By Martin J Young
The war over DVD formats came to an abrupt end this week when Japanese electronics giant Toshiba announced that it would no longer be developing, producing or marketing its HD-DVD technology. The move propels Sony’s Blu-ray format to victory as the new global standard in high definition DVD and eliminates the confusion amongst consumers who were in two minds over which format to adopt.
The battle has been seen by many as reminiscent of that in the 1980’s between Matsushita’s VHS format and Sony’s Betamax, the latter losing out and being relegated to a darkened room at the rear of many video rental outlets. This time though Sony emerged triumphant having successfully enticed a number of Hollywood studios to use its format for the release of new movies. The final blow for the failing format was said by Toshiba’s chief executive, Atsutoshi Nishida, to have been made when Warner Brothers chose to adopt Blu-ray.
A number of games consoles have also been in the fray with some using HD-DVD drives and some opting for the Blu-ray. Microsoft’s Xbox 360 seems to be the one that analysts predict will be hurt the most by adopting the Toshiba format. Sony had the winning hand from day one with its built-in Blu-ray drives in the PlayStation 3.
Many believe that consumers will now choose this console over the Xbox for future compatibility, although Microsoft responded by stating, "We do not believe the recent reports about HD DVD will have any material impact on the Xbox 360 platform or our position in the marketplace. We will wait until we hear from Toshiba before announcing any specific plans around the Xbox 360 HD DVD player."
The bones of the technology are in the programming that can be built into DVD-sized discs and offer higher resolution and sharper pictures than standard DVDs. The formats were incompatible with each other so it was widely assumed that one would emerge triumphant. Now that we have a winner we can expect to see a lot more of them in the market as the new technology is embraced and regular DVDs slowly get phased out and go the way of the VCD and VHS.
Internet
Following the rejection of Microsoft’s buyout offer for Internet stalwart Yahoo! the California based company has begun to offer severance plans to its employees. Yahoo workers will be eligible for payouts if they are fired or leave for "good reason"; the decisions appear to be making any possible move to purchase the company more expensive.
Yahoo has stated that the $31 per share bid by Microsoft substantially undervalues the company and has rejected the offer. Microsoft has responded by authorizing a proxy fight and is seeking to nominate a slate of directors to Yahoo’s board unless the Internet company is willing to enter into talks. Microsoft would hire a proxy solicitor to urge Yahoo investors to kick out board directors according to reports by The New York Times. The move will cost the Redmond-based software giant between $20 million and $30 million, a figure far more attractive than the prospect of a higher bid.
The proposed takeover appears on the surface to be moving into hostile territory, Microsoft know that it needs to make this deal productive if it is to have any hope of catching the market-dominating, runaway Internet advertising machine at Google.
Software
Microsoft has announced a new initiative this week that will give students around the world free access to development tools and software. The new software will assist students to write software applications, websites and design video games for the Xbox 360. Chairman Bill Gates stated that the concept should prevent learning barriers for students which would include high software licensing fees. Software has been made available to students before but the universities were made to register the programs limiting use to computer science students. This initiative will be available to all, the only drawback being that the products will only be Microsoft compatible!
Microsoft has also announced the official release of Service Pack 1 for Windows Vista this week. The release to web (RTW) download will be available on March 18 yet the software giant has stated that some users will still experience problems with drivers. These will be patched in an ongoing process through the automatic update feature of the operating system. The long-awaited software upgrade has not performed optimally in initial benchmarks, indicating that many of the annoyances of Vista will remain after the service pack is implemented.
As a result of this, the respect for Windows XP has increased and its third service pack is in process, but it is likely that this will be delivered via the Windows Update feature and not as a separate download.
More problems are expected with the Vista service pack as Microsoft has also confirmed that some third-party applications are either blocked or lose functionality when SP1 is installed. Programs from Trend Micro, Zonelabs, Bit Defender and Novell are expected to be affected and blocked by the service pack "for reliability reasons". Another glitch with SP1 was pulled this week; a file known simply as KB937287, which is a prerequisite for the service pack, caused some machines to enter an endless cycle of reboots. It seems that Vista still has a long way to go before confidence in it improves, despite what Microsoft claims.
