US stimulus plan just a repeat of past mistakes

US stimulus plan just a repeat of past mistakes

By R SIVANITHY

FORMER British prime minister Winston Churchill once famously said: 'Those who fail to learn from history are doomed to repeat it.'

In trying to repair the damage wrought on the US economy by the sub-prime crisis, the American authorities may end up doing more long-term damage than good because they seem bent on following the same steps taken by their predecessors in the hope that they can engineer a quick return to how things were before the crisis erupted.

Unfortunately, there is plenty of reason to believe that the present US stimulus package could well turn out to be a disastrous mistake.

Although opinions are divided on how best to mend the US economy, there seems to be general agreement over the need to 'fix the financial markets' in order to 'get credit flowing', which will then 'kick-start the economy', as if one follows the other in logical fashion.

But should credit drive the economy, or should the economy drive credit?

In a properly functioning system, credit/money should be viewed as any other product of that economy - a commodity that has prices determined by supply and demand.

Those prices, or interest rates, are set by market forces with minimal intervention from central banks. If economic activity is robust, there will be sufficient competition for credit, which should then ensure money is channelled to its best possible uses.

The present crisis was almost a decade in the making and was founded almost entirely on easy, artificial and non-market-determined credit. It started when former Fed chairman Alan Greenspan slashed interest rates 12 times between 2000 and 2002 to near-zero to try and pump-prime America out of the dotcom recession, and it gained unstoppable momentum when the resultant lax lending then inflated a huge debt bubble whose most visible manifestation was in the property market.

This then attracted millions of low-income or sub-prime borrowers who technically did not qualify for loans but were granted them anyway because they either lied about their finances or got their bankers to lie on their behalf in order to speculate in property.

The collapse in sub-prime debt, however, was only the tip of the iceberg. According to the US Federal Reserve, total US consumer debt, which includes credit card and non-credit card debt but not mortgage debt, reached US$2.55 trillion at the end of 2007 (2008's figures are not available yet).

Savings on the other hand, are poor; in 2006, the average savings rate fell into negative territory for the first time in almost 70 years and although it has now improved slightly, in 2009 is estimated to be no more than 3-5 per cent of income - less than half the 10 per cent level it was in the 1980s.

In short, the American consumer is hugely reliant on debt but has virtually no savings.

Crucially, it is this that is the crux of the problem and arguably not the crashing real estate market; the fall in property prices only precipitated the crisis but it is massive indebtedness with no savings backup that lies at the root of the present US economic mess.

This conclusion is not new. US fund manager Robert Albertson in the Feb 16 issue of US newspaper Barron's spoke about the need for a savings, not stimulus, plan; economics professor Ravi Batra in his 2005 book, Greenspan's Fraud, warned about an impending worldwide collapse from America's over-reliance on debt; while in December 2007, Morgan Stanley's Stephen Roach said that the Fed needs to rethink its 'reckless, bubble-prone policy' and that the only hope of breaking the endless but lethal chain of inflating bubbles is by raising, not lowering, interest rates.

All of these warnings have fallen on deaf ears and instead of addressing the fundamental problem, which is the over-reliance on debt - at the very least by coming up with ways of encouraging people to save and reduce their reliance on borrowed money - the present approach seeks to get people borrowing and spending again, on the assumption that borrowing/lending leads to increased economic activity, when in reality it should be the other way around.

Standard prescription

The fundamental problem is that in the hands of officialdom everywhere (not just the US), monetary and fiscal policies are simply euphemisms for debt creation. So when a crisis strikes, the policy responses always follow the same, standard prescription: cut interest rates and keep cutting until they get to zero; print money; slash taxes; get credit flowing; put money in the pockets of the public so as to get the consumer spending again - pretty much what the present US stimulus plan aims for.

Never mind that it hasn't worked in Japan for many years and never mind that it hasn't worked yet in the US, because eventually if you throw enough money at the economy, things must surely pick up.

The problem is that even if there is a recovery later this year, it might only be a short-term, artificially inflated blip that could very well taper off quickly to be followed by an even worse downturn.

You'd have to wonder if investors know this and are very worried - Wall Street dived immediately after the stimulus package was announced and is now almost 20 per cent down since the beginning of the year.

