and growing market, even in the faces of such a deficit, and it is a highly dependence upon economy by the rest of the world. The US economy not only draw in investor globally, new and old, but it stands as a symbolism for global capitalists. A fail US economy would leads to worldwide disaster, and it is in no one true interest to see a faltering US economy. The uniqueness in how important the US economy is to the world had, in the past, allowed the US to live way beyond its limit. What does a growing Russian and Chinese economies mean for the US then?

First, lets look at an important case in economic development concerning Japan. The Japanese Keiretsu system had, in the past, been accredited to Japan’s success as a developed economy, uniting Japanese culture with business and work. However, the Keiretsu system, like its predecessor the zaibatsu, is a very uncompetitive system that allows for heavy investment into research and development by eliminating competition from the market. This gave Japan a great advantage in rapidly developing itself as a global economic power, and made it one of the most important economy in East and Southeast Asia. This, though, mean that the Keiretsu system is a very inefficient system that does not work well against competition as Japan is starting to find out against Korea and Taiwan.

What had allowed Japan to became so successful in the past waas not so much its economic system, but instead, it was due heavily to the lack of competition in Asia when Japan economy started its boom. Without the option of going elsewhere for the value added good , especially in the area of electronic, Japan made itself into a niche market in the Region.

How does this all applies to the US situation? The US is, like Japan, a niche economy. The US strong stable growth, its size, and its symbolism serves to give it huge global market power, demanding investment from people everywhere, and at the same time, preventing run even in the faces of any bump in the road. Consider that there really is no alternative to the US market in the past, and it is such a large and important market that, like old industries, most investors feel safe enough about any turmoil that the US can recover, and the US had always recovered; the US is extremely special. However, that special-ness is not going to last.

As China and Russia grow, like the growth of Korea and Taiwan in Asia, they become alternative to the US market as Korea and Taiwan became alternative to Japan. When the US economy look weak, there will be alternative, and this will, I repeat, will hurt the US economy as a whole. If you had been reading my articles up to this point, you will know that I had been saying all along, the US have been living way beyond its mean, and the world eventually will have the option of closing its wallet when it see fit to do so. The World Bank and the IMF had been worries about its relevancy in the coming future concerning global economic, while I on the other hand see that they will be facing the greatest of challenges their institution had ever face in the coming future, and their relevancy will be determine by how they will handle something as big as the US. The scary thing about this situation is that it is only a backdrop to other glooming threat to the US current economy: increasing foreign holding of US debt, larger and larger trade deficit, energy crisis, sub-prime lending, unstable wall-street, and a war with a myriad of other things. I believe we are at a turning point in history, and I’m just hoping for the best right now.

On the Road to Recovery

In the face of a flue like economy, the Dow Jones passed 14000. Why is that? Consider this: real estate is a way of storing wealth, but when signs point to a devaluation of said wealth, any economic agents would try to move that wealth to something better, in most cases, it is either money, or stocks and securities. So, which would it be?

With a weaken economy, holder of US currency, formerly a great way of storing wealth, might not want to hold US dollars. With over 50-70% of held currency being held by people outside of the US, an expectation of losing value would lead many to run for better harbor. This would creates a shift in demand for money downward, creating the lose of value that was expected, which would then creates a vicious cycle. The intensity of the lose is dependent on how people adjust their expectation as they read the market and compare it to their own experience. This is good for the US because the US economy is big, and it had preformed admirably in the past, which would greatly dampen the intensity of expectation. Nevertheless, people will see that money value is dropping, and money demand should still shift downward. In other word, having to choice between storing one’s wealth in stock or in money in this situation, it seem obvious which is the the better choice. Adding to that the rate cut be the Fed help in providing more credit to the market as a stimulus, the stock market seem a good place to move to.

This situation then would help to provide some positives to our ailing economy. For starter, to any observer, it is clear that the US has benefit much from global trades as it allows the US to live way beyond its mean; however, in doing so, the US had built up a huge trade deficit that would someday become unsustainable. The drop in the value of the dollar relative to other currencies should helps to increase US export and decrease US import, a first step toward balancing the trade imbalance.

Secondly, our stock market had be a little more than volatile in recent months, and it need stabilities for our economy to recover to good health. The credit influx into the market, because there really is no where else to store it, should help our market recover. Added to that is the descrease in financial confidences due to the subprime mortgages and increasing rate of default, a strong Wall Street should help in restoring some confidences.

Thirdly, the current turmoil will help to teach lenders to be less complacence and to be more responsible with their lending, and to rely on more than just the market to tell if someone is going to be a good borrower. It is true that as lender, one must lend money with incomplete information of the borrower; hence collateral help to make the lending less worrisome. However, as real estate value increase, more collateral become available, which lead to more lending, which will help to increase demand on real estate; resulting in a vicious cycle that lead to a bubble. This is why lenders must not become complacence and to learn to step back from the market to see what is developing, and sometime to slow down lending before it actually become a problem like it already have.

From my point of view, I think the US economy is in a good position to recovers before any real recession take root, and at the same time it will become a stronger economy. However, the key to recovery still remain in restoring confidence in the market, especially the financial market. But, this is not a new path that America now faces as the story is very similar to the 1990s, and again, the US will recover.