Rethinking the Asian Mercantilism

Who have been the biggest beneficiaries of the Asian mercantilism policies?

How have they contributed to the job growth and the income growth in the broader context of economic development? If they did so during the early stages of industrialization, how about in the late phases of industrialization?

There is ample literature on its positive aspects and effects (e.g., how it has helped some Asian countries build their manufacturing foundation).

Yet, it may have screwed its own entrepreneurs.

Further, one needs to factor in the political eoonomy issue, of course.

Emerging Middle Class and Bubbles in China

If one looks at what has been going on in China since the 1990s in terms of technology capacity building and emerging middle class coupled with bubbles, s/he can’t help but notice some parallels between China and Korea (even Japan to some extent) (e.g., development trajectories and bad loans).

China needed the means of production, so they have invested in it accordingly. This has made China see the largest emerging middle class. And yet, their credit/property bubbles are bound to deleverage. They have also engaged in monetization. What effects would these policy actions have on their emerging middle class?

Of course, China is a communist country after all.

The Role of Government at a Major Inflection Point

Some argue that we are at one of major inflection points in history. Then, what would be the purpose for any government in this situation? Perhaps the ultimate role would be to protect the public’s lives and liberties.

Some governments are playing the long game.

As I said on numerous occasions, global forces are no excuses for the policy errors.

We have to use history as guidance.

We also have to ask what type of nation it wishes to be.

The Fallacy of Globalization

I’ve written several pieces on globalization.

Globalization has painted quite a different picture across the globe. Two major factors have driven globalization: wage arbitrage and high levels of international capital flows.

The fuel for Korea’s economic engine had been manufacturing and innovation. The 1997 financial crisis largely caused by overleveraged chaebols which had pursued globalization was one of major inflection points for the Korean economy as Korea got exposed to external global forces to a significant degree.

Globalization has been one of the underlying forces behind worldwide economic slowdown. For a number of countries, it has impeded wealth producing growth, blowing bubbles.

Yet, again, global forces are no excuses for domestic policy errors. Policy tools should be backed by morality.

We need to reconsider globalization and its scope and impact on policy actions before it is too late.

Housing Bubbles and Their Consequences Worldwide

China is facing huge property bubbles. So are some other Asian countries. It is no surprising to see the similarities between U.S.-Europe of 2007-2008 and China/Asia now. Some Asian countries are tightening.

If one wants to know what would happen when this storm arrives, take a look at the U.S. of 2006-2008 and the Europe of 2009-2010. The cycle seems to continue.

Who is responsible for these bubbles?

They have been destructive forces of an economy.

Deleveraging is a good thing, yet, the general populace would seem to suffer most through this deleveraging process.

The Role of Innovation in Economic/Political/Social Wellbeing of a Nation

The role of innovation is often considered in the context of economic and technological development. Yet, it should be probed in the broader context of political and social wellbeing as well.

A number of nations are experiencing similar trends such as the continued erosion of the middle class, the loss of manufacturing jobs, and stagnant incomes, which point to a deterioration of economic and social wellbeing.

The decline of SMEs which hold up a large portion of an economy and increased unequal income distributions are associated with not only economic indicators such as living standards but also social wellbeing indicators like crime levels.

Along with financial reform and other necessary measures to bring back balance to the economy, industrial production and innovation which will spur the job/income growth are key drivers of economic recovery. Any policy interventions should be crafted in this framework.

In the case of U.S., new startups were the drivers for jobs. Unfortunately, entrepreneurial investment has been replaced by financial engineering (e.g., unfathomable derivatives).

Japan had a strong manufacturing based economy, but they squandered their world-class assets through bad debt and insolvent Kereitsu.

Korea had a chance to undertake a fundamental restructuring of its economy toward a solid innovation and production-based economy in the wake of the 1997 financial crisis.

The cases of the U.S., Japan and Korea show the importance of innovation and industrial production in the overall health of a nation. It may well prove that they are vital to sovereignty.