We believe that all accepted wisdoms have to be jettisoned in favour of different, out-of-the-box solutions.

It might be that interest rates and corporate taxes have to be raised instead of lowered. Perhaps a vast, long-term plan installed to reduce the multi-trillion-dollar deficits and wean everyone off the over-reliance on credit.

Whatever the case, the US should get back to the idea of the economy driving credit, not the other way around. For the measures as they stand are nothing more than plastering over the cracks - they have been used before and failed to yield results. To continue on the same path dooms the US to fail again.

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Leading Exchanges by Market value:

  Leading exchanges by market value: 
                                Market value  Pct change  2009 
                                 ($ billion)  last 6 mth   P/E 
  1. CME Group <CME.O>                11.58     -53.1     10.6 
  2. Hong Kong <0388.HK>               9.07     -34.8     17.6 
  3. Deutsche Boerse <DB1Gn.DE>        8.80     -45.9      7.7 
  4. Bovespa (Brazil) <BVMF3.SA>       5.40     -25.0     13.0 
  5. NYSE Euronext <NYX.N>             4.39     -55.8      7.2 
  6. Nasdaq OMX Group <NDAQ.O>         4.01     -37.0     10.1 
  7. Intercontinental Exchange <ICE.N> 3.91     -27.8     10.8 
  8. Singapore Exchange <SGXL.SI>      3.36     -28.6     15.6 
  9. DFM (Dubai) <DFM.DU>              3.20     -57.8     13.4 
 10. ASX (Australia) <ASX.AX>          2.93     -18.8     14.7 
 11. TSX Group (Toronto) <X.TO>        1.82      -2.9     10.6 
 12. London Stock Exchange <LSE.L>     1.69     -52.3      7.2 
 13. BME (Spain) <BME.MC>              1.60     -22.4      8.6 
 14. Osaka Securities Exch <8697.OJ>   0.96      -7.6     13.1 
 15. Bursa Malaysia <BMYS.KL>          0.72     -22.3     28.5 
 16. Bolsa Mexicana <BOLSAA.MX>        0.37      -2.9     10.0 
 17. Hellenic Exch (Athens) <EXCr.AT>  0.35     -51.6      7.6 
 18. Johannesburg Stock Exch <JSEJ.J>  0.33     -22.6     10.0 
    Source: Reuters data 

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China warns slowdown could worsen, does not rule out rate cut

China's central bank warned the country's economic slowdown could worsen and the risk of deflation was high, in its latest quarterly report, while not ruling out further interest rate cuts. China's economy will continue "stable and rapid growth" as government stimulus measures kick in but the global economic crisis has hit hard, the People's Bank of China said in its fourth quarter monetary policy report. "(We will) appropriately use various tools, including adjustment of interest rates and banks' reserve requirement ratios, to ensure reasonable monetary and credit growth," the bank said. China cut interest rates five times in the period from September to December, with the benchmark one-year lending rate now standing at 5.31 percent, while the one-year deposit rate is 2.25 percent. The export-dependent Chinese economy , the world's third-largest, expanded by nine percent last year, the first time in six years that it posted single-digit growth. "External demand is shrinking, some sectors have overcapacity, enterprises face operating difficulties and urban unemployment is rising, while the downward pressure on economic growth is increasing," the central bank said. Weak demand means deflation is likely in the short term, but in the medium-to-long term massive injections of liquidity by central banks around the world could fan inflation, it said in the report released late Monday. China's consumer price index, the main gauge of inflation, was up only 1.0 percent in January while producer prices, which measure trends at the wholesale level, fell 3.3 percent, prompting economists to warn deflation was imminent. Deflation is a situation when a continued fall in prices encourages people to postpone buying products as they expect to get a better bargain later, but that in turn only serves to further slow the economy.