Hardware
Gaming fans will have something to smile about this week as Nvidia prepares to launch its next "generation 9" series graphics cards. The 9600 GT will have Internet forums buzzing and is expected to weigh in at less than US$200, although there will be some confusion over the card as it remains on G94 architecture as opposed to its bigger "8 series" brother, the 8800 GT on G92. Meanwhile rival AMD has announced price drops on its HD 3800 series graphics cards indicating that it too may have something new in the pipeline.
Intel has launched an 8 core Skulltrail enthusiast platform this week, offering Ferrari performance for your PC. The dual socked board will seat two quad core Intel processors clocked at 3.2GHz and twin graphics card setups. Don’t expect much change from $15,000 for a high end and fully configured system.
Martin J Young is an Asia Times Online correspondent based in Thailand.
Saturday, February 23, 2008
Sectors decouple, not markets
By R M Cutler
MONTREAL - A relatively broad-based advance on Asian exchanges is being cut short by new fears of a developed-world recession.
The original upward movement surprised investment professionals who had expected continued weakness on the basis of forecasts of economic slowdowns in the developed market economies of Western Europe and North America in particular. It began in Asia at the end of last week. Equities in the Japanese markets in particular advanced 3% on Wednesday, February 13, due primarily to growth in Japan's GDP. Manic-depressively, however, they slid back on the 14th and spent the Friday flat.
These movements, confirmed by the Mumbai-based BSE 30 Sensex, occurred only secondarily in response to developed-country (in particular US) economic data. They were driven by endogenous Asian macro-economic developments. The 2% decline in the Nikkei on Tuesday this week, for example, was caused by investors locking in profits from previous days, even as Japan Government Bonds tracked US treasuries to the downside.
The Nikkei may be moved by the Dow Jones averages, and sometimes it can create a feedback downdraft when esoteric parameters calculated and tracked by computer buy and sell programs exceptionally exceed the ranges for which quantitative analysts have programmed them. But also the ever-increasing program-driven trading can create counterintuitive moves.
This may be why, for example, the New York averages unaccountably began to drive higher around noon on Wednesday 20th, about two hours before the release of the Federal Open Market Committee minutes from January. It may be one reason why East Asian markets were buoyed, against expectations, several days over the past week when foreigners entered them late in the day to buy futures.
Throughout the week it was energy and raw materials - oil and metals in particular - that generally drove most world equity markets higher, and these sectors continued to rally even as others, such as financials, began to show signs of weakness towards the end of the current week. Specialists who a week ago were saying that they expected gold to consolidate from $910 down to the $830 round before moving higher, are ending the current week expecting it to rise from its present $940 to over $1,000 before falling. Platinum and palladium soared.
Oil and gas stocks across the broad, from exploration and production to integrated companies, advanced strongly, seemingly ignoring fears of a recession that would decrease demand.
Much ink has been spilt over the question of "decoupling" of Asian from American equity markets. One view holds that Asian demand can drive Asian markets in the event of a US recession. Another view is that if Europe is less badly hit than America, then Asia can withstand a US recession because demand for consumer goods produced in Asia will remain relatively strong. A third view is that other economies cannot decouple from trends in the US.
All these views make the error of taking a national view. Although central banks remain undeniably influential in their ability to affect short and medium evolution in national equity markets, it is economic sectors that drive the aggregate national equity index averages.
The Australian market, for example, began to decouple from the American one at the beginning of the present decade. The trends may be similar, and the volatility of the Australian All Ordinaries index may be slightly greater than that of the Standard & Poor's 500, but it is up about 80% since the beginning of 2001, while the S&P 500 is up only just over 20%.
If the Australian index is adjusted for appreciation of the Australian dollar over this time, then it is up 145% over the US market, ie, worth nearly two and a half times as much. The Canadian market is also up about 80% since the beginning of 2001 in absolute terms, and the Canadian dollar is up 50% over the US dollar since then, making the advance of the Toronto-based S&P/TSE Composite comparable to Australia's in currency-adjusted terms.
