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monsta666 · 2012-04-27, 15:53

I see some clear systemic risks with the current model of globalisation. I just finished reading a book recently and it explains the risk quite well. Basically the global economy is structured around the US. The main market for consumers is in the US and most countries, particularly Asia have capitalised on this by developing export driven economies. The US has allowed this to happen and has been running chronic trade deficits which have basically acted as subsidies to the exporting nations.

As dollars leave the US the money stimulates growth in those exporting economies. However when lots of money enters these economies it can create a lot of inflation as those dollars are converted into the countries local currency. This excessive money can lead to high inflation if not properly managed or worse yet bubbles in various asset classes such as stocks, commercial/residential real estate to overcapacity in various manufacturing firms.

To prevent this from happening a lot of the dollars are invested back into the US through various means either through direct foreign investment, buying of government or corporate bonds or the purchase of stock. Problem is this dynamic cannot persist indefinitely as the longer it goes on the more indebted the US becomes and the more dependent the Asian economies will be on exports. Also as mentioned earlier the other major risk with this model is the amount of hot money entering the country can lead inflation of various asset classes leading onto bubbles. When those bubbles burst a major crisis will result as proven with the Japanese real estate bubble in the 80s and the Asian crisis of the 90s. More recently there would appear to be another real estate bubble developing in China which maybe even more extreme than the Japanese one as the income to price ratio is even higher (it is around 15 in the major cities as opposed to 7 at the peak of the bubble in Japan).

Also another issue to be aware is while the Asian economies are growing rapidly there is also a lot of credit creation. Now extra credit may not necessarily be a bad thing but the problem is rapid growth can easily disguise the problem of non-performing loans. It is becoming more apparent that China carries a lot of poor quality loans that is unlikely to be paid back and should growth slow or god forbid go to zero or even contract then there will be major problems in servicing these bad loans.

At the end of the day though this model cannot go on indefinitely and is unsustainable. The Asian economies cannot continue to be export driven economies. They must transition into consumer economies or there will be large negative repercussions. The problem with the transition however is it has never been done before and if it were to happen it would mean a period of hardship as most of the things that help a economy become consumer driven have a detrimental effect on export manufacturers.

2012-04-27, 15:53	Link #4
monsta666 Senior Member Join Date: Jan 2012 Location: London, England Age: 37	I see some clear systemic risks with the current model of globalisation. I just finished reading a book recently and it explains the risk quite well. Basically the global economy is structured around the US. The main market for consumers is in the US and most countries, particularly Asia have capitalised on this by developing export driven economies. The US has allowed this to happen and has been running chronic trade deficits which have basically acted as subsidies to the exporting nations. As dollars leave the US the money stimulates growth in those exporting economies. However when lots of money enters these economies it can create a lot of inflation as those dollars are converted into the countries local currency. This excessive money can lead to high inflation if not properly managed or worse yet bubbles in various asset classes such as stocks, commercial/residential real estate to overcapacity in various manufacturing firms. To prevent this from happening a lot of the dollars are invested back into the US through various means either through direct foreign investment, buying of government or corporate bonds or the purchase of stock. Problem is this dynamic cannot persist indefinitely as the longer it goes on the more indebted the US becomes and the more dependent the Asian economies will be on exports. Also as mentioned earlier the other major risk with this model is the amount of hot money entering the country can lead inflation of various asset classes leading onto bubbles. When those bubbles burst a major crisis will result as proven with the Japanese real estate bubble in the 80s and the Asian crisis of the 90s. More recently there would appear to be another real estate bubble developing in China which maybe even more extreme than the Japanese one as the income to price ratio is even higher (it is around 15 in the major cities as opposed to 7 at the peak of the bubble in Japan). Also another issue to be aware is while the Asian economies are growing rapidly there is also a lot of credit creation. Now extra credit may not necessarily be a bad thing but the problem is rapid growth can easily disguise the problem of non-performing loans. It is becoming more apparent that China carries a lot of poor quality loans that is unlikely to be paid back and should growth slow or god forbid go to zero or even contract then there will be major problems in servicing these bad loans. At the end of the day though this model cannot go on indefinitely and is unsustainable. The Asian economies cannot continue to be export driven economies. They must transition into consumer economies or there will be large negative repercussions. The problem with the transition however is it has never been done before and if it were to happen it would mean a period of hardship as most of the things that help a economy become consumer driven have a detrimental effect on export manufacturers.