China Blames the U.S. for Being Insolvent and Facing Bankruptcy

As we all understand, there are two opposite views on China. Some argue it is headed for a collapse. Others contend the U.S. is in much worse shape than China. Time will tell.

From Jesse’s:

China is not the only country that resents the devastating frauds that the US has perpetrated on not only its own people but the rest of the world through its Wall Street banks and ratings agencies.

Most Americans overlook this developing estrangement that is beginning to isolate the US and UK from even their traditional allies in Europe and South America and Asia. This is a serious error, but so typical of the short term mentality dominated by greed, dishonesty, and self-delusion that captured the American psyche in the latter part of The New American Century. But what choice does Europe have except to take what the Anglo-Americans serve them. Take it or leave it. And ain't currency war hell?

It never pays to have a 'checkerboard mentality' when your opponent is playing Go."

http://jessescrossroadscafe.blogspot.com/2010/07/china-us-is-insolvent-and-faces.html

Regarding Inflation vs. Deflation

As for the inflation-deflation debate, one has to keep in mind that the general public will likely suffer either way in the current economic climate worldwide. Further, one may need to view inflation trends in the context of change in the value of currency.

From Zero Hedge:

The jury is out: I have been in the deflation camp personally for the last 2 years, but I hear the arguments for Zimbabwean hyperinflation, or the case of the oscillation in no man's land as governments and central banks stop us on our way to the deflationary Kondratieff winter at each market collapse with a new round of monetization. Maybe this last cynic remake of the Japanese lost decades is the most obvious way to bet on the demagogy of our modern "capitalist" system where government are helpless against deflation and will therefore sacrifice our future and the planet if they have to in order to save whatever face they have left.

http://www.zerohedge.com/article/inflation-or-deflation

The Asian Mercantilism vs. the U.S. Mercantilism

Some Asian countries have engaged in the Asian mercantilism for manufactured goods. In a similar fashion, the U.S. has practiced mercantilism for financial assets.

The world is not experiencing any ordinary recession. Bubbles are deleveraging (or bound to deleverage) regardless of government interventions (QE, stimulus, etc). This seems to be far from over.

Many nations are acting for their own interests. The bottom line is: are they acting for the interests of their people?

The issue of mercantilism may need to be understood in this context as well. How long can any form of mercantilism go on? Many countries may have to rely on self-sufficiency to a significant degree somewhere down the road. Is each nation ready for this? How will the welfare of the people be protected?

The Dynamics of Sovereign Default

One has to understand the dynamics of sovereign default. For example, what are the signs of the crash?

A set of articles on sovereign debt.

http://www.calculatedriskblog.com/2010/07/sovereign-debt-series-summary.html

Part 1: How Large is the Outstanding Value of Sovereign Bonds?

Part 2. How Often Have Sovereign Countries Defaulted in the Past?

Part 2B: More on Historic Sovereign Default Research

Part 3. What are the Market Estimates of the Probabilities of Default?

Part 4. What are Total Estimated Losses on Sovereign Bonds Due to Default?

UPDATE on Sunday: Part 5A. What Happens If Things Go Really Badly? $15 Trillion of Sovereign Debt in Default

Coming soon: Part 5B. What Happens If Things Go Really Badly? More Things Can Go Badly: Credit Default Swaps, Interest Swaps and Options, Foreign Exchange.

From Calculated Risk:

So, who defaults? A simple method is to choose the 45% of countries with large sovereign debts (over $50 billion) that currently have the highest cumulative probability of default. They are assumed to default in the same order as implied by their cumulative probability of default at 6/30/10 from CMA: Greece, Argentina (again), Portugal, Ireland, Spain, Italy, Turkey, Indonesia, Belgium, South Africa, Thailand, South Korea, Poland, Brazil, Mexico and Malaysia.

http://www.calculatedriskblog.com/2010/07/part-5a-what-happens-if-things-go.html

Korea’s Local Government Faces Budget Problems

Those who understand what has happened and where the U.S. is going know that budget issues at the state level are more serious than those at the federal level.

