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October 03 Bailout: Impacts on AsiaUS Bailout: Impacts on Asia
The world's financial systems are holding their breath on the outcome of the vote for the great US bailout. Stock markets across the world are trading on the "Ayes" and "Nays" of the USA government.
The bailout, it seems, limited only to stocks and shares when discussed outside of USA. While the USA battle is marked by the common American (main street) against the Wall street.
The bailout consisted mainly of printing money, or increasing money supply (USD) to cushion the credit crunch. The USA government will use this "new" money to buy over the bad loans from the banks so they have funds to continue with business, instead of massive writedowns, and eventual closure.
The main street is angry for having to pay for the Wall street's expensive failures, and apprehensive about a massive inflation caused by the extra cash. It may also potentially drop the value of the USD, causing lower Purchasing Power Parity (PPP) for the main street.
The credit crunch does not seem to be much of the world's concern, other than inter-bank holdings and contract businesses. A slow USA economy also means a slow world economy, as USA is the main consumer of the world's produce.
However, most of us have been distracted from the fact that being the world's largest consumer, it means almost everything, especially oil, is priced exclusively in USD. A low USD means a fall in real value of the contracts signed in USD. This will cause many forward prices to jump accordingly, even without an increase in consumption.
A spike in oil price looks to be in the making. First, to reflect the drop in the value of the USD, nominal value of oil will go up. This means inflation, for the rest of the world. Second, when stocks and shares go down, investors, fund managers, common man will hold cash, gold and oil as alternatives. This is a shift in funds from the stock market, to the oil contracts. The spiked demand for oil, will further inflate oil prices, in the short term.
With little policable minimum wage policies, Asian countries will see rising prices. Employers now faced with the credit crunch, high materials costs, have little retreat but seek to use wage to balance the book. This potentially creates a recipe for massive stagflation for Asia.
Without careful thought on how to excerise the huge bailout plan, USA may find itself again as the epicenter of a massive economic chaos, due to the USD being the currency of the world. The result may be a herculean task for the USA foreign service trying to balance a wonderful opportunity for Russia to step in as the counterweight in a world distraught at USA policies.
The bailout plan may seem to be mainly an American issue. But Asia, and Russian superpower dreams wait in the wings. October 02 Vote No for Wall Street BailoutMy perspective, in very simple illustration: A man earning $1 a month wants to buy a cup worth $2. He applies to the bank for a loan for $1.50. The bank in its greed for more interest collection, values the cup at $20 and extends a loan of $20 to the man. The interest rate is pegged to 0.1% for the first 3 years. The man happily takes the extra money. After 3 years, the bank revises the interest rate to 10%. The man is unable to service his loan anymore. The bank gets the cup. Due to massive cup sales this way, the oversupply of cups causes the cup value to become $0.20 now. The bailout means, the Government buys the cup from the bank. Now, the bank will NOT quote $0.20 or even $2 for the cup to the Government. These bankers will tell the Government, it is worth $50! This will cause long tedious negotiations, which will fail some banks in the meantime anyway. The Government will be forced to buy the cup at $25 eventually to end the long negotiations. The OVERPRICED cup will be a BAILOUT to the banks, who takes $5 more than the loan they gave out, and the economy is worse off, with inflation due to $0.20 cups priced at $25, paid for by taxpayers! |
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