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CITIGROUP

SINGAPORE, Feb 23 (Reuters) - Citigroup <C.N> is in talks with federal officials which could see the U.S. government holding as much as 40 percent of the struggling lender's common stock, the Wall Street Journal reported on its website. Citigroup executives are hoping the talks with U.S. federal officials will result in a stake closer to 25 percent, the Journal reported, citing sources familiar with the talks. The report comes amid heavy selling of U.S. bank shares last week on fears the U.S. government may be forced to nationalise some ailing banks to stave off further damage to the economy. For story, click here [ID:nHKG310337] Below are analysts' comments on the report. *********************************************************** KU YONG-UK, ANALYST, DAEWOO SECURITIES, SEOUL: "For the government to take on a stake in a bank would mean the government itself would like to resolve fundamental problems at the bank. "But that may precede a capital writedown. We need more details on what the government will mark as losses for Citi before it buys a stake." SEAN CALLOW, CURRENCY STRATEGIST AT WESTPAC IN SYDNEY "(The report) is definitely drawing much interest, supporting S&P futures and also Asian FX. "It seems markets are taking the story on face value and pricing in the U.S. government not fully nationalising banks. Whether that ends up proving to be the case is very debatable, but for now it is helping broad risk appetite and thus weighing on dollar/Asia FX, pushing Treasury yields higher." ALEX WONG, DIRECTOR WITH AMPLE FINANCE IN HONG KONG "The news itself is hardly positive, if anything it is indicative of further weakness in the financial markets going forward, but at least now investors know the extent of the damage that will be done in terms of equity dilution." STEPHEN ROBERTS, ECONOMIST AT NOMURA, SYDNEY "This still maintains a high degree of uncertainty regarding the financial rescue package from the United States. It is reasonable enough to expect markets to remain volatile and my suspicion is the rise in risk appetite that we are seeing now could peter out in the U.S. session as it will not be taken very positively." TONY MORRISS, SENIOR MARKETS STRATEGIST, ANZ INVESTMENT BANK, SYDNEY "It's a sign of relief that the move at least removes some of the uncertainty around the banking sector. It confirms that markets have the greatest sensitivity to uncertainty in the banking sector. They are certainly moving much faster this time and it can be taken as a commitment that some banks are too big to fail and the economic consequences too bad to contemplate. "Now we need further clarity on the criteria they will use to stress test the banks. Nationalisation is still possible. If you continue to see pressures on lending, they will have to take more measures down the road." SHARADA SELVANATHAN, CURRENCY STRATEGIST AT BNP PARABAS, HONG KONG: "The possibility of nationalising a major U.S. bank turns away private capital flows, and this needs to be seen in the context of Asia's pool of liquidity that funds the U.S. current account deficit. "Asian investors would hence raise questions with regards to how the United States will be able to fund its deficit in the medium to long term, hence we could see an extension of the euro/dollar rally this morning. "But I don't think this is the turnaround for the dollar. Remember that when a bank gets nationalised, it will be forced to handle business in a more domestically oriented manner; this would mean that the nationalised bank would have to pare back its business offshore. Repatriation flows would prove to be dollar positive. "Thus I would allow for the euro/dollar rally to extend until the 1.3070 level and then sell into euro/dollar strength." YASUTOSHI NAGAI, SENIOR ECONOMIST, DAIWA SECURITIES SMBC IN TOKYO "The media report that the U.S. government may inject capital into Citigroup has sparked unwinding of flight-to-quality buying on U.S. Treasuries. If the government really takes such a step, it would help Citi tackle its problems, thus it is a negative factor for Treasuries. "The dollar was sold against the euro, also on a reverse of flight-to-quality buying of the U.S. currency. "The U.S. government is very fast in taking necessary measures to fight the financial crisis. The United States could be the first to arise from the crisis before Europe and Japan, so I think the dollar will be on a rising trend against other major currencies." SAILESH JHA, SENIOR REGIONAL ECONOMIST, BARCLAYS CAPITAL SINGAPORE: "This gives you the sense that authorities' worries have intensified that problems relating to the U.S. economy may potentially spill over to the rest of the world. "We have lowered our U.S. economy growth forecasts for 2009." "In Europe, the banking sector problems have started to intensify as well. You have seen the problem in Eastern Europe relating to Hungarian banks having contagion to developed country banks in Europe as well. "There are risks that you will get continued government involvement in the financial sector in Europe as well." DARIUSZ KOWALCZYK, CHIEF INVESTMENT STRATEGIST, SJS MARKETS, HONG KONG "Longer term, it is necessary for the government to recapitalise banks, and if they put in more capital, then obviously their ownership has to increase. I think 40 percent may not be the end of it." "Until most of the news is known, there will be a lot of volatility and probably a downward trend in the equity market because we don't know how much pain for investors government measures will induce, by which I mean, will current holders of bank equity lose everything, or most?" "What I don't like is this kind of creeping mode of announcing this sort of news. It would be best if a sort of full-fledged plan could be announced in detail in one go. Then the market could fall, the air would be cleared, and it could start rising again." MARKET REACTION U.S. equity futures turned positive, and Treasuries fell after the report, while the euro <EUR=> jumped to the day's highs against the dollar and the yen. Asia stocks also rose. * S&P 500 futures <.GSPC> were up 0.9 percent and Dow futures <DJc1> rose 0.7 percent; the MSCI index of Asia-Pacific stocks outside Japan <.MIAPJ0000PUS> rebounded from a 3-month low and was up more than 1 percent. * The benchmark 10-year Treasury yield <US10YT=RR> ticked up to 2.82 percent from 2.79 late on Friday. * The euro jumped around 1 percent to $1.2914 <EUR=>, while the dollar slid 0.5 percent to 92.98 yen <JPY=>. * For the latest news on Citi, click [C.N-RTRS-LEN] (Reporting by Asia bureaus; Editing by Kim Coghill) (Compiled by Asia Treasury Desk; +65 6870 3840) ((Reuters Messaging:kim.coghill.reuters.com@reuters.net Email: kim.coghill@thomsonreuters.com)) Keywords: CITIGROUP/