Can it be a coincidence that Australia and Canada were not only less heavily tech-laden than the US exchanges but also more heavily based in the "real economy" of energy and metals? Can it be a coincidence that, although financials in both countries have indeed taken hits with the subprime liquidity crisis, nevertheless the two countries are much less dependent upon performance by companies in the financial sector, as a percentage of aggregate corporate profits, than is the case in the United States?
National markets still matter, and governments can still be more important than their central banks. Witness, for example, the purchase by the Chinese state aluminum company Chinalco of 9% of Rio Tinto's listed shares on February 1, a move intended to prevent the Australian mining company BHP Billiton from acquiring the Rio Tinto group in what would have been the second largest takeover in history. But this is precisely in the natural resources sector, which rather makes the point that an integrated view of international sectors may in some cases supercede and give a more comprehensive perspective than national markets all taken together.
R M Cutler http://www.robertcutler.org is a Canadian international affairs analyst.
MONTREAL - A relatively broad-based advance on Asian exchanges is being cut short by new fears of a developed-world recession.
The original upward movement surprised investment professionals who had expected continued weakness on the basis of forecasts of economic slowdowns in the developed market economies of Western Europe and North America in particular. It began in Asia at the end of last week. Equities in the Japanese markets in particular advanced 3% on Wednesday, February 13, due primarily to growth in Japan's GDP. Manic-depressively, however, they slid back on the 14th and spent the Friday flat.
These movements, confirmed by the Mumbai-based BSE 30 Sensex, occurred only secondarily in response to developed-country (in particular US) economic data. They were driven by endogenous Asian macro-economic developments. The 2% decline in the Nikkei on Tuesday this week, for example, was caused by investors locking in profits from previous days, even as Japan Government Bonds tracked US treasuries to the downside.
The Nikkei may be moved by the Dow Jones averages, and sometimes it can create a feedback downdraft when esoteric parameters calculated and tracked by computer buy and sell programs exceptionally exceed the ranges for which quantitative analysts have programmed them. But also the ever-increasing program-driven trading can create counterintuitive moves.
This may be why, for example, the New York averages unaccountably began to drive higher around noon on Wednesday 20th, about two hours before the release of the Federal Open Market Committee minutes from January. It may be one reason why East Asian markets were buoyed, against expectations, several days over the past week when foreigners entered them late in the day to buy futures.
Throughout the week it was energy and raw materials - oil and metals in particular - that generally drove most world equity markets higher, and these sectors continued to rally even as others, such as financials, began to show signs of weakness towards the end of the current week. Specialists who a week ago were saying that they expected gold to consolidate from $910 down to the $830 round before moving higher, are ending the current week expecting it to rise from its present $940 to over $1,000 before falling. Platinum and palladium soared.
Oil and gas stocks across the broad, from exploration and production to integrated companies, advanced strongly, seemingly ignoring fears of a recession that would decrease demand.
Much ink has been spilt over the question of "decoupling" of Asian from American equity markets. One view holds that Asian demand can drive Asian markets in the event of a US recession. Another view is that if Europe is less badly hit than America, then Asia can withstand a US recession because demand for consumer goods produced in Asia will remain relatively strong. A third view is that other economies cannot decouple from trends in the US.
All these views make the error of taking a national view. Although central banks remain undeniably influential in their ability to affect short and medium evolution in national equity markets, it is economic sectors that drive the aggregate national equity index averages.
The Australian market, for example, began to decouple from the American one at the beginning of the present decade. The trends may be similar, and the volatility of the Australian All Ordinaries index may be slightly greater than that of the Standard & Poor's 500, but it is up about 80% since the beginning of 2001, while the S&P 500 is up only just over 20%.
If the Australian index is adjusted for appreciation of the Australian dollar over this time, then it is up 145% over the US market, ie, worth nearly two and a half times as much. The Canadian market is also up about 80% since the beginning of 2001 in absolute terms, and the Canadian dollar is up 50% over the US dollar since then, making the advance of the Toronto-based S&P/TSE Composite comparable to Australia's in currency-adjusted terms.
