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International stock exchanges concluded last week on an optimistic note, which entirely ignored the accelerated deterioration of the global economic situation. As the major U.S. banks reported some good results in advance, the downgrade of the Berkshire Hathaway and General Electric ratings was less evident.
The markets completely forgot what Warren Buffett had stated last fall: "If Berkshire is not Triple A, I"m not sure which company would be." Although Buffett repeatedly warned about the major risks linked to financial derivatives, it was precisely the exposure on such instruments that caused the degradation of his company.
The crisis continues to raise doubt as to the value of any financial assets. The governmental actions to support the banking systems will not have any success, until they are put to the market test. Despite the "minor" matter of the mark-to-market, increasingly numerous economists, including Willem Buiter, formerly a Member of the Monetary Policy Committee of the Bank of England, are not happy with the slow rollout of the crisis rescue plan in the United States. "The current US administration neither thinks nor acts much, judging from the results," wrote Professor Buiter on this blog hosted by the Financial Times. He quoted an FT article which mentions that British officials were blaming the power void in the U.S. Treasury for the lack of any consensus at the next G20 Summit in London. It is particularly this power void that could benefit the United States, as it is hard to believe that a crisis caused by over-indebtedness can be cured by new debts.
The Europeans want the G20 agenda to focus on strengthening supervision and control over the financial markets, while the United States is pleading for increasing governmental spending in order to sustain the aggregated demand. Unfortunately, the resources for such sustainment are running scarce on the markets, while governmental bond issues can meet a complete lack of demand at any time.
America"s largest creditor, China, is increasingly concerned with its ability to keep making payments, judging by the recent statements by Chinese Prime Minister Wen Jinbao: "We have lent a huge amount of money to the United States. I request the U.S. to maintain its good credit, to honour its promises and to guarantee the safety of China"s assets," he said, quoted by Bloomberg.
The assurance given by the White House press secretary (i.e. "There is no safer investment in the world than the United States," according to Bloomberg) seems insufficient, as China is maintaining an extraordinary appetite for raw materials. This is only a reflection of the deep conviction that we will soon see a significant plunge of the dollar and a notable inflation surge. The Central Bank of China has forecast further increase in the price of copper, aluminium and oil in 2009. For the first time ever, China"s monetary authority also voiced their opinion on the price of gold, which they see at a new unprecedented height in the second half of the year.
Under such circumstances, the U.S. Government will have a harder and harder time to convince investors to "subsidize" their efforts against the crisis. Difficulties are going to grow exponentially when Washington decides to follow in Britain"s footsteps and start printing money to buy Treasuries.
These desperate actions to sustain the financial markets and the economy have already started to produce some "results." Henry C. Liu, the CEO of a private investment group in New York, believes that the U.S. has gone into a new phase of State capitalism where the Government decides who lives and dies.
Martin Hutchinson wrote that subsidies for failure "both deepen the recession moderately and extend its duration inordinately." Governments are incapable of admitting that the industries which once boomed only based on cheap money in an economic environment characterized by an unprecedented lending surge cannot sustain their current size. "Counterproductive economic pathologies have been encouraged, financial structures that endangered global prosperity have been bailed out and trillions of dollars have been poured into industries that obviously needed to downsize," Hutchinson wrote.
Eastern Europe is trying to adopt the same strategy, but, for some of the economies in the region, it"s already too late. In nominal terms, the Baltic States were close to economic stagnation in 2008 and, as far as real growth is concerned, even the hope for a crash landing has been shattered. After the slowdown in 2007, the economies of Estonia and Latvia simply crashed in 2008 (see chart)
Why is the nominal GDP important, too? Because it determines the capacity to pay back loans, as Reuters analyst John Kemp explained. Debt is expressed in nominal terms and a steadfast increase of the gross domestic product in current prices shows the sustainability of the loan agreements. A comparison between the growth rate of non-governmental credit and the nominal GDP between 2004 and 2008 shows that Romania is in a much more fragile position than Latvia (see table).
Growth 2004 - 2008
CreditGDP
Latvia290.1%118.5%
Estonia181.1%64.3%
Lithuania287.9%77.9%
Romania373.9%104.5%
In that case, it took a 290% lending growth over four years to produce a 118.5% increase in the nominal GDP in the same interval. The dramatic lending plunge turned a real growth of 10% in 2007 into a nearly 5% contraction in 2008. The "crash landing" of the Baltic economies is a thing of the past, as it"s just a crash now. The only thing left for the authorities to do is look for the black box.
Romania"s gross domestic product increased by 104.5% in nominal terms between 2004 and 2008. Although a two-fold increase in the GDP is impressive, it can no longer be compared to the non-governmental credit surge, which was almost five-fold (!!!). The link between Romania and the Baltic States could be much stronger than the authorities were ready to accept last summer. Under the current circumstances, any forecast becomes irrelevant because, as Chronicler Miron Costin put it, "thoughts can scare themselves."
Călin Rechea
Euro
Dolar SUA
Franc elveţian
Liră sterlină
Gram de aur