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GOLD - SPDR Dold Trust

TOKYO, Feb 20 (Reuters) - The world's largest gold-backed exchange-traded fund, the SPDR Gold Trust <GLD>, said holdings hit a record 1,028.98 tonnes as of Feb. 19, up 4.89 tonnes or 0.5 percent from the previous day.

For details on gold holdings by the ETF listed in New York and also co-listed on other exchanges, click on:

http://www.exchangetradedgold.com/iframes/usa.php

Holdings in the trust, which issues securities backed by physical stocks of gold, began climbing again in December as worries about the economic crisis drove investors to seek the metal as a safe-haven asset. <XAUEXT-NYS-TT>.

Following are changes in SPDR holdings

Date: Total tonnes

Feb 19 1,028.98

Feb 18 1,024.09

Feb 17 1,008.80

Feb 13 985.86

Feb 12 970.57

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HYFLUX

  
    HYFLUX JUMPS ON STRONG PROFITS 
    Water treatment firm Hyflux <HYFL.SI> rose as much as 6.6 
percent on Thursday after posting a near-80 percent jump in 
annual net profit, but some analysts cut their price targets, 
citing concern over a weak industrial sector.  
    JPMorgan, which rates Hyflux as "overweight", said there was 
potential gain from its Build-Own-Transfer plants divesture, 
adding that a portfolio of 9 plants initially priced at S$180 
million ($117.5 million) was in the pipeline.  
    "The price tag could be potentially revised upwards depending 
on the state of completion and operating levels of the plants," 
JPMorgan said in a research note.   
    But JPMorgan cut its Hyflux price target to S$2.50 from 
S$3.00 previously.   
    Credit Suisse, which rates Hyflux as "outperform", reduced 
its target price to S$2.39 from S$2.52, citing industrial sector 
weakness.  
    A local dealer said Hyflux's strong revenues were impressive 
at a time of recession.  
    "The water business is not high risk, except for higher 
gearing from time to time. But Hyflux has proven itself in the 
long-run without putting too much strain on the business," he 
said.  
    By 0415 GMT, Hyflux was up 6 percent at S$1.76, outperforming 
a 1 percent drop on the benchmark Straits Times Index

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Protectionism Doesn't Pay

Trade can help revive the economy, and China is ready to do its part

By CHEN DEMING | From today's Wall Street Journal Asia.

The global financial crisis is no doubt a catalyst for trade protectionism. As the world economy deteriorates, some countries try to boost growth prospects by erecting trade barriers. China calls on these governments not to replay history and revert to protectionism and economic isolationism.