Korea’s sovereign debt concerns have been mentioned from time to time. Budget concerns at the local level come to the forefront.

Gyeonggi Province’s Sungnam City announced a moratorium on constructing the new town, Pangyo. The city borrowed the 520 billion won from the special accounts for Pangyu. Sungnam mayor Lee Jae-myung said it would pay back the money within the next four years through municipal bonds and budget cuts.

The Ugly Side of the Semiconductor Business

It’s interesting to point out that the semiconductor business has been largely dominated by big players like Intel, Samsung, and TSMC backed up by sovereign fund to some extent.

This is closely related to a country’s industrial policy and political economy of course.

The 50 Ugliest, Most Underreported Facts about the State of the U.S. Economy

From Zero Hedge:

#50) In 2010 the U.S. government is projected to issue almost as much new debt as the rest of the governments of the world combined.

#49) It is being projected that the U.S. government will have a budget deficit of approximately 1.6 trillion dollars in 2010.

#48) If you went out and spent one dollar every single second, it would take you more than 31,000 years to spend a trillion dollars.

#47) In fact, if you spent one million dollars every single day since the birth of Christ, you still would not have spent one trillion dollars by now.

#46) Total U.S. government debt is now up to 90 percent of gross domestic product.

#45) Total credit market debt in the United States, including government, corporate and personal debt, has reached 360 percent of GDP.

#44) U.S. corporate income tax receipts were down 55% (to $138 billion) for the year ending September 30th, 2009.

#43) There are now 8 counties in the state of California that have unemployment rates of over 20 percent.

#42) In the area around Sacramento, California there is one closed business for every six that are still open.

#41) In February, there were 5.5 unemployed Americans for every job opening.

#40) According to a Pew Research Center study, approximately 37% of all Americans between the ages of 18 and 29 have either been unemployed or underemployed at some point during the recession.

#39) More than 40% of those employed in the United States are now working in low-wage service jobs.

#38) According to one new survey, 24% of American workers say that they have postponed their planned retirement age in the past year.

#37) Over 1.4 million Americans filed for personal bankruptcy in 2009, which represented a 32 percent increase over 2008. Not only that, more Americans filed for bankruptcy in March 2010 than during any month since U.S. bankruptcy law was tightened in October 2005.

#36) Mortgage purchase applications in the United States are down nearly 40 percent from a month ago to their lowest level since April of 1997.

#35) RealtyTrac has announced that foreclosure filings in the U.S. established an all time record for the second consecutive year in 2009.

#34) According to RealtyTrac, foreclosure filings were reported on 367,056 properties in March 2010, an increase of nearly 19 percent from February, an increase of nearly 8 percent from March 2009 and the highest monthly total since RealtyTrac began issuing its report in January 2005.

#33) In Pinellas and Pasco counties, which include St. Petersburg, Florida and the suburbs to the north, there are 34,000 open foreclosure cases. Ten years ago, there were only about 4,000.

#32) In California’s Central Valley, 1 out of every 16 homes is in some phase of foreclosure.

#31) The Mortgage Bankers Association recently announced that more than 10 percent of all U.S. homeowners with a mortgage had missed at least one payment during the January to March time period. That was a record high and up from 9.1 percent a year ago.

#30) U.S. banks repossessed nearly 258,000 homes nationwide in the first quarter of 2010, a 35 percent jump from the first quarter of 2009.

#29) For the first time in U.S. history, banks own a greater share of residential housing net worth in the United States than all individual Americans put together.

#28) More than 24% of all homes with mortgages in the United States were underwater as of the end of 2009.

#27) U.S. commercial property values are down approximately 40 percent since 2007 and currently 18 percent of all office space in the United States is sitting vacant.

#26) Defaults on apartment building mortgages held by U.S. banks climbed to a record 4.6 percent in the first quarter of 2010. That was almost twice the level of a year earlier.

