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Op-Ed Contributors

West moving toward deeper financial abyss

By Lau Nai-keung (China Daily)
Updated: 2010-06-01 07:48
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Let us take a look at the US. Its government and agencies have by far the largest stock of interest-bearing debts of $15.6 trillion, and the greatest indebtedness to the rest of the world at $4.8 trillion. The US blames the over-saving in emerging economies, especially China, and their under-valued currencies, for this predicament. And the solution is to pressure China into revaluating the yuan, a position echoed by the EU.

If the US economy is still in negative saving, which is inevitable with its trillion-dollar fiscal deficit, the large part of the shortfall still has to be made up by multilateral trade deficit. Granted that a revaluated yuan will reduce its deficit with China, but this has to be compensated by deficits with other countries.

Apart from hurting China's growth, revaluation of the yuan is not the way out of the woods for Western economies.

There are inevitable ramifications for this borrowing-money, borrowing-time policy because the production of debt cannot forever replace the production of goods and savings, and no country can borrow its way to prosperity. Higher bond yield means higher interest for mortgage and car loans, which apart from delaying recovery, will also mean a devaluation of the existing stock of bonds and houses, making the life of many governments and individuals even more difficult.

Yes, governments can and will default their debts, and more are expected to default in the next one or two years. And should the US and the EU bond market collapse, they and their economic troubles will be too big for other countries to save them.

The Western economies, having spent well beyond their means for years, should spend less for some time to pay off the debts, and should take this opportunity to change their lifestyle and consumption habits drastically. Their governments should punish the financial fat cats and protect the small guys from desperation. It now seems that more Americans and Europeans will learn from the examples of financial fat cats and the demonstrating Greeks.

Quantitative easing has produced two decades of sluggish economy in Japan despite the robust external environment. External conditions are not that favorable now, and the whole situation should be worse. Factoring in moral hazard as well as social injustice, that implies political and social turmoil. The US and EU are destined to head south, at least for a while. Some pundits are talking about a double-dip this year, and in the longer run, we can expect many more dips.

The author is a member of the Hong Kong Special Administrative Region Basic Law Committee of the National People's Congress Standing Committee.

(China Daily 06/01/2010 page9)

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