Worrying Asian Prospects

In addition to the malignant outcomes such as corruption, inefficiency, misallocation of capital, large scale government intervention can lead to even greater financial disaster if it is based on just plain wrong philosophical tenets. The governments of Asian countries like China and Japan have been pursuing mercantilistic economic policies to create the environment where domestic production is directed toward export production at the expense of other economic activity. To prevent their own currencies appreciating as a result of selling large quantities of exports these governments have been buying US dollar investments and effectively lending the US consumer the money to buy their products. Like some perverse boomerang theory no matter how much American consumers tried to spend their money it kept coming back and as a second engine to credit expansion along side the Fed's profligacy with the money supply they have inputted into their own problems. With easy money in the US economy reckless investment decisions were carried out greatly increasing underlying risk and the potential for a negative return somewhere along the line. As is illustrated by China's case where it is estimated to hold a fifth of its currency reserves -- as much as $400 billion -- in Fannie Mae and Freddie Mac debt. It is hard to feel sympathy for the Asian government (though you would for their people) in this precarious position of holding bad dollar debt which if they try and diversify out of will further reduce their investments as they believed this activity would actually increase their own wealth (it is unlikely such activities were undertaken out of a charitable bent toward the American consumer).

That they allowed it to go on for so long is indicative of how much belief the Asians have in the US as the economic producer and protector of wealth. The most serious outcome of the implosion of the US financial system is in Asian terms the Americans have lost face and the funding of America to the degree that kept the country afloat for the last decade will decrease greatly. The cost to Asians is a poor return on their capital and a destruction of the market they hitched themselves to and which was driving their own economic expansion. As this external market closes much of Asia's recent capital investments will be shown to be obsolete and the cost of not following a more sustainable level of economic development will become apparent. Bad debt, misdirected investment and slowing economic activity will lead to severe challenges for Asia with massive populations and large quantities of people existing at the margin of poverty. In China's case the booming economy, though leading to an even greater income inequality, has helped contain political unrest but when things go into reverse this containment must come into doubt. The dark clouds appearing over China are ominous.