#25) In 2009, U.S. banks posted their sharpest decline in private lending since 1942.

#24) New York state has delayed paying bills totalling $2.5 billion as a short-term way of staying solvent but officials are warning that its cash crunch could soon get even worse.

#23) To make up for a projected 2010 budget shortfall of $280 million, Detroit issued $250 million of 20-year municipal notes in March. The bond issuance followed on the heels of a warning from Detroit officials that if its financial state didn’t improve, it could be forced to declare bankruptcy.

#22) The National League of Cities says that municipal governments will probably come up between $56 billion and $83 billion short between now and 2012.

#21) Half a dozen cash-poor U.S. states have announced that they are delaying their tax refund checks.

#20) Two university professors recently calculated that the combined unfunded pension liability for all 50 U.S. states is 3.2 trillion dollars.

#19) According to EconomicPolicyJournal.com, 32 U.S. states have already run out of funds to make unemployment benefit payments and so the federal government has been supplying these states with funds so that they can make their payments to the unemployed.

#18) This most recession has erased 8 million private sector jobs in the United States.

#17) Paychecks from private business shrank to their smallest share of personal income in U.S. history during the first quarter of 2010.

#16) U.S. government-provided benefits (including Social Security, unemployment insurance, food stamps and other programs) rose to a record high during the first three months of 2010.

#15) 39.68 million Americans are now on food stamps, which represents a new all-time record. But things look like they are going to get even worse. The U.S. Department of Agriculture is forecasting that enrollment in the food stamp program will exceed 43 million Americans in 2011.

#14) Phoenix, Arizona features an astounding annual car theft rate of 57,000 vehicles and has become the new “Car Theft Capital of the World”.

#13) U.S. law enforcement authorities claim that there are now over 1 million members of criminal gangs inside the country. These 1 million gang members are responsible for up to 80% of the crimes committed in the United States each year.

#12) The U.S. health care system was already facing a shortage of approximately 150,000 doctors in the next decade or so, but thanks to the health care “reform” bill passed by Congress, that number could swell by several hundred thousand more.

#11) According to an analysis by the Congressional Joint Committee on Taxation the health care “reform” bill will generate $409.2 billion in additional taxes on the American people by 2019.

#10) The Dow Jones Industrial Average just experienced the worst May it has seen since 1940.

#9) In 1950, the ratio of the average executive’s paycheck to the average worker’s paycheck was about 30 to 1. Since the year 2000, that ratio has exploded to between 300 to 500 to one.

#8) Approximately 40% of all retail spending currently comes from the 20% of American households that have the highest incomes.

#7) According to economists Thomas Piketty and Emmanuel Saez, two-thirds of income increases in the U.S. between 2002 and 2007 went to the wealthiest 1% of all Americans.

#6) The bottom 40 percent of income earners in the United States now collectively own less than 1 percent of the nation’s wealth.

#5) If you only make the minimum payment each and every time, a $6,000 credit card bill can end up costing you over $30,000 (depending on the interest rate).

#4) According to a new report based on U.S. Census Bureau data, only 26 percent of American teens between the ages of 16 and 19 had jobs in late 2009 which represents a record low since statistics began to be kept back in 1948.

#3) According to a National Foundation for Credit Counseling survey, only 58% of those in “Generation Y” pay their monthly bills on time.

#2) During the first quarter of 2010, the total number of loans that are at least three months past due in the United States increased for the 16th consecutive quarter.

#1) According to the Tax Foundation’s Microsimulation Model, to erase the 2010 U.S. budget deficit, the U.S. Congress would have to multiply each tax rate by 2.4. Thus, the 10 percent rate would be 24 percent, the 15 percent rate would be 36 percent, and the 35 percent rate would have to be 85 percent.

http://www.zerohedge.com/article/presenting-wall-worry-50-ugliest-facts-about-us-economy

The Continued Erosion of the Middle Class

As Dr. Elizabeth Warren at Harvard has discussed well (take a look at her presentation where she illuminated the effects of the depreciating dollar on the middle class and presents statistics on how the middle class spends its money over the past several decades http://www.youtube.com/watch?v=akVL7QY0S8A), there has been the continued destruction of the U.S. middle class.