David Klein

Previous global economic crises were usually accompanied by frequent trade disputes. The United States' erection of large-scale tariffs in 1930, for example, triggered a retaliatory global trade war. During the two oil shocks in the 1970s and 1980s, trade frictions emerged when major economies attempted to increase exports by depreciating their currencies. And in the wake of the 1997 Asian financial crisis, there was a notable uptick in antidumping actions, countervailing duties and other protectionist measures.

The financial crisis is now spilling over into the real economy, hitting sectors like manufacturing and services. In almost all countries, factories are closing and unemployment is rising, creating political pressure and social problems. More and more governments are strengthening intervention in their economies under the excuse of "economic security" and protecting vulnerable domestic industries to curb imports from other countries, especially those in emerging markets.

Trade protectionism differs from legally acceptable measures to protect trade. It is an abuse of remedies provided by multilateral trade rules. This kind of protectionism is morphing into more complex and disguised forms, ranging from conventional tariff and nontariff barriers to technical barriers to trade, industry standards and industry protectionism.

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With the economic crisis worsening, caution must be taken even in employing trade protection measures consistent with World Trade Organization rules. At the Group of 20 Financial Summit in November 2008, world leaders called for countries to resist trade protectionism and committed themselves to refraining from erecting new barriers to trade and investment, a message strongly echoed by the Asia-Pacific Economic Cooperation summit at the end of last year, and the World Economic Forum held in Davos last month.

History tells us that trade protection measures hurt not only other countries, but eventually the country that erected that trade barrier in the first place. To counter the Great Depression, the U.S. adopted the Smoot-Hawley Act in 1930, which raised import duties of over 20,000 foreign products significantly and provoked protectionist retaliation from other countries. Faced with that crisis, other countries pursued beggar-thy-neighbor policies that slashed global trade volumes from $36 billion in 1929 to $12 billion in 1932. Among the victims, not the least was the U.S. itself, where exports shrank from $5.2 billion in 1929 to $1.2 billion in 1932. Even in the U.S., the Smoot-Hawley Act was widely believed to be a catalyst that aggravated the effects of Great Depression.

Global trade is now in dire straits. Thanks to shrinking external demand caused by the economic crisis, major trading countries have seen their export growth tumble or have suffered huge contractions. Germany's exports dropped 10.6% in November 2008, compared to the same period the prior year -- the highest one-month drop since 1990. China also experienced negative export growth in November, and a 17.5% decline last month, when compared to the prior year. Protectionist policies would make things even worse and the consequences would be hard to predict.

In the heat of the crisis, it's critical that all countries refrain from pointing fingers at each other or pursuing their own interests at the expense of others. The financial crisis reflects a chronic illness resulting from global economic structural imbalance and financial risk accumulation, and there is no quick fix to this malady. The fundamental interest of every country is to step up consultation and cooperation and keep international trade smoothly flowing. Healthy international trade can help revive the world economy. During the Great Depression, the U.S. recovered from its economic woes because the Franklin D. Roosevelt administration implemented the New Deal and shunned protectionism.

Today's unprecedented financial crisis has inflicted a severe impact on China and other countries as well. China's economic growth has slowed, exports have plunged and unemployment pressure has mounted. Yet even so, China still firmly believes that trade protectionism isn't a solution to the world's problems. In 2008, amid a contraction in global trade, China imported $1.133 trillion worth of goods from countries around the world -- an 18.5% increase over the prior year. These imports are boosting the economic development of China's trading partners. Since the crisis broke out, the Chinese government has decisively put forward a series of measures aiming at stimulating domestic demand. Given the size and openness of our country, the growth in China's domestic markets can be translated into greater market potential and investment opportunities for other countries. This year China will continue to increase imports and send buying missions abroad for large-scale purchase of equipment, products and technology.

China has always championed our mutually beneficial opening-up policy and advocated international economic cooperation. We maintain that the Doha Round of global trade negotiations should be taken forward in a way that meets the interests of members and complies with the multilateral trading system already established. China is ready to stand together with all nations in the world to face up to the challenges of today, tackle the financial crisis through cooperation and guide the world economy into a new period of prosperity.

Mr. Chen is minister of commerce for the People's Republic of China.

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