NationStates Jolt Archive

So, the US is stuck between a rock and a hard place, Europe is slowing down, Japan isn't greeting the news of inflation with nearly as much enthusiasm as some had initially hoped, Australia is completely dependent on primary exports, and now the increases in food and fuel prices are eating into Asian government budgets something shocking.

http://www.bloomberg.com/apps/news?pid=20601109&sid=au_OfTapVjnM&refer=home
Asian Nixonomics May Spell Subsidy-Driven Stagflation

[...]

Governments are being forced to choose between two unattractive alternatives: run up bigger deficits by continuing to shield citizens from soaring energy prices, or start to withdraw subsidies, fueling inflation and political backlash. Inflation has already reached decade highs throughout the continent and played a role in destabilizing politics.

The result will be a combination of slower annual growth, amounting to 7.6 percent in 2008, and accelerating inflation of about 6.3 percent in East Asia, which excludes Japan and the Indian subcontinent, according to a July 22 report from the Asian Development Bank. The region averaged 8.4 percent gross domestic product growth and 3.2 percent inflation in 2004-2007, according to ADB figures.

The consequences for Asia ``may prove more socially and politically noxious'' than the currency crisis of the late 1990s, says Uwe Parpart, chief Asia economist and strategist for Cantor Fitzgerald Hong Kong Capital Markets. Unlike the region's rapid recovery in 1997-98, ``there is no V-shaped exit from inflation, only a long and painful one,'' he says.

Nixon's Controls

The current Asian experience is reminiscent of the U.S. after President Richard M. Nixon's wage and price controls were dismantled in 1974. That experiment has ``gone down in history as one of the biggest failures in public policy,'' Kochhar says, culminating after Nixon left office in the country's worst economic downturn since the Great Depression.

Stagflation Asia-style would erode the economic gains that the ADB estimates have lifted 300 million people out of poverty since 1990.

Though subsidies ``may temporarily help alleviate symptoms of underlying inflationary pressures, they bypass the fundamental supply and demand balance and thus can ultimately be more costly,'' the ADB said. ``Increased food and energy subsidies erode fiscal ability to provide social protection and support for a slowing economy and reduce funds available for development.''

[...]

At stake is one of the pillars of the Asian economic miracle of the last decade. Below-market fuel and power costs made it cheaper for manufacturers in export-dependent economies to operate, giving them a competitive advantage over rivals in other markets. Subsidized prices also left consumers with more disposable income, boosting demand for goods and services.

Now, higher costs will erode the export edge. That may lead to more shuttered factories in countries such as China that already have more manufacturing capacity than they need to meet domestic and foreign demand, putting millions of people out of work.

Hong Kong companies may close 20,000 plants in the neighboring Chinese province of Guangdong this year as higher wages and fuel prices raise costs, the Hong Kong Small and Medium Enterprises Association said last month.

More unemployment and less disposable income also imperil the domestic consumption that China and other nations have been trying to foster to reduce their dependence on foreign markets.

[...]

Even after India raised fuel prices, Prime Minister Manmohan Singh's government will still pay about $42.5 billion in oil subsidies this year, more than twice as much as last year, and about six times the entire education budget.

That's robbing India of funds it needs for power and other infrastructure improvements to correct deficiencies that shave 2 percentage points from annual economic growth, the Finance Ministry estimates.

Malaysia, which spent $10.8 billion on fuel subsidies last year, has shelved $1.1 billion in public-works projects on railroads and highways.

`Got to Give'

Indonesia's government, waning in popularity, may spend as much as $22.2 billion in energy subsidies this year. That's about the same amount President Susilo Bambang Yudhoyono estimates Indonesia needs to invest annually on development programs for highways and ports. Subsidy costs may reach $33.3 billion next year.

``The social and political fabric is preventing governments from taking the next step to put an end to subsidies,'' says Vishnu Varathan, a regional economist at Forecast Singapore Pte. ``Something has got to give.''

[...]

So, I could go on a usual rant about how government interventions in the economy tend to end up like this, but I won't. Instead I'm going to ask: where do you think the world economy is heading? A financial crisis in the US hurts, but even more serious is the way it now exposes weaknesses all over the world. A lot depends on how China will deal with this, but do you think the relatively good times we enjoyed since the '90s are going to be replaced by a decade or so of hardship?

Some more stuff:
http://www.economist.com/finance/displaystory.cfm?story_id=11639442
http://www.economist.com/finance/displaystory.cfm?story_id=11750467
http://www.economist.com/world/britain/displaystory.cfm?story_id=11750900
http://www.economist.com/finance/displaystory.cfm?story_id=11751181
http://www.economist.com/finance/displaystory.cfm?story_id=11731994
http://www.economist.com/opinion/displaystory.cfm?story_id=11707471
http://www.economist.com/finance/displaystory.cfm?story_id=11622353
http://www.economist.com/finance/displaystory.cfm?story_id=11402856

Japan has inflation? I didn't know the yen could be worth any less.

Japan has inflation? I didn't know the yen could be worth any less.
Inflation isn't a direct cause of currency movements in the short term. Capital flows trying to find good returns are.

And one of the links tells you more: http://www.economist.com/finance/displaystory.cfm?story_id=11750467

Well from what I can gather, it may be good news for the US. If chinas costs of manufacturing and exporting grow, companies could very well move back over to the states to save on shipping costs.

