The normal body temperature is 36.5 degree Celsius. Higher than that, you need to go to the hospital, but in fact, hypothermia is more serious than having a fever. The body temperature of patients suffering from adult diseases hardly goes over 36 degrees Celsius, and if one's body temperature goes under 35 degree Celsius, the condition becomes critical. Reaching 34 degrees is a matter of life and death. A body starts losing its vital signs at 33 degrees, becomes unconscious at 30 degrees, and stops breathing at 27 degrees.
How cold is the American economy now The downgrade of the US credit rating caused panic all over the world. Global stock markets tumbled down and the major tone of media is that the US hegemony has come to an end and it is losing its superpower status. It seems like the US economy reached 34 degrees of body heat according to the media. But history tells us otherwise - a superpower never loses its grip overnight.
One hundred and sixteen years of the US hegemony doesn't diminish so easily. The power of the US is being underestimated. America's true power is not its military or IT, but its dollar-making machines, the key currency that transfuses the world economy. Asia and Europe do not have this blood-making machine, so their economy can become exsanguinated to a critical point, but the US can't, since it has unlimited access to blood. What Federal Reserve Chairman Bernanke reads every morning is not the Wall Street Journal but money printing papers. He checks for errors like if there is any ten dollar bill which should have been a hundred dollar bill.
Countries hold about sixty percent of their foreign-exchange reserves in dollars and eighty five percent of global foreign exchange is in dollars. Therefore, the US going bankrupt means global economy sinking down all together. Reserve currency country US is virtually the bank of the world. In fact, whatever credit rating US has, it doesn't really matter unless something else becomes alternative reserve currency.
In the same sense, the bank of Korea just can't go bankrupt because they print money. Would there be any meaning in rating the Bank of Korea's credit Warren Buffet disagrees with S&P's rating, and he said if there were a quadruple-A he'd give the U.S. that. However, the U.S having a quadruple-A rating doesn't differ much to having an undecuple (11)-A rating which is as good as creating sunlight or semi-conductors.
Is a French Kiss a Kiss of Death
European and American stock markets resumed their fall after the French Shock, and it was because of this rumor that France's Triple-A credit rating was going to be downgraded just like America's. The top three credit rating agencies including S&P who shocked the world, immediately announced that France's credit rating will remain AAA. Despite the announcement, stock markets around the world stumbled, as the markets have become extremely sensitive after the US credit downgrade. and also because it was only a sticking-plaster solution. The world's richest countries, the G8, have the most debt in the world. The emerging countries had a financial crisis because they couldn't borrow money, but the G8's rank tells who lends most money with their power over the global market.
In <picture 2>, G8's credit ratings are all blue which means safe, but objectively looking at their economic situation, we can find problems in credit ratings. Logically speaking, emerging countries should have a higher credit rating than the G8 if their economy is rated a Triple-A. The reason behind this nonsense comes from the fact that major rating agencies are western companies.
The major international rating agencies like S&P or Moody's have never accurately predicted economic situations like the Asian financial crisis or the Eurozone crisis beforehand. They were always one step behind, except for the US credit rating downgrade this time. Even in that, S&P made an error of two trillion dollars in their calculation and it all leads to one conclusion.
S&P's credit rating is not very reliable, unless it was secretly planned with president Obama. With this unreliable credit rating of advanced countries, it seems like the results from Dagong Global Credit Rating, a Chinese company, sound more persuasive, even after considering its patriotic bias.
Dagong Global Credit Rating's rating grades for top 50 countries
1 Norway AAA 稳定(Stable)
2 Denmark AAA 稳定
......
10 China AA+
11 Germany AA+
12 Saudi Arabia AA
13 USA AA -
14 South Korea AA-
15 Japan AA-
16 United Kingdom AA-
17 France AA-
France, which has the most problems after the US, has less government debt or deficits than the US, but has a much higher unemployment rate. Italy and the United Kingdom have had the same problem for a long time now. Germany is a relatively stable country in the Eurozone. G8 countries in Europe have a strong service industry while their manufacturing industry has all moved to emerging countries. Germany, who has the soundest economy right now, has strong manufacturing industries.