Can it be a coincidence that Australia and Canada were not only less heavily tech-laden than the US exchanges but also more heavily based in the "real economy" of energy and metals? Can it be a coincidence that, although financials in both countries have indeed taken hits with the subprime liquidity crisis, nevertheless the two countries are much less dependent upon performance by companies in the financial sector, as a percentage of aggregate corporate profits, than is the case in the United States?
National markets still matter, and governments can still be more important than their central banks. Witness, for example, the purchase by the Chinese state aluminum company Chinalco of 9% of Rio Tinto's listed shares on February 1, a move intended to prevent the Australian mining company BHP Billiton from acquiring the Rio Tinto group in what would have been the second largest takeover in history. But this is precisely in the natural resources sector, which rather makes the point that an integrated view of international sectors may in some cases supercede and give a more comprehensive perspective than national markets all taken together.
R M Cutler http://www.robertcutler.org is a Canadian international affairs analyst.
How about a Y?
By Chan Akya
I wrote in two previous articles about the destruction of the global financial system (In gold we trust, Asia Times Online, December 8, 2007) and the vast value destruction in G7 countries Dear dinosaurs, Asia Times Online, October 20, 2007). The plant that grows out of the soil is from the seed that was thrown in, and thus we should see all of G7’s grand errors come back and bite them in the posterior regions.
The behavior of Wall Street analysts and economists almost never ceases to amaze me. After first holding on for years to a charlatan-like view of "this time it's different" as a means to explaining the apparent miracle of uninterrupted growth for a very long time and inflation of asset prices ad nauseum, the group has now shifted its focus on what shape the ensuing recovery would take. Yes, I shook my head too when I realized these imbeciles had never acknowledged the errors in their forecasts nor do they still recognize the perils being imposed on the global economy by idiot central banks (see The Rogue and the pogue, Asia Times Online, January 26, 2008).
As always, this group over simplifies the task at hand, using some short-forms such as "V" or "U". One or two have gone to the extent of using an "L". Those fancy alphabet soups mean precisely nothing by themselves; all that market observers are trying to tell you is that the global economy will rebound quickly after hitting a bottom (V), linger in the bottom like a sea slug for a while and then miraculously rise up like a submarine-fired rocket (U), or most candidly among the three options, simply plunge and stay at the bottom for a while (L).
In the parlance of this group of market strategists and economists who between them couldn’t muster up the collective skills required to run a fast food franchise outlet, those three letters mean: "Please give me a bonus for 2008" (V), "Please let me keep my job for 2008" (U), and "Please don’t hurt me" (L). Put differently, these are the optimists, realists and pessimists respectively. And all three groups are wrong.
Revenge of the Y
I propose to add another letter of the alphabet into their web of misunderstanding; this may confuse some of the quacks among them, but at least a few should be able to paraphrase this article and publish it as their original thinking soon enough. The letter I have in mind is Y.
A Y-shaped recovery is much the same as a V, except there is an additional tangent from the bottom. What this means in practice is that while a few economies will recover quickly from the current mess, many others will fall by the wayside and slowly (or quickly, it doesn’t really matter) achieve irrelevance to global markets.
It may come as no surprise to readers that I expect Asia to form the upward trajectory in this scenario while much of G7 falls into the steep downward tangent envisaged by the tangent below the "V". Before anyone starts muttering stuff about how unprecedented all this would be, perhaps they should spend some time thinking about the world economy of barely three hundred years ago. At the time, two economies between them had 50% of global GDP - these two were China and India. What happens for the next couple of decades will simply represent a return of the pendulum to produce the same outcome.
Getting into the details would require readers to understand first the question of "why a Y" and secondly, "how".
