---------- Forwarded message ---------- Date: Wed, 14 Jan 1998 01:17:32 -0600 From: Kim Scipes <[EMAIL PROTECTED]> Reply-To: Forum on Labor in the Global Economy <[EMAIL PROTECTED]> To: [EMAIL PROTECTED] Subject: Asian econ crisis--and US January 13, 1998 Folks-- This is a follow-up to my messages of January 7 and 9, and will touch on two issues: the impact of the situation on the US, and some info regarding the situation in general. The general message being dissiminated here in the US--and probably around the world--is that the economic situation in Asia is under control, and will not hurt the US. As I've argued before, I don't think the situation is under control and that it WILL effect the US. In today's New York Times (NYT), there is an extensive number of articles on the situation in Asia--see particularly the Business section. Perhaps most importantly is the collapse of Peregrine Investments Holdings in Hong Kong. Peregrine, which the NYT calls "the largest investment bank in Asia outside of Japan," went bankrupt and out of business. Its closure "spread panic though the Hong Kong stock market and raised further questions about the depth and duration of the economic crisis...." And there is a pretty good story about the demise of Peregrine. Edward A. Gargan, "Soar Like a Falcoln ... Sink Like an Overextended Investment Bank", NYT, Jan 13, 1998: C-1, C-4. But who was Peregrine's biggest creditor? First Chicago NDB Corp., the major bank in Chicago. "First Chicago was Peregrine's principal banker, and banking analysts in Hong Kong say the size of the bank's exposure to Peregrine is estimated at $100 million." The story continues, "US banks had a total of $34.24 billion in outstanding loans to Asian countries at the end of 1996, according to the Bank of International Settlements. [Note: The BIS is basically central bank to the world's central banks, and is located in Switzerland--KS]. If the percentage of bad debt is in line with the regional average of 20%, US BANKS COULD SEE $6.8 BILLION WIPED OFF THEIR BALANCE SHEETS (emphasis added). [para] Banks in other major economies are even more exposed: Japan has $118 billion in outstanding loans, Germany $41 billion and France $37 billion." Liz Sly, "Asia fallout stings First Chicago: Bad debt may hurt Loop banking giant." Chicago Tribune, Jan 13, 1998: Section 1, pp. 1, 9. Also hurt has been Motorola. "Motorola, Inc., offering investors the first hard look at the impact of Asia's economic turmoil on US technology giants, reports profits below expectations Monday and said prospects likely would not improve in the first half of this year. *** [para] Motorola's disappointing earnings were significant because the company was the first of the nation's technology giants to release results since the Asian crisis escalated. Analysts consider Motorola a bellweather stock for the technology sector." Jon Bigness, "Motorola feels a chill from Asia: Profits climb, but fall short of analysts' forecasts", Chicago Tribune, Jan 13, 1998: Section 3, pp. 1, 3. Another industry hurt has been military arms producers. "The big weapons buyers in Asia are abandoning some major arms deals and postponing ambitious plans for others. *** [para] While it is not clear how long the economic crisis will last, the contagion that has swept economies from Malaysia to South Korea could erode one of the few growing markets for American-made weaponry. The prospect is stirring concern at the Pentagon and among the nation's military contractors, who fear that a prolonged downturn could slash sales that the Pentagon relies on to keep production costs lower for its own purchases." It then talks about US Defense Secretary Cohen's trip to Asia, and notes "Six of the seven countries Mr. Cohen will visit during his trip have spent more than $3 billion on American arms over the past three years. American law forbids the export of weapons to the seventh, China." And then it talks about efforts to restructure deals, etc., and concludes "It is a measure of the priority given to supporting American arms manufactures and the jobs they create that there has been no talk of simply canceling the sale" [of F-18s to Thailand]. Steven Lee Myers, "Asian Turmoil Putting Barkes on Arms Race," NYT, Jan 13, 1998: A-1, C-3. Another industry facing hits is the US auto industry. See Robyn Meredith, "Detroit's Big 3 Say Asia Is Forcing Cost Cuts", NYT, Jan 13, 1998: C-3. It seems quite clear that banks are going to lose a bunch of money and that export markets will be lost--which I am only too happy for in the case of weapons!