Gock's Viewpoint - A column by Choong Khuat Hock
THE world is heading for an L-shape stagnation due to a long deleveraging process after an orgy of excesses that led to a debt and housing bubble.
The total US debt (private sector and government debt) as a percentage of GDP at 358% at Sept 30, 2008 is highest ever in US history, higher than even during the Great Depression.
The ratio has since risen further to 375% at March 31, 2009 as the US GDP shrank while total debt rose due to government borrowing.
Easy and irresponsible financing fuelled a 130.6% rise in house prices from 1997 till 2006. Highly-leveraged US consumers are worried about rising unemployment and have lost US$13 trillion in the value of household assets between mid-2007 and end-2008 as a result of falling house and stock prices.
Deleveraging by consumers could take over a decade, after all, Japan has yet to fully recover from the bursting of its debt-fuelled property bubble in 1990 despite low interest rates and aggressive pump priming which saw government debt to GDP rising from 60% in 1990 to 162% in 2008.
Why should we be worried about what is happening in faraway United States?
The reason is because the country is the largest importer in the world.
US consumer spending accounts for 70% of the US economy and, as long as US consumers are deleveraging (spending less and saving more), it is unlikely for Asian exports to rebound sharply. For example, gross Malaysian exports peaked at RM63.3bil in July 2008 and had declined to RM41.1bil in April 2009, down 26.3% from a year ago.
In the region, Singapore – which is most dependent on trade with an average annual trade to GDP ratio of 444% between 2005 and 2007 (compared with a ratio of 209% for Malaysia) is the worst affected while those with a large domestic economy, which is less dependent on trade like Indonesia (trade to GDP ratio of 60%), are still growing. In the first quarter this year, Singapore’s GDP fell 10.1% from a year ago,
Malaysia fell 6.2% while Indonesia grew 4.4%. China, with a high savings rate and the ability to undertake aggressive fiscal pump priming due to low government debt levels, is also showing signs of recovery.
However, China only accounted for 6.8% of the world economy in 2008 and cannot completely offset the decline of large economies like the United States, European Union and Japan, which in total account for 61.1% of the world economy.
The book D is for Depression talks about the implications of a prolonged period of L-shape stagnation for investments.
If the Federal Reserve and central governments do not print money, interest rates are likely to remain low for decades. In this scenario, accumulating assets with sustainable yields become paramount.
After the Great Depression, interest rates did not surpass levels in 1920s until 1968. In Japan, interest rates have not recovered to the pre-1990 levels despite modest printing of money.
The United States, unlike Japan, does not have large domestic savings to rely on when the bubble burst. Neither can the United States rely on boosting exports to compensate for falling private sector demand. It has been relying on countries like China and Japan to purchase its debt. However, these countries have become increasingly wary of US debt with rising US government debt levels and a weakening US dollar.
If printing money becomes the preferred tool to fight deflation and to deflate away debt held by the United States and devalue the real value of bonds (held by foreigners), the book discusses implications for investments in an inflationary world.
● The writer is the author of the book titled “D is for Depression” which is available in Malaysian book shops this week. He further elaborates on the L-shape stagnation theory in his book.
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