First the question of why a Y. The Achilles’ heel of G7 economies is the financial system, which has now gone into a full-fledged deleveraging mode. Consider the following news items from the last week or so:
1. The failure of the US market for cities and townships to raise money used to pay for things like schools and hospitals (through auction rate securities, see Wealth destruction gathers pace, Asia Times Online, February 20, 2008), because US banks couldn’t find the measly few billion in capital required to support that system. This brings back memories of the aftermath of Hurricane Katrina - when a somnolent US Federal government failed to provide basic necessities to its afflicted citizens, only multiplied by a few hundred times. What this also showed is that the shortage of capital has become the chief constraint in the US financial system, and it is unfortunately not something that either the government or the Fed can do anything about.
2. Great Britain nationalized its failed lender Northern Rock after evaluating all alternatives (see Rocking the land of Poppins, Asia Times Online, September 22, 2007) and finding them overly expensive for taxpayers. In the process, the country has breached fiscal constraints and will now have to tax its citizens in an attempt to recover its financial footing; this will come at the significant cost of economic growth for years if not decades to come.
3. Market reports have cited the impending demise of a large US investment bank that has frozen part of the global derivative market as all banks attempt to quantify their exposures to the "weakest link" in their individual chains. Surprising losses reported this week by two European banks - Credit Suisse and BNP Paribas - that had previously been seen to avoid a bulk of the US problems only accentuated market fears of further write-offs.
4. Two high-profile failures in Germany - IKB and Sachsen LB - continue to haunt the European financial system as Germany has failed to find a buyer and also set the stage for other potential embarrassments such as bigger Landesbanks and commercial bank losses in the near future.
5. I really could go on and on.
To put things in perspective, all of these incidents above, with the exception of Northern Rock, are among the world’s top 100 banks. Readers may respond with - alright, we know that the global financial system is broken, but so what. The banks take losses and move on.
Well, not really. Any recovery is contingent on the emergence of alternative economic uses for assets that were previously mispriced. Think about that - when the dotcom bubble ended, the world still had Internet technology and millions of miles of optic fiber cable. That in turn created the boom in outsourcing, as well as the acceleration of price competition that sparked a global search for cheaper manufacturers that benefited Asia.
Meanwhile, what G7 had left behind was the lifestyle afforded by decades of wealth accretion from the rest of the world, even as their unit labor inputs declined sharply. The US is merely the most obvious example of this malaise, but similar trends can be seen in other countries such as the UK and Italy as well. In essence, the production systems of G7 have become extremely dependent on capital intensive processes, which are in turn dependent on the flow of financing.
This is what kills Achilles - hurting the heel (ie the weakest link in global financing leverage, in this case the US subprime sector) opens up the gush of blood straight from the heart (ie the massive storm of losses engulfing banks). The assets that caused the loss are houses in various suburban locations across various American cities. There is no productive value for these houses, and having cheap houses without any jobs around the region won't help change population dynamics. Unable to offload these dead assets, banks cannot lend any more to companies, and without those borrowings, G7 factories will simply wilt away and die.
After the question of "Why a Y", the question of "how" is relatively easy and has been answered above - just reverse the course for Asia and you can see the makings of a recovery. As noted above, the beneficiaries of recent real technology transfers - factories, call centers and the like - were all in emerging markets and particularly Asian countries such as China and India.
These two countries have leveraged growth into building infrastructure that can eventually support self-sustaining economies. While many other Asian countries have also benefited from these trends in the last few years, they lack the strategic depth required to make it on their own domestic consumption. This is why I believe that differentiation would become a key factor in Asian markets this year (see Storm warning for Asia, Asia Times Online, January 4, 2008).
Between them, China and India have vast ability to increase consumption and improve their living standards to what prevails in the rest of the world. One of the first things to do would be to acquire the resources required for further growth but otherwise desist from investments in the US and European financial systems, allowing banks in these countries to crumble under the weight of their own bad loans.
There are those who point out that at US$3.5 trillion between them, China and India are too small to matter against economic colossus like the US at US$11 trillion and Europe at a similar level. That view is wrong because it uses historical currency values that over-estimate the intrinsic worth of G7 economies, or more to the point diminish the GDP sizes of Asian countries.
