Thursday, 30 October 2008

Crisis exported...

Yesterday the United States Federal Reserve lived up to global expectations and cut the Fed Funds rate from 1.5 to 1 per cent. This implies that the Fed has abandoned fears about inflation and will be concentrating, first and foremost, on the threat of recession.

On the same day that rates were cut, the Fed has agreed to lend $120 billion to Mexico, Singapore, Brazil and South Korea ($30 billion each). This move is in response to the unmet demand for U.S. dollars in the national banking systems of the four countries. Emerging economy banks want dollars to counteract volatility in currency, to meet obligations that must be in dollars, and to shore up confidence.

This is yet another sign that the world's financial leaders are recognizing that this crisis is no longer isolated to the industrialized nations. In fact, while the direct effects of the crisis have not fully hit the emerging economies, the effects of it on their currencies and indices have been magnified. This is partly due to emerging nation's reliance on foreign direct investment and trade. That said, for now it appears that the bulk of the instability in the emerging economies is a result of currency pressures and insecurity.

Production cuts in China are spreading fear that the world's work-shop is decelerating much faster than expected. Manufacturers are closing their doors all over the industrial regions of China. This is happening while China has reduced interest rates in an attempt to stimulate the economy. As an economy that relies heavily on export, China's output should be heavily effected by large shifts in global demand. These factory closures, however, might best be understood as a preemptive reduction in costs to prepare for what is seen as an inevitable downturn in the advanced countries (read: U.S., Japan and the E.U.), the main destination for China's exports.

While forecasts for China's growth are still highly positive they have been reduced from previous estimates and are sure not to reach the pre-crisis levels. China is a special case. It is not special because it is immune to the global recession--it certainly is not immune. It is special because the rate at which the economy must grow in order to maintain employment levels is much higher than other countries. Thus a reduction in the growth rate has grave implications for China's enormous workforce. Increasing unemployment and an inability to absorb workers migrating from the country to the cities in search of jobs could spell dangerous instability for China's government. Increasing unemployment could result in substantial social unrest.

Japan, another export dependent economy, has just announced that its industrial output was down 1.2% in the last quarter (July-September).

In European news, a poll shows the majority of Germans would favor the nationalization of large swaths of the economy.

In the U.S., consumer confidence fell to lows not seen in 41 years. Consumer confidence is an indicator that is said to measure, in some form, expected consumer spending, which accounts for two-thirds of US economic growth. Confidence has waned as falling home values, rising official unemployment, and financial insecurity have consumers tightening their belts and putting away their credit cards.

It has been reported that more than half of the bailout money given to banks has gone to dividend payments to shareholders and not lending to potential borrowers. Amidst recent nationalizations, it is about time that Americans start thinking about exerting their democratic will on the economic institutions that effect our day-to-day lives.

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