As in the U.S. the middle class is shrinking in Korea.

Several research outputs support this. For instance:

“According to the Hyundai Research Institute, the number of middle-class families has declined sharply over the past three years.The institute said middle-class households accounted for 49.9 percent of the total in 2008, down 7.6 percentage points from 57.5 percent in 2005. It was the first time for the portion to fall below the 50 percent mark.”

Along this line, the Bank of Korea points out the repaid expansion of household debt since the 1997 financial crisis, resulting in the rapid decline in the household savings rate especially among the middle class, while that of the highest income bracket hasn’t changed much.

Another research done by Dr. Kang Sung-jin at Korea University points to the dwindling middle class base.

What have been the main causes of this trend?

What have the policy actions got to do with it?

The continued erosion of the middle class has far reaching consequences.

Medical Oligopoly Stifling Innovation and Elevating Costs

People in the West often talk about a dubious collusion between big government and big business in Asian countries, yet this is not limited to Asia.

Those who understand the current state of affairs in the U.S. knows what’s been going on in the financial sector.

Another big industry which has shown a similar pattern is the medical industry including pharmaceutical and medical instruments.

What saddens me is the fact that the medical industry is the one which has to keep humanity and intellectual integrity most, helping suffering people.

The following article illuminates how the medical device industry in the U.S. has succumbed to the inner workings of an oligopoly.

From Washington Monthly:

Around this time, GPOs started to come under scrutiny. The New York Times ran an investigative series on their business practices in 2002, and Congress followed suit with a string of hearings. One of the first witnesses was California entrepreneur Joe Kiani, who had invented a machine to monitor blood-oxygen levels. Unlike other similar devices, Kiani’s worked even when patients moved around or had little blood flowing to their extremities, a crucial innovation for treating sickly, premature infants, who tend to squirm and need to be monitored constantly for oxygen saturation—too little and they suffocate, too much and they go blind. But most hospitals couldn’t buy Kiani’s product because his larger rival, Nellcor, had cut a deal with the GPOs.

http://www.washingtonmonthly.com/features/2010/1007.blake.html

글

우리는 전세계적으로 현재 단순한 불경기가 아닌 역사의 한 시점을 지나고 있다. 미국의 정책은 올해 들어와 아주 명확해 졌다.

출판사 상무님이 개정판 내자고 여러 번 전화를 했다. 계속 거절하고 있다. 원고 쓰는 것은 어렵지 않으나 정직한 글을 쓸 수 없을 것 같다라는 말씀을 드리고 있다.

후에 부끄럽지 않은 글을 쓰고 이것이 디딤돌이 되어 누군가가 내가 하고 있는 작업을 이어가기를 소망한다.

쇼팽

20년 이상 잊고 살았던 피아노를 올해 들어와 거의 매일 30분 이상 쳤다. 세상에 이리 좋은 것을 왜 안쳤던가 하는 생각이 들었고 (매번 느끼는 것이지만 하나님의 작품이 작곡가의 힘을 빌려 구현된 것이 아닌가 싶다. 도저히 인간의 힘만으로는 이 작품들을 만들어 내지 못 한다는 생각이다), 또 아래층 사시는 분으로부터 밤 9시 넘어서는 치지 말아달라는 얘기를 들었을 정도로.

운동하다 다친 오른쪽 어깨가 아파 한의원에서 침을 한 달 반 정도 맞고 있다. 한 곳에서는 인대에 염증이 생겼다고 하고 다른 곳에서는 회전근개 파열이라고 한다. 난생처음 피도 뽑고 뜸도 뜨고 했다. 낫는 듯 하다가도 조심을 하지만 오른 팔을 전혀 안 쓸 수가 없어서 조금만 무리를 하는 듯해도 다시 통증이 재발하고 있다. 한 곳에서는 정형외과를 가보라고 하고 다른 곳에서는 정형외과 가서 사진 찍어봤자 별 의미가 없다고 의사 지시 안 따르고 오른팔 자꾸 쓰니까 치료가 더뎌지고 있다고 양치질도 왼쪽 손으로 하고 오른 팔을 전혀 쓰지 말라고 하신다. 그런데 생활하는데 부목을 하지 않는 이상 그게 참 힘들다.