Much like the US dollar’s bluff has been called, other "reserve" currencies such as the euro and pound sterling will fall by the wayside. The Swiss franc will survive, if only because the need for a country with a secretive banking system that helps finance one’s mistresses will never disappear, but I digress.
To achieve this separation from the continuing economic decline of the US and Europe though, China and India must cut the umbilical cord of currency pegs to the rest of the world. They must float their currencies, take the bite off the export apple but allow domestic consumption to take over as the primary driving force. Without that happening, we are going to end up looking at another letter altogether: a prolonged decline in global GDP size, or an I.
I wrote in two previous articles about the destruction of the global financial system (In gold we trust, Asia Times Online, December 8, 2007) and the vast value destruction in G7 countries Dear dinosaurs, Asia Times Online, October 20, 2007). The plant that grows out of the soil is from the seed that was thrown in, and thus we should see all of G7’s grand errors come back and bite them in the posterior regions.
The behavior of Wall Street analysts and economists almost never ceases to amaze me. After first holding on for years to a charlatan-like view of "this time it's different" as a means to explaining the apparent miracle of uninterrupted growth for a very long time and inflation of asset prices ad nauseum, the group has now shifted its focus on what shape the ensuing recovery would take. Yes, I shook my head too when I realized these imbeciles had never acknowledged the errors in their forecasts nor do they still recognize the perils being imposed on the global economy by idiot central banks (see The Rogue and the pogue, Asia Times Online, January 26, 2008).
As always, this group over simplifies the task at hand, using some short-forms such as "V" or "U". One or two have gone to the extent of using an "L". Those fancy alphabet soups mean precisely nothing by themselves; all that market observers are trying to tell you is that the global economy will rebound quickly after hitting a bottom (V), linger in the bottom like a sea slug for a while and then miraculously rise up like a submarine-fired rocket (U), or most candidly among the three options, simply plunge and stay at the bottom for a while (L).
In the parlance of this group of market strategists and economists who between them couldn’t muster up the collective skills required to run a fast food franchise outlet, those three letters mean: "Please give me a bonus for 2008" (V), "Please let me keep my job for 2008" (U), and "Please don’t hurt me" (L). Put differently, these are the optimists, realists and pessimists respectively. And all three groups are wrong.
Revenge of the Y
I propose to add another letter of the alphabet into their web of misunderstanding; this may confuse some of the quacks among them, but at least a few should be able to paraphrase this article and publish it as their original thinking soon enough. The letter I have in mind is Y.
A Y-shaped recovery is much the same as a V, except there is an additional tangent from the bottom. What this means in practice is that while a few economies will recover quickly from the current mess, many others will fall by the wayside and slowly (or quickly, it doesn’t really matter) achieve irrelevance to global markets.
It may come as no surprise to readers that I expect Asia to form the upward trajectory in this scenario while much of G7 falls into the steep downward tangent envisaged by the tangent below the "V". Before anyone starts muttering stuff about how unprecedented all this would be, perhaps they should spend some time thinking about the world economy of barely three hundred years ago. At the time, two economies between them had 50% of global GDP - these two were China and India. What happens for the next couple of decades will simply represent a return of the pendulum to produce the same outcome.
Getting into the details would require readers to understand first the question of "why a Y" and secondly, "how".
First the question of why a Y. The Achilles’ heel of G7 economies is the financial system, which has now gone into a full-fledged deleveraging mode. Consider the following news items from the last week or so:
1. The failure of the US market for cities and townships to raise money used to pay for things like schools and hospitals (through auction rate securities, see Wealth destruction gathers pace, Asia Times Online, February 20, 2008), because US banks couldn’t find the measly few billion in capital required to support that system. This brings back memories of the aftermath of Hurricane Katrina - when a somnolent US Federal government failed to provide basic necessities to its afflicted citizens, only multiplied by a few hundred times. What this also showed is that the shortage of capital has become the chief constraint in the US financial system, and it is unfortunately not something that either the government or the Fed can do anything about.
