The economic trauma in the West is merely part of a painful but healthy rebalancing of the world economy
By Steven Ooi
Full-time English/GP tutor
For enquiries, click ‘About the Tutor/ Testimonials’ above
In recent years, there has been a pall over financial markets and economic reports because of the massive financial difficulties that have beset two juggernauts of the world economy: the United States and Europe.
Europe is mired in a government debt crisis that has seen Portugal, Ireland and Greece receive bailouts, while the governments of Spain and Italy have teetered on the edge of financial collapse. The US government is in debt to the tune of over US$16 trillion and the country is facing a “fiscal cliff” at the end of this year when the Bush-era tax cuts will expire and deep government spending cuts agreed between the two main political parties will take effect, which threaten to plunge the weak US economy into recession.
While the headlines and the world’s attention are focused on the gloom and doom coming out of the West, something interesting is happening in Asia: emerging nations like Indonesia and the Philippines are seeing strong economic growth of over 6%. China, despite the strong headwinds from dwindling export demand from the US and Europe, is still growing at over 7.5%.
Furthermore, the governments of these Asian countries are mostly in a very sound fiscal position and are able to spend to stimulate their economies in order to offset the effects of slowing export demand from the West and maintain healthy economic growth. China, for instance, has just announced a RMB1 trillion (US$158 b) package of infrastructure projects.
Instead of viewing the recent economic headlines as all gloom and doom, could we not see what is happening as a healthy rebalancing of the world economy?
For decades now, the US has been running gargantuan current account deficits and European nations running gigantic budget deficits, while Asian exporters like China ran huge surpluses and propped up the Western nations by buying their government debt (ie lending them money so that their economies wouldn’t collapse and they could keep buying our products). Many Asian nations have been grossly overdependent on exports to the West for years.
In other words, Asian countries have been thrifty and hardworking so that we can save money to lend to profligate, self-indulgent, financially insolvent Western nations in order that they can keep buying our stuff. It’s like a shopkeeper who keeps on lending money to his heavily indebted customer so that the latter can continue to patronise his shop. The absurdity of this situation should not escape anyone with two brain cells, but somehow eminent economists and politicians have conspired to keep this farce going for years.
It should also have been obvious to anyone with two brain cells that this situation was unsustainable. And so it has proven.
I believe that the traumas and upheavals the world economy is witnessing now are, to a large extent, merely the painful, inevitable, and ultimately healthy unwinding of its massive imbalances accumulated over decades. The West will learn to be more thrifty, responsible and prudent. Asia will learn to depend more on its own consumers and enjoy life more instead of living so frugally in order to feed the overfed Western consumer. And life will go on. Perhaps this is food for thought for investors who have let the negative headlines frighten them excessively.
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