The Zero Interest Rate Policy Trap
The US Federal Reserve decided to keep interest rates near zero until mid-2013. Federal Open Market Committee (FOMC) would keep the target range of the federal funds rate between 0% and 0.25%, the Federal Reserve announced. According to a committee statement, "Recent downside risk to the economy is growing" and also the economy is healing more slowly than previously expected, and the committee now expects a somewhat slower pace of recovery over coming quarters.
FRB would keep the reinvestment of bonds that were obtained by Quantitive Easing but it would adjust it after checking maturing dates and volume. Especially, FRB put a strong emphasis on "We Internally discussed every possible political measure and are preparing to adapt when necessary."
It doesn't make sense to keep the interest rate that low when the credit rating is downgraded. America's problem is not credit rating but the price of bonds that were already issued and interest on the bonds that are to be issued. Raising the interest rate causes a drop of bond price and then the US bond market could be paralyzed when major creditors start selling the bonds. Also, as I wrote in the last column, the US would have no choice but to spend twenty to thirty percent of its government revenue for interest.
Interest rates indicate the price of money. With a zero interest rate policy, no money is going to stay in America. Unless another world war or massive financial crisis breaks out, the dollar will become a risk asset instead of a global riskless asset. Dollars wouldn't be able to offer attractive values as an asset, therefore they would likely become worthless in the long term. The US announced keeping a zero interest policy since it has no other alternative right now, but technically speaking, it is normal to raise interest rates to constrain public and private spending when a country is in serious debt.
The zero interest rates policy could distort resource allocation and offset the effects of monetary policy. In the history of interest rates, when a superpower country's interest rates go under two percent, it means that the country is losing its hegemony as a superpower. After the drop, interest rates go up, and that is the sign of the end of the superpower. Italy, the United Kingdom, and Japan walked through the same path and now the US's interest rates are showing the same signs. The zero interest rates policy trap always causes empires to fall.
Raising Gold Price, Summer Rally is for Gold, not for Stocks
With near zero interest rates, what will happen next when the US raises the debt ceiling They would have to release
money into the market to stop the real-estate falling into a double-dip recession and to decrease the real unemployment rate which is currently over sixteen percent. The US government wouldn't have raised the debt ceiling if there was no need for QE3.
American politicians are now well-known for lying and for moral hazards. Gold is America's canary. Canary is the most sensitive animal to oxygen levels, so miners take them in a cage as an emergency indicator. The dollar has lost its function as a riskless asset, so gold becomes the relative value to measure the dollar's value. The reciprocal of the price of gold is the dollar value's direct indicator.
The price of gold is making history every day. This suggests that America's monetary policy would likely print more dollars - Quantitative Easing - whatever politicians say. Stock markets expect a summer rally, but this summer gold will have its summer rally with the US's debt ceiling rise.
Financial Crisis, Debt Crisis, What's Next
Western countries are preparing to release more money into the market. Quantitative Easing is still debated in the US but is already started in Japan and Europe. The US has no other alternatives and they don't want to endure the suffering from spending cuts. However, politicians are trying to avoid responsibility and justifying their actions for popularity even though there is only one conclusion. While they are dragging it out, the price their people have to pay is just increasing.
The US's Quantitative Easing, QE1, was to bailout morgage companies like Fannie Mae and Freddie Mac, and QE2 was because of national debt. QE3, if it would be called by the same name, would be for national debt and state government bankruptcy. The US state governments could go bankrupt one after another like smaller European countries. Some US states like Illinois and California have virtually defaulted.
The way the US deals with the financial crisis is strange and comical. America is not following American economic rules, but just shifting responsibility around. The government bailed out unhealthy companies by buying all their debt instead of reforming unhealthy financial structures, and Europe copied this ping-pong game policy. In the end, the national debt reached almost a hundred percent of its GDP, and it causes the current US credit issues.
If the US keeps on printing poisonous money, it will take its toll. An addiction to printing poisonous dollars will suffocate its people and investors, and this will make the national credit crisis into a currency crisis. This bubble, the US's super debt cycle, will come to an end when the Federal Reserve cannot take it anymore. However, Federal Reserve Bank is showing its strong will to keep interest rates for the next two years, and that means the Federal Reserve Bank has two to three more years to breathe.
Printing too much money to prevent national bankruptcy will cause the value of creditors' assets to drastically drop and start a panic when creditors lose their patience and start selling their bonds in the market. This will cause a currency crisis, which will be a critical chance for those who want to weaken the US dollar's position as the reserve currency.
