Archive for the ‘sub-prime’ Category

The Coming Crisis of 2009: Some Thoughts (Part 2)

January 3, 2009

I am continuing this series in order to provoke some thoughts. In this way we might have a better understanding of the crisis that is coming to our shores.

Finance capital, monopoly capital, “hot money”. What do these all mean?

Finance capital is basically wealth producing wealth. Investors lend money for profit and it will always seek the greatest return. Monopoly capital and finance capital are similar up to a point. “Hot money” is the behavior of finance capital.

In the later stages of capitalism finance capital dominated industrial capital. The industries are now at the mercy of banks, finance houses and more lately by various kinds of funds including hedge funds. Their “worth” now rise and fall with the movement of finance capital. “Bubble”. Just like Henry Sy “earned” S1.1B in the first 9 months of the year and his fellow taipans “lost” hundreds of millions of dollars.

Finance capital can also be exported. And withdrawn. And that is the problem of national economic planners. In the development of a country more and more its planners and its legislatures are no longer the dominant factors. Their economies shrink and expand and their exchange rates change with the movement of “hot money” finance capital. The size of this money dwarfs the national savings of nations.

And that is the reason why our exchange rate is on the downslide. “Hot money” is being withdrawn. Our equities and stock market earned 30% per year from 2003 ton 2007. All because of the “bubble” created by the inflow of “hot money”.

Our local economy was not responsible for that “prosperity” (but it certainly helped Mrs. Arroyo survive). But woe to those that do not understand this kind of “investment”. They will have to be content with the 3-4% interest the bank gives for time deposits which is not even enough to cover inflation.

In the competition of nations, we will be left by Vietnam, a country ravaged by war not so long ago. Our $1B direct foreign investment (DFI) per year is but a fraction of their $7B. And we better learn how to kowtow to China which receives $1B a day at its peak. They will be our investors and buyers in the future.

How do we catch this elusive “hot money”? It is simple as long as one country’s economy can guarantee it will earn handsomely. That is why former developing countries like China and India are fast becoming powerhouses. They will not be left holding the proverbial empty bag because they have real wealth–their manufacturing sector, export market, capital market and technology is own the way to development and they can now absorb flights of “hot money”.

“Hot money” without outlet is a dangerous thing. Arbitrageurs and fund managers became too “creative” in inventing new kinds of investment vehicles and this led to the “sub-prime” woes in the US. They have to show enough “profits” so that they wont lose their (finance capital) investors. After all their earnings are based on percentage and on the rise of their own shares.

And this is the reason for the rise of Madoff schemes (seems Madoff is on the way to replacing Ponzi in the dictionary). We can just speculate how many Madoff schemes are out there in the world.

Whatever financial conflagration that will happen finance capital will find a way to seek profits in all parts of the globe. It won’t even matter if it is a conflict area, a dictatorship for as long as there is reasonable guarantee they will get their money back with interest.

So this crisis, in essence, is just a temporary thing. The world economy will “recover” when finance capital gains enough “confidence” again. But it is gullible, the suckers and the small fries that will bear the brunt of their activity.

Is this what is meant by greed?

[photo credits:huffington post, wired newyork]

Quo Vadis, US?

November 22, 2008

There is no firm estimate yet of the number of people who will lose jobs in the United States. After all, nobody assumes right now that the current economic (and not just financial) has already bottomed out. And nobody is hollering that recovery is just around the corner.

The property bubble has burst in the US. Together with a high level of personal debt done through the use of plastic cards, it has ravaged the whole economy and dragging the rest of the world with it. As they say, when the US sneezes, the rest of the world catches cold. And the current crisis seems more than a sneeze.

The plan of President-elect Obama to create 2.5M jobs is commendable. But I wonder how he will do it. Is he hoping for a recovery soon?

I remember that when the property bubble burst in Japan in the ’80s the Japanese economy sagged. It has not really recovered after that and it has to be content with a 2% annual growth for years on end. After being the world’s engine of growth in the ’70s, it has not able to regain its former lofty role.

The US was lucky in the ’80s when the ICT (Information and Communications Technologies) sector boomed and they happened to be the world’s leader in this field. “Junk bonds” and similar instruments pioneered by the likes of Mike Milken made capital available to start-ups and fueling the boom that followed.

The US also earned big in its China investments. As they say, the early bird gets the worm. US companies were able to negate the loss of competitiveness at home by shifting factories to China.

But the trouble with this relation is that is it China which earned more. Proof of this is their mammoth foreign exchange reserves which is estimated to be $1.9 trillion dollars as of last September and growing. Most of this was earned through a big trade imbalance with the US. US investments in China actually worsened this imbalance.

The US was not immediately “impoverished” since China invested the bulk of its foreign exchange reserves in the US. It has to because it is the quid pro quo for maintaining its open door to the US. This “easy money” further fueled the boom in the US. Its system was awash in cash and interests were low. Actually, bankers and investment houses were fast devising new (but dubious, it turned out) instruments to invest this money. Soon this “sub-prime” thing shot down the balloon.

China’s US investments will be severely burned by this crisis. Will they again invest as heavily as they did in the past? This is the future dance that is worth watching. Lord Chris Patten, the former Hongkong British governor, former European Commissioner for foreign affairs and now Oxford University Chancellor, has said that in the future he sees the US and China acting together to solve some of the world’s problems. And he said this even before the current crisis became full-blown.

What will be the US next engine of growth after ICT and China? I will be interested in the answer because ultimately the answer to that will determine the US’ recovery. I cannot predict if the US will hit the doldrums like Japan or it will discover a gold mine like what unified Germany found in Eastern Europe after the fall of the Berlin Wall.

Observers and planners needs to understand that the US bit the dust after its profligate Indochina wars which negated its undisputed status when Eisenhower relinquished office. I fear the US will be brought down by the after-effects of its wars in Iraq and Afghanistan. And if Nixon and Ford has the oil shock to contend, Obama now has this full-blown crisis to deal with.

Quo vadis, US?