제일 아쉬운 게 피아노를 치지 말라는 한의사의 말씀이시다. 그 동안은 무시하고 그냥 쳤는데 요즘 쇼팽이 좋아서 매일 치는데 치면 어깨가 아픈 것을 계속 쳐왔다. 그러다가 지난 주 비가 많이 왔던 날 처음으로 통증이 심해 잠을 잘 수가 없었다. 다음 날 한의원 열자마자 가서 침 맞고 오른팔 절대 쓰지 말라는 말씀을 다시 들었다. 하여 지난 주말부터 피아노를 치지 않고 있다. 쇼팽이 너무 치고 싶다.

The IMF Austerity Measures and the Korean Economy

Seemingly, the IMF austerity program intended to help bolster the economic fundamentals of the Korean economy through tightening fiscal and monetary policies and reforming financial and corporate sectors. It may have been true to a certain extent, but financial liberalization has been a game changer.

Has austerity offered by the IMF been in essence the solution or the cause of the economic difficulty facing Korea?

The irony seems to lie in that policy actions as part of a broader movement toward a more open market-oriented system have yielded long-term repercussions.

Andy Grove Stressing the Need for Job Creation in the U.S.

Andy Grove, a former CEO of Intel, makes a compelling argument about the need for the U.S. job creation.

Korea still has a significant manufacturing base, yet manufacturing jobs are waning.

I hope that Korea is not on a similar trajectory to the U.S.

From Bloomberg:

Bay Area unemployment is even higher than the 9.7 percent national average. Clearly, the great Silicon Valley innovation machine hasn’t been creating many jobs of late -- unless you are counting Asia, where American technology companies have been adding jobs like mad for years.

As time passed, wages and health-care costs rose in the U.S., and China opened up. American companies discovered they could have their manufacturing and even their engineering done cheaper overseas. When they did so, margins improved. Management was happy, and so were stockholders. Growth continued, even more profitably. But the job machine began sputtering.

Today, manufacturing employment in the U.S. computer industry is about 166,000 -- lower than it was before the first personal computer, the MITS Altair 2800, was assembled in 1975. Meanwhile, a very effective computer-manufacturing industry has emerged in Asia, employing about 1.5 million workers -- factory employees, engineers and managers.

You could say, as many do, that shipping jobs overseas is no big deal because the high-value work -- and much of the profits -- remain in the U.S. That may well be so. But what kind of a society are we going to have if it consists of highly paid people doing high-value-added work -- and masses of unemployed?

Long term, we need a job-centric economic theory -- and job-centric political leadership -- to guide our plans and actions.

http://www.bloomberg.com/news/2010-07-01/how-to-make-an-american-job-before-it-s-too-late-andy-grove.html

The Perils of Skewed Industrial Structure

I have discussed the perils of big-business centered industrial structure on numerous occasions.

Many of the East Asian countries have purposefully pursued the big-business centered industrial structure. While there have been some attempts to correct this, the skewed industrial structure hasn’t changed much.

Who have been the beneficiaries of this policy?

It has long-term repercussions since it impedes fair competition and nurtured crony capitalism.

Small businesses are the engine of hiring. Have they grown or declined since the Asian financial crisis?

How are they faring in these historic times?

Has the Korean Economy Hit Peak?

Since the Asian financial crisis, has the fundamentals of the Korean economy (e.g., debt levels, manufacturing jobs and wealth distribution issues) improved or deteriorated?

Is the Korean economy on a path to a decline or prosperity?

How are signs (economically and politically) pointing to?