US treasury Secretary Timothy Geithner says US debt is the safest anywhere even after Standard & Poor’s (S&P) yanked away Washington’s triple-A credit rating. America’s bankers in Asia may have a different take on things.
Asia is sitting on $2.6 trillion (R18.7 trillion) of US treasuries, at a time when one of the official arbiters of creditworthiness has just delivered a vote of reduced confidence.
Reassurances by Geithner are small comfort as Asian nations consider how to move beyond export-driven development models that compel them to buy treasuries with their accumulated dollars. Here are 10 things Asian leaders need to think about as they try to keep their economies intact.
- Weathering the triple-A crisis. S&P’s move is another acknowledgment that the US is on the path of a long-term decline unless it can reverse course. Yet the dollar is the linchpin of our global system. Expect an adjustment process that might see other countries tossed out of the triple-A club. That will unnerve investors still smarting from 2008. It forces Asia to confront a balancing act – figuring out how to reduce dollar holdings without undermining markets.
- Double-dip recession. The recent debt ceiling deal in Washington begins siphoning money out of the US economy at a time when fiscal and monetary stimulus efforts are winding down. Europe, meanwhile, is wrestling with a debt crisis that seems to be spreading. Asia proved that it can grow without much help from US and European consumers for two or three years, but it may have to adjust to life with slower growth.
- The money glut. The US Federal Reserve, Bank of Japan and European Central Bank are all offering free money. Expect more liquidity from the Fed, especially if unemployment rises. Asian economies worried about hot-money flows and asset bubbles a year ago haven’t seen anything yet.
- Europe’s meltdown. A Greek default seems unavoidable, and so are worsening conditions in Ireland, Portugal and Spain. Yet what should scare markets is an Italian crash. German citizens are being told these economies are too big to fail. Italy might be too big to save. What if Germans grow tired of bailing out Europe’s weak links and demand a return to the Deutsche mark?
- Deflation, not inflation. Weakening global demand buttresses the view that consumer prices from the US to Singapore will fall. The counterpoint is that liquidity provided by Washington, Tokyo and Frankfurt will make inflation the real risk. I side with the deflation scenario. Slack demand is the bigger problem.
- Initial public offering (IPO) bust. Asia has been an IPO bright spot in recent years. Expect fewer of them. That means less money for expansion, research, hiring, wage growth and wealth creation.
- Chinese overheating. At the core of Asia’s impressive post-Lehman Brothers performance has been China’s 10 percent growth. That risks domestic inflation that might roar out of control. Trouble in China is among the last things Asia, or the rest of the world, needs.
- Out of the blue. The unthinkable has an uncanny knack of happening. The list of events that could devastate markets include a Japanese bond-market crash, the “Arab Spring” sweeps through Beijing, provocation from North Korea, terrorist attacks and firefights in the South China Sea.
- Co-operation deficit. Asia puts on a great show of working together with countless summits, communiqués and conference calls. In reality, nations are becoming more insular, not only in Asia but globally. If ever there were a time for policy collaboration, it’s now.
- Leadership void. The world economy has rarely been in greater need of credible, savvy and forward-looking policies. Look around the globe. If we are heading into Global Financial Crisis 2.0, today’s crop of leaders and policymakers make me wonder if they are up to the challenge.
William Pesek is a Bloomberg columnist. The opinions expressed are his own.