China, the largest foreign holder of US bonds, blamed America for borrowing more debt and printing money. The world turned upside down because there were hardly any countries who would publicly blame America since the second World War. After all, borrowing money costs something. As soon as a country becomes a debtor country, it doesn't matter if the country is advanced or not, the country becomes more timid. China's money is raising its voice to America through the credit crisis.
Even though America releases money into the market, it will have different effects from the same policy conducted in the 1930s. The New Deal would still work in China where the manufacturing industry is still strong, while America only has the service industry. A country with highly-advanced finance has to find money and added value abroad.
America has reached its limit of exporting financial businesses and military weapons because of the financial crisis and excessive defense budget. The only hope they have left is Apple's profits from selling iPhones, but it is just not enough to feed America. With the financial crisis deepening and shifting into a currency crisis, the US is slowly going down, and Asia and China are slowly emerging like a nuclear submarine.
The US Emergency, but Not before Losing Grip on Oil
Even though America is going through the harshest crisis since the Second World War, the end of the dollar hegemony will not come unless the US loses it power over oil. Oil is the collateral of the dollar's value, so the US deploys its military in the Middle East and five major oil companies control the oil. It is to make sure oil is traded in US dollars and to send military forces when there is a breach.
The current international currency system was doomed to have trade and financial deficits for the reserve currency country, and it inevitably faces the Triffin dilemma that causes both deficits.
The chances are pretty good that this credit rating crisis was a political show carefully planned by the US government who has the power to print money. The credit crisis has already occurred, and unfavorable factors cannot threaten the market once they are exposed. Politicians who don't do anything when their country is going through hard times don't deserve to be politicians. The US media sarcastically commented on the Federal Reserve Bank's announcement this time, calling Bernenke drunk, but he has to think more about voters now. After all, he is not an upright university professor anymore, but a political figure now.
Some worry the downgrade of the credit rating will bring a burden of a hundred billion dollars interest, but this can be solved by printing more money. The US can just print more money to repay, but it will create dollar depreciation. However, the result of this depreciation will be a shared responsibility for the world since dollars are the reserve currency. It is just like the cost of war in the Middle East is shared by countries that import oil. The reserve money system is designed to share the results of dollar depreciation within the globe.
Because the Eurozone and Japan are having a credit crisis, Asia's manufacturing companies have no choice but to buy US treasury bonds with the money they earned from exports, the money the US printed. The global market is unlikely have another panic unless China starts to bargain with US bonds, but it is just a scenario right now because China will have more problems if it does so.
With the unemployment rate over sixteen percent, can the US tighten its belt The answer is no. Under a democratic system where the unemployment rate directly affects voters, fiscal retrenchment means giving up the election. Politicians can even sell their soul to the devil for more power.
As long as those immoral western politicians who are spending all of future generations' money are alive, a retrenchment policy is impossible without a strong organization's control like the IMF, who grills developing countries very well. However, there are no international agencies that can control the US; it is an economic train wreck.
The US Credit Rating Downgrade, Chance for Asia to upgrade Their Value
The US credit rating downgrade and raising debt ceiling all can only mean one thing; global inflation. America's financial business is four times bigger than its real economy and this inescapably fueled massive speculation. Applying the law of supply and demand, the value of real assets will skyrocket while financial assets will lose value. Thus, Asia and China's strong real economic value will increase, while America's and Europe's financial and service asset value will decrease.
Puritanical capitalism built America, but now greed is tearing America down. The answer for American financial capitalism might be Asia's Confucian capitalism. The culture that despises debtors, values saving, and treats neighbors with kindness and politeness could finally become mainstream.
After this financial crisis, it seems like five hundred years of the Western marine-powered era is ending, and the era of the Asian continent is opening up. If the West fails to create a black swan industry like they did in the industrial revolution, their empire rests on sandy pillars. Financial and service industries are vain without a manufacturing industry.
By the complete transition to tertiary industries, the West lost its base for manufacturing and they don't have colonies anymore. Multicultural companies from the West have advanced into the emerging Asian market but their nationality is not very clear now. In the global generation, where you are living is more important than where you were born. The companies were born in the US, but they moved to Asia following the money, just like Asians moved to America to make money fifty years ago.