--and that companies in the US will face increasing import pressure, both from Japanese corporations that export to the US (US-based production by foreign multinations will probably not be affected), and especially from exporters from the countries whose currencies have been so strongly hit. I think there are going to be a significant number of layoffs, if not actual plant closeures here in the US in the coming months--I think there will be a lot of jobs lost, and then their loss will only spread further. This is going to hurt US workers--and has already hurt a lot of Asian workers. But a couple of interesting developments in the "crisis" itself. Firt, the Prime Minister Hashimoto of Japan "warned that Japan risks triggering a worldwide financial catastrophe if it can't pull off the economic recovery plan now under consideration." He said that Japan had "had about $500 billion in bad or questionable loans. *** [para] Japan, the world's second-largest economy, is not in danger of financial collapse, and it remains with the United States the only country with the financial muscle to help the rest of Asia repair its damage. [para] But Hashimoto's warning was another reminder of the near-total reversal of fortune that has struck Asia AND AN ACKNOWLEDGMENT THAT THE PROBLEMS CANNOT NECESSSARILY BE CONTAINED WITHIN THE REGION (emphasis added). *** "... Japan's precarious position could be made worse by the weaknesses throughout Asia because it is the main lender and exporter to the region. Conversely, other Asian economies will be less likely to rebound if Japan is sick and its major corporations can't invest abroad. [para] Hashimoto admitted on Monday that Asia's problems had become worse than previously believed." Michael A. Lev, "Japan admits it must work to clean its financial house," Chicago Tribune, Jan 13, 1998: Section 1: 9. Second, I want to report (and quote from) an extremely interesting and I think correct column by William Pfaff that appeared in the Chicago Tribune, and which is clearly marked as "commentary." Pfaff is an American (I believe) residing in Paris, and I've always found his analysis and thinking worth considering. I quote extensively from his latest column. "Currency collapse in Indonesia has outstripped the economic remedies proposed by the International Monetary Fund. This could very likely become the case for Thailand and South Korea as well. A new initiative is needed, which means new thinking. [para] THE ECONOMIC CRISIS IN ASIA IS A CRISIS OF THE AMERICAN MODEL FOR A GLOBALIZED ECONOMY. Asia's implosion has resulted from the conflict between that American model and an Asian growth model that originated in Japan and was imitated elsewhere. [para] THE IMF'S PROPOSED REMEMDIES ARE ALSO AMERICAN IN INSPIRATION. THEY WERE DEVELOPED BY THE IMF IN CLOSE COOPERATION WITH THE CLINTON ADMINISTRATION TREASURY AND REFLECT MAINSTREAM ECONOMIC VIEWS. *** [para] As David Hale of Zurich Kemper Research has said, IT IS EVIDENT THAT THE MARKET ALONE HAS A RECORD OF PERSISTENT MISCALCULATION OF RISK AND MISALLOCATION OF RESOURCES. There is an essential role of governments in dealing with what Hale calls THE MOST IMPORTANT CASE OF TRANSNATIONAL FINANCIAL CONTAGION SINCE THE COLLAPSE OF AUSTRIA'S CREDITANSTALT BANK IN 1931. [para] As matters stand, the contagion continues to spread, with China spared until now because its economy is not deregulated, being drawn toward the deflationary vortex. [para] If the Hong Kong stock market fails--it droped 13 percent in the first four days of last week and is down by more than a third since the high that followed Hong Kong's takeover by China--pressure on the dollar-linked by China-supported Hong Kong dollar could force devaluation of China's own currency. That would explosively enlarge the crisis, which then almost certainly could no longer be confined to Asia. [para] The Asian growth model originated in Japan and produced rapid industrialization and export-led growth through a state-influenced system of close cooperation between bankers and industrialists. It could sustain higher debt levels than Western systems because industry, banks and government were collaborating in what was viewed as a national enterprise. [para] The United States has for years attempted to destroy this Asian model because of its protectionist and statist features. Hale writes of what now has happened to Korea: 'The shattering of this economic moddel as a result of foreign banks suddenly withdrawing their funding ... is going to produce a legacy of distrust and resentment which will have long-term political implications.' [para] That is why AMERICAN-INSPIRED REMEDIES TO THE PROBLEMS OF ASIA NO LONGER POSSESS THE CREDIBILITY THEY POSSESSED BEFORE THAILAND'S FINANCES COLLAPSED. That provided the first falling domino in a sequence which has yet to be interrupted, whose political consequences could prove more dangerous than the economic ones." William Pfaff, "American-inspired remedies to Asia's problems no longer credible," Chicago Tribune, Jan 13, 1998: Section 1, p. 11. (All emphases are added by me--KS.] Kim Scipes
