The great financial crisis facing US and Europe will be with us for a long time

Dr M warns of long financial crisis

By Shannon Teoh October 08, 2011

KUALA LUMPUR, Oct 8 — Tun Dr Mahathir Mohamad warned the ongoing global economic crisis will continue long into the future as the West continues spending in a “state of denial.”

The former prime minister said in his blog yesterday that Western countries continue “believing that they can somehow continue to remain rich. They are unable to behave like poor people.”

On the same day Datuk Seri Najib Razak tabled a budget that aims to rein in the deficit to 4.7 per cent, Dr Mahathir (picture) said the West “will not recover because they are still in a state of denial.

“They still believe they are rich, as rich as before they plunged into the crisis. They must keep up the big power wealthy country image even if their people have no jobs, riot and protest.

“The great financial crisis will be with us for a long time. Even when it is resolved the aftermath will see slow recovery for the giants of the West,” he wrote.

“How nice it would be if our pocket is picked, we are allowed to print some money to replace what is lost,” he said, mocking the United States’ quantitative easing measures which has seen its federal reserve print US$3 trillion (RM9.5 billion) since the start of the financial crisis in 2008.

“Now Britain is following in the footsteps of elder brother,” he added, referring to the United Kingdom’s recent move to print £75 billion (RM370 billion) to help distressed banks.

The debt crises in Europe and the US have caused the global economy to wobble in recent months and is likely to stunt Malaysia’s export-driven economy in the near future.

Analysts said yesterday that Najib’s prediction of a 5 to 6 per cent growth for 2012 is “too high” which may in turn see Putrajaya fail to meet its deficit forecast.

The prime minister tabled a budget yesterday which saw cash handouts, more money for civil servants, schools and a fund for “high-impact development” projects to put cash in the pockets of voters ahead of a general election expected soon.

http://www.themalaysianinsider.com/malaysia/article/dr-m-warns-of-long-financial-crisis/

Spectre of international trade war looms as recovery proves elusive

October 5, 2010

As world economies continue to falter, central banks are running out of options and the spectre of protectionism grows, writes Larry Elliott.

In all the comparisons between the Great Recession of the past three years and the Great Depression of the 1930s, one comforting thought for policymakers has been that there has been no return to tit-for-tat protectionism, which saw one country after another impose high tariffs to cut the dole queues.

Yet the commitment of governments this time round to keep markets open was based on the belief that recovery would be swift and sustained. If, as many now suspect, the global economy is stuck in a low-growth, high-unemployment rut, the pressures for protectionism will grow.

The former British chancellor Kenneth Clarke summed up the mood when he said in the Observer that it is hard to be ''sunnily optimistic'' about the West's economic prospects.

Despite a colossal stimulus, the recovery has been shortlived and, by historical standards, feeble. The traditional tools - cutting interest rates and spending more public money - were not enough, so have had to be supplemented by the creation of electronic money. In both the US and Britain, policymakers are canvassing the idea that more quantitative easing will be required, even though they well understand its limitations.

There is the sense of finance ministries and central banks running out of options. They cannot cut interest rates any further; there is strong resistance from both markets and voters to further fiscal stimulus, and so far quantitative easing has had a more discernible effect on asset prices than it has on the real economy.

So what is left? The answer is that countries can try to give themselves an edge by manipulating their currencies, or they can go the whole hog and put up trade barriers.

Brazil's Finance Minister, Guido Mantega, warned that an ''international currency war'' has broken out following the recent moves by Japan, South Korea and Taiwan to intervene directly in the foreign exchange markets. China has long been criticised by other nations, the US in particular, for building up massive trade surpluses by holding down the level of its currency, the renminbi.

The currencies under the most upward pressure are the yen and the euro. Why? Because the Chinese have all but pegged the renminbi to a US dollar that has been weakened by the prospect of more quantitative easing over the coming months.

But currency intervention is one thing, full-on protectionism another. The existence of the World Trade Organisation has made it more difficult to indiscriminately slap tariffs on imports. What's more, there is still a strong attachment to the concept of free trade.

The question now is whether the commitment to free trade is as deep as it seems. The round of trade liberalisation talks started in Doha almost nine years ago remain in deep freeze. Attempts to conclude the talks have run into the same problem: trade ministers talk like free traders but they act like mercantilists, seeking to extract the maximum amount of concessions for their exporters while giving away as little as possible in terms of access to their own domestic markets.

The approach taken by countries at the WTO talks also governs their thinking when it comes to steering their countries out of trouble. There are plenty of nations extolling the virtues of export-led growth, but very few keen on boosting their domestic demand so that those exports can find willing buyers.

The global imbalances between those countries running trade surpluses and those running trade deficits are almost as pronounced as they were before the crisis, and are getting wider. This is a recipe for tension, especially between Beijing and Washington.

This tension manifested itself last week when the House of Representatives passed a bill that would allow US companies to apply for duties to be put on imports from countries where the government actively weakened the currency - in other words, China.

The Senate will debate its version of the same bill after the mid-term elections next month, but it was interesting that the House bill was passed by a big majority and with considerable bipartisan support.

China responded swiftly and testily to the developments on Capitol Hill. It argued that the move would contravene WTO rules and quite deliberately tweaked its currency lower.

It is not hard to see why Beijing got the hump. It introduced the biggest fiscal stimulus (in relation to GDP) of any country and helped lift the global economy out of its trough. It can only fulfil its domestic policy goal of alleviating poverty if it can shift large numbers of people out of the fields and into the factories, and that requires a cheap currency. It has been financing the US twin deficits.

Unsurprisingly, then, its message to the Americans was clear: ''It is not smart to get on the wrong side of your bank manager, so do not mess with us.''

What happens next depends to a great extent on whether the global economy can make it through the current soft patch.

But imagine that the next three months see the traditional policy tools becoming increasingly ineffective, that the slowdown intensifies and broadens, and that the Democrats get a pasting in the mid-term elections. In those circumstances, a trade war would be entirely feasible.

Guardian News & Media


http://www.smh.com.au/business/spectre-of-international-trade-war-looms-as-recovery-proves-elusive-20101004-164e1.html

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