2. Great Britain nationalized its failed lender Northern Rock after evaluating all alternatives (see Rocking the land of Poppins, Asia Times Online, September 22, 2007) and finding them overly expensive for taxpayers. In the process, the country has breached fiscal constraints and will now have to tax its citizens in an attempt to recover its financial footing; this will come at the significant cost of economic growth for years if not decades to come.
3. Market reports have cited the impending demise of a large US investment bank that has frozen part of the global derivative market as all banks attempt to quantify their exposures to the "weakest link" in their individual chains. Surprising losses reported this week by two European banks - Credit Suisse and BNP Paribas - that had previously been seen to avoid a bulk of the US problems only accentuated market fears of further write-offs.
4. Two high-profile failures in Germany - IKB and Sachsen LB - continue to haunt the European financial system as Germany has failed to find a buyer and also set the stage for other potential embarrassments such as bigger Landesbanks and commercial bank losses in the near future.
5. I really could go on and on.
To put things in perspective, all of these incidents above, with the exception of Northern Rock, are among the world’s top 100 banks. Readers may respond with - alright, we know that the global financial system is broken, but so what. The banks take losses and move on.
Well, not really. Any recovery is contingent on the emergence of alternative economic uses for assets that were previously mispriced. Think about that - when the dotcom bubble ended, the world still had Internet technology and millions of miles of optic fiber cable. That in turn created the boom in outsourcing, as well as the acceleration of price competition that sparked a global search for cheaper manufacturers that benefited Asia.
Meanwhile, what G7 had left behind was the lifestyle afforded by decades of wealth accretion from the rest of the world, even as their unit labor inputs declined sharply. The US is merely the most obvious example of this malaise, but similar trends can be seen in other countries such as the UK and Italy as well. In essence, the production systems of G7 have become extremely dependent on capital intensive processes, which are in turn dependent on the flow of financing.
This is what kills Achilles - hurting the heel (ie the weakest link in global financing leverage, in this case the US subprime sector) opens up the gush of blood straight from the heart (ie the massive storm of losses engulfing banks). The assets that caused the loss are houses in various suburban locations across various American cities. There is no productive value for these houses, and having cheap houses without any jobs around the region won't help change population dynamics. Unable to offload these dead assets, banks cannot lend any more to companies, and without those borrowings, G7 factories will simply wilt away and die.
After the question of "Why a Y", the question of "how" is relatively easy and has been answered above - just reverse the course for Asia and you can see the makings of a recovery. As noted above, the beneficiaries of recent real technology transfers - factories, call centers and the like - were all in emerging markets and particularly Asian countries such as China and India.
These two countries have leveraged growth into building infrastructure that can eventually support self-sustaining economies. While many other Asian countries have also benefited from these trends in the last few years, they lack the strategic depth required to make it on their own domestic consumption. This is why I believe that differentiation would become a key factor in Asian markets this year (see Storm warning for Asia, Asia Times Online, January 4, 2008).
Between them, China and India have vast ability to increase consumption and improve their living standards to what prevails in the rest of the world. One of the first things to do would be to acquire the resources required for further growth but otherwise desist from investments in the US and European financial systems, allowing banks in these countries to crumble under the weight of their own bad loans.
There are those who point out that at US$3.5 trillion between them, China and India are too small to matter against economic colossus like the US at US$11 trillion and Europe at a similar level. That view is wrong because it uses historical currency values that over-estimate the intrinsic worth of G7 economies, or more to the point diminish the GDP sizes of Asian countries.
Much like the US dollar’s bluff has been called, other "reserve" currencies such as the euro and pound sterling will fall by the wayside. The Swiss franc will survive, if only because the need for a country with a secretive banking system that helps finance one’s mistresses will never disappear, but I digress.
To achieve this separation from the continuing economic decline of the US and Europe though, China and India must cut the umbilical cord of currency pegs to the rest of the world. They must float their currencies, take the bite off the export apple but allow domestic consumption to take over as the primary driving force. Without that happening, we are going to end up looking at another letter altogether: a prolonged decline in global GDP size, or an I.
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