Well from what I can gather, it may be good news for the US. If chinas costs of manufacturing and exporting grow, companies could very well move back over to the states to save on shipping costs.
These things aren't zero-sum games. If manufacturing needs to be relocated to the US, that would still make it much more expensive than it was previously before this whole thing started, so inflation is still going to hit very hard. And it's not like the US really has a structural unemployment problem that needs fixing by hugely increasing the manufacturing base.

Japan has inflation? I didn't know the yen could be worth any less.

Well, at least they haven't started printing 100 billion Yen notes to cover the cost of a loaf of bread.

:tongue:

So, I could go on a usual rant about how government interventions in the economy tend to end up like this, but I won't. Instead I'm going to ask: where do you think the world economy is heading? A financial crisis in the US hurts, but even more serious is the way it now exposes weaknesses all over the world. A lot depends on how China will deal with this, but do you think the relatively good times we enjoyed since the '90s are going to be replaced by a decade or so of hardship?



I don't understand how you're connecting the dots on the US financial crisis and rising fuel costs. Aren't the energy subsidies themselves creating this mess by inducing manufacturers to invest too much into expanding production?

At any rate, it does look like the Wal-Mart economy is in a precarious state.

Some very encouraging signs this week:

1. US has finally recognized that the GSEs are insolvent and a realistic price tag has been put on the residential real estate losses. (1.3 trillion).

2. Merril Lynch sold $30 billion of CDOs today for $6 Billion, and diluted the common 20% to raise capital.

3. NABs massive writedowns on American debt.

So the denial phase is starting to end. People are starting mark their losses, which will actually free up the credit markets as vulture capital moves in. No doubt there will be all sorts of acrimony, lawsuits, careers will be ruined and there will be prosecutions. But it is the end of the beginning.Also, there are going to be IB and regional bank failures, b/c they don't have the capital and in retrospect, some of them didn't know what they were doing w/ the RMBS market. (See Merril).

But it's good news really, because it will lead to restored confidence eventually rather than the silly impasse that has existed since Jan 2007 when the ABX started to collapse.

So where do we go? Like I said before, deflation. Because even when credit markets start to function again, it's not going to be like the 'good old days'. Consumers in the west are just not going to be able to use their houses as ATMs to buy imported toys, which is really what was driving everything this. So all of a sudden there is going to be an oversupply of almost everything. Might take another 6-12 months before the penny drops with everyone, but you just can't remove all that demand and expect commodity prices to remain high.

The whole 'inflation' thing is a non event.

I don't understand how you're connecting the dots on the US financial crisis and rising fuel costs. Aren't the energy subsidies themselves creating this mess by inducing manufacturers to invest too much into expanding production?
I would say that the fact that there is too much capacity now is made obvious by the crisis in the US and the lack of demand that follows and rising funding costs. And by the same token, the financial crisis also screws with the costs and returns from buying all those Treasury Bills for foreign reserve purposes.

That being said, you're right in that even without any crisis there would be something wrong.

<snip>

So, I could go on a usual rant about how government interventions in the economy tend to end up like this, but I won't. Instead I'm going to ask: where do you think the world economy is heading? A financial crisis in the US hurts, but even more serious is the way it now exposes weaknesses all over the world. A lot depends on how China will deal with this, but do you think the relatively good times we enjoyed since the '90s are going to be replaced by a decade or so of hardship?


Yes, I do. I think times are going get tougher and tougher for the middle class for a long time, and I think the poor are going to suffer worse than they have in maybe more than a generation.

Yes, I do. I think times are going get tougher and tougher for the middle class for a long time, and I think the poor are going to suffer worse than they have in maybe more than a generation.

The middle class is going to be decimated. But it will be okay for the poor, b/c so many middle class people will be poor that welfare benefits will be increased. There probably will be all those silly programs, like CCC and stuff, which also helps the poor.

Yay, the time of demagogues, like me, is returning after more then eighty years. *Glee of Joy*

So anyone who wants to become part of my growing following simply give me a buzz and you will have a decent position in my new world order.

*Ruffys Need Not Apply*

The middle class is going to be decimated. But it will be okay for the poor, b/c so many middle class people will be poor that welfare benefits will be increased. There probably will be all those silly programs, like CCC and stuff, which also helps the poor.

Actually, at least in the US anyway, our government is cutting welfare and social fundings in response to the economy. If the middle class will get poorer then the poor will literally have nothing to eat. It will probably remain that way until enough middle class falls below poverty themselves and can no longer blame the poor for the falling economy.

The New Deal doesn't just come out of nowhere, it takes a great depression and enough social support to make it happen. Any president who tries to do something similar right now will just be label a communist and have all his proposal shot down.

Yeah I'm just hoping it isn't going to go so far as the "Great Depression" did. I'm sad to say that most people aren't intelligent enough to pay much attention to it or not even care. I wish I understood economics more to better understand the situation but I definitely know that it isn't good.

Most likely. Just like the rapid economic growth of the 1950's and 1960's was undoubtedly involved in the stagflation of the 1970's, the rapid economic growth of the past two decades will play a role in a second area of stagflation. It takes time to bring more resources to market, and it takes time for economies to adjust to meet the new resource reality; I'd say we've only begun the process of structural adjustment, with many more changes to come.

That being said, the end result is almost always beneficial for the world economy. Just like the 1970's primed the world economy for a new phase of rapid growth, this period will play a similar role going forward towards mid-century.