Hot Topic – 2009 is the year of financial imbalances

Last autumn when G20 formally met for the first time, the G20 leaders were all smiles. They were probably more aware of growing economic difficulties but didn’t address the issue like today. The leaders agreed not to impose trade barriers but all countries should export more, fully aware of the disastrous impacts of a global trade war.

It didn’t really seem like a forceful plan. The truth was that G7 hoped the new friends in the G20 family would be a market that saved G7 economies, and the new 13 members were happy because the export to the old economies stayed open.

Reality came in a bit harder, and here are a few examples on what has happened since then:

The G7 economies are bailing everything out leading to giant government bond issues. Nobody knows where it ends, but minimum 3 times last years issues is a guess. It soaks all capital up meaning it most likely moves risk capital from new economies to old economies. The enormous budget deficits are imbalances itself leading to an oversupply of government bonds, higher interest rates and possible higher inflation. This is a serious long term imbalance with US in the lead.

The above budget deficits are partly linked to increased public spending. Political thinking is also globalised as all politicians allocate the funds to sectors that support domestic demand the most. Regardless where you look it will be schools getting renovated, health care will be upgraded, we will build some new bridges and more roads. It smooth out the economic downturn but do not lead to any fundamental change keeping status quo with a risk of some of the initiatives translating into long term commitments. China will do the same, but with success, as they need infrastructure meaning that factories can move their production facilities to low cost areas. China will maintain its low cost production status and keep the enormous “China against the world” trade imbalance.

Towards the end of 2008 India increased the import tax on different metal products and last week on chemical products. During the same time they have cut export taxes on some products.

Today Russia devaluated for the 14^th time since 11^th November last (i.e. within 2 months).

South Korea fights to generate current account surplus like any other country wants to do now (doesn’t work). Partly by letting the Won slide.

Vietnam devaluated the Dong by 3% end of 2008.

Thailand and Taiwan are suddenly net purchasers of USD (to push down their own currencies).

Indonesia has introduced an import tax on several hundred products.

China has reduced the export tax on textiles. It increases the Chinese competitiveness i. e. also the global trade imbalance.

Here is a good Chinese one for you to consider. We all cheer the ongoing Chinese rate cuts but Chinese private households only have some housing related debt, they in general don’t debt finance their consumption. A rate cut do not spur private consumption (it might force private Chinese investors to buy stocks), but Chinese corporations have debt. A rate cut improves their profitability i. e. also their global competitiveness protecting their trade surplus – the very big global trade imbalance.

Then to the final, largest and growing imbalance – global production against global consumer demand. The 2 biggest demand zones in the world, USA and continental non German Europe (trade deficit areas) are seriously hit with a need of higher saving ratios, unfortunately combined with rising unemployment. It would be fatal to believe that this drop in consumer demand (plus corporate investments) can be compensated that fast anywhere in the world. The rebalancing of production is taking place now, with surprisingly deep cuts. The politicians are fundamentally fighting against this with all the rescue packages. The battle is impossible to win, it can be smoothed out but the price is a longer duration for the crisis and a giant public debt like we already are exploring.

The G20 dream of exporting more stays as a dream unless somebody figures out to export to the moon against prepayment. As I very humble mentioned after the last G20 meeting, that it looked like a very difficult task, then I can only say that the task is even more complicated when they meet again in April.

Can I point a more balanced situation out? Yes – the stock market. Due to the large sell off last year, basically caused by the above mentioned imbalances, then stocks are closer to be in balance. The very serious global imbalances will pressure stocks further, but the stock market is ahead of the curve J.

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