The Market with a Right Shoulder Broken, but Each One that Falls has Wings
The stock market is a mixture of liquidity, mentality, and corporate performance. With negative mentality, the market severely stumbles, and with redundant liquidity, the market rallies whether or not corporate performance is good. Also, of course, good corporate performance brings the market up. There is an old saying in the stock market; the law of supply and demand comes before performance. Like this saying, where drums beat, laws are silent. Right now, negative mentality is dominant in the stock market, and liquidity that will come from the US takes time to affect to market.
In the Korean stock market, corporate performance depends on China and liquidity depends on the US. Mentality is decided by foreign investors and individual investors. The worse America's economy is, the more liquidity flows into the Korean stock market. The most accurate barometer for the globe, American liquidity is the price of gold, and it is skyrocketing. The US credit rating downgrade was S&P's confession that the US is the worst debtor in the world. Actually, everyone knew how serious America's debt was, but a credit rating agency who predicts the bankruptcy of the central bank money-printing machine is crazy. For a central bank to go bankrupt, the government has to fall or the printing paper is out of stock for good. In the US's case, the country itself has to disappear or the dollar must no longer be used as the payment measure for the international oil trade.
With the raised debt ceiling, America is going to print more money to stimulate the economy until the employment rate and housing prices surge to a stable level. Ironically, newly-printed money quickly flies to Asia where the manufacturing industry is still fresh, and is used to buy stocks and bonds. Also, this speculation continues in oil, iron ore, and grains that have potential demands in Asia. This troubles the American government and Obama.
Despite an old stock market saying; don't take a falling blade, this collapse triggered by the US credit rating downgrade and French shock is, in a long term, a chance to buy stocks. America has the most brilliant talents from their prestigious universities like Harvard and rest of the Ivy League positioning in their government and financial sector. These brains would never let America sink. In a way, those disasters have exposed what people try to hide even though it was obvious to everyone that something was wrong. This will enable governments to start making plans and treating problems in a proper way. The stock market reflects events in advance, thus starting treatment would be enough to move back up again.
The current stock market is like a person with a broken right shoulder. Some people say each one that falls has no wings, but in the stock market nothing lasts forever. There is no permanent growth or fall. Anything excessive stops before it reaches the end.
The recent global stock price shows a drastic drop. Even countries with relatively stable fundamentals including China are getting close to the bottom and it indicates that the stock markets reflected the shock of economic downturn at once.
Most media and experts have negative opinions about this situation and recommend staying away from the possibly never-ending fall. However, we can learn from the history of the stock market that when the fear index skyrockets, short-term stock prices plunge to the bottom. That is when everyone turns into safety mode. Also, when articles of stock price are all over the front page of newspapers, it is the sign that the market is about to nosedive. Now, we have to look closely to trading volume because when trading volume shrinks, that is the bottom for short term stock prices as well.
You can join others selling if you think America or the Bank of Korea can go bankrupt, but if not, your radical thinking will lead you to realize profits in a tough market. No risk-taking, no profits.
The volatility index, also known as the fear index, that reflects investors' mentality has set a history record. The stock markets will have volatility for a while but it feels like it is going to end soon. Now, instead of fearing the plunge, it is time to think about when and how a rally would start. I believe the stock price will show a pattern of a root sign (√) among all the predictions such as V, U, L, W shapes.
In this crisis, the Korean Stock market suffered from bigger volatility than the global average because it is open to foreign capital, so the market was used as an ATM machine for foreigners. However, there is no need to worry about it so much. When you walk your dog, the dog sometimes runs faster than you and vice versa. In the end, the dog comes back to the master who feeds him. Other markets can look more attractive than Asia in the short term, but foreign capital returns because Asia has less debt, a stronger manufacturing industry, and less risk for a credit downgrade. It is just painful and confusing to wait until they come back.
There is a saying, "The most expensive thing in the world is getting something for free", because we have to pay it back some day. The Korean market's high volatility is the price for using the free foreign money that we enjoyed in the past. The mistake that the Korean stock market made during the IMF crisis fourteen years ago was to completely open its doors to foreign capital, thinking it was free money without interests. But the Korean economy is much better than other OECD countries, so the dog is highly likely to return. It's just hard and boring to wait.
