Global Agenda: Don’t look East

Japan and China cast a shadow over the whole of East Asia, with the sharp slowdown in the Indian economy completing the gloomy picture.

March 9, 2012 00:07
4 minute read.
Global Agenda: Don’t look East

global agenda 88. (photo credit: )


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The good news is that Greece finally defaulted. That is what should have happened between the time this was written and it is read, because on Thursday evening the deadline for the Greek government’s offer to its private-sector bondholders is scheduled to expire and, according to preliminary reports, the necessary majority of them have agreed to participate in this extraordinary Purim spiel, which requires them to accept that they have lost some three-quarters of their money, in return for getting back anything at all.

This scenario is regarded as “good news” because it allows the Greek government to default in a graceful and greedy manner. You know it is good news, because all the markets are going up in what is known as “risk-on mode,” meaning that market players are ready to buy speculative assets. If it should transpire that an insufficient proportion of bond-holders agree to the terms offered, that will be considered very bad news.

In other words, the reason why the official Greek default is regarded favorably is because it is orderly (guess who is calling the shots in Europe today?). A year ago, any kind of Greek default was considered the most horrendous disaster.

Now, in March 2012, an orderly default has been upgraded to good news (some things do get upgraded after all...), while only a disorderly default would be considered a disaster. The mainstream media and the analysts at the big banks and investment houses are able to explain why this state of affairs represents “progress‚” but outside of that cocoon this kind of Orwellian logic is seen as further evidence of the ongoing crumbling of the euro, the European Union, and the global economy as a whole.

In a world where the default of a sovereign nation which is an EU member is considered good news, what then counts as bad news? The answer, unfortunately, is very clear. Bad news is when the countries that the defaulters and their partners were relying on to save the world, or at least serve as a bastion of stability, become part of the problem instead of being the solution.

The countries in question are mainly the ones referred to as “the Pacific Rim‚” or “East Asia‚” or simply as “Chindia.” All these kitchy terms were invented to label the rising economic powers in the East which, it was believed, would be the powerhouses that would heave the world economy – including the dead-weight of the large developed economies of North America and Western Europe – out of the mud into which they are sinking.

The bad news is that they aren’t the powerhouses they are imagined to be, so they can’t be the source of salvation and this will have to be sought elsewhere – maybe on Mars, since there are no more potential saviors on this planet.

The prime candidate for the savior role was China, although India was also spoken of as a supporting actor, with possibly even greater long-term potential. No one would today regard Japan as a source of hope, but until very recently it was regarded as a source of capital, because it had a seemingly endless flow of excess capital to export to the rest of the world. Last week’s column noted the long-term factors that will prevent Japan from continuing to play that role, but I must admit to having been overly optimistic about that country.

The Japanese economic data published over the last couple of weeks has made it crystal clear that the situation there is deteriorating far more rapidly than ever before.

The reason for that is also clear: The multiple disaster of exactly one year ago – the earthquake and tsunami that destroyed a large nuclear facility on the north-east coast – caused not only short-term disruptions in production across a wide swathe of industries, but forced the Japanese government to take all the country’s nuclear plants out of commission – supposedly temporarily, but that remains to be seen.

This month, the last nuclear power stations will be shut down, thereby removing a total of 30 percent of Japan’s electricity-producing capacity. This has forced Japan to import much more oil and natural gas than in the past, sending its import bill soaring.

Meanwhile, the disruption of industrial production has been followed by longer-term reductions in output, as manufacturers move as much production off-shore as they can.

The result is a sharp drop in exports, especially to China, to where much of the production has been moved.

Higher imports and lower exports have resulted in something unthinkable as recently as February 2011 – a large annual trade deficit, the first in several decades. That, in turn, has pushed Japan’s balance of payments into the red, so that it is no longer an exporter of capital but, increasingly, an importer.

This explains why the yen is losing value, after reaching record highs last year. The fact that the central bank is printing huge sums in an effort to create inflation in Japan’s deflationary economy, has further undermined the yen.

Japan is thus out of kilter domestically, thanks to its huge government deficit; and now externally too, thanks to its trade and payments deficit.

Meanwhile, China is obliged to accept that its economy will grow more slowly than in the past, again for both domestic and global reasons. The two giants together cast a shadow over the whole of East Asia, with the sharp slowdown in the Indian economy completing the gloomy picture.

The bottom line is thus clear: Don’t look east expecting the cavalry to come to the rescue from that direction. The easterly wind is blowing something altogether less pleasant.

Hopefully, it’s not Japanese-made radioactivity, but it may well be Japanese-style deflation.

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