Diane Francis in Davos

Wednesday, January 25, 2006

DAVOS STUFF

DAVOS - China's economy overtook France's last year, said Min Zhu yesterday, executive assistant to the president of the Bank of China.

"We have just readjusted our GDP figures to US$2.2 trillion which makes China the fifth largest economy in the world," he said during a lively panel discussion at the World Economic Forum. "Previous figures did not include service companies with fewer than 60 workers or less than 5 million yuan [roughly US$700,000] in revenues."

China's phenomenal growth was center stage, as usual, during the kick-off panel discussion at the World Economic Forum into the state of the world's economy.

But every year, the panelists mostly incorrect and last year was no exception. The majority view back then was that the U.S. would come unstuck in 2005 due to overspending and the dollar would plummet.

Instead, the U.S. dollar went up in value and its economy grew nicely.
The only exception to last year's bearishness was Jacob Frenkel, vice chairman of insurance giant AIG and former head of Israel's central bank.

"The dire predictions didn't materialize which is a reflection of the robustness of the U.S. economy," he said. "It's capable of absorbing enormous shocks."

U.S. trade deficits are happily financed by Japanese, Chinese and other Asian countries with trade surpluses and they are not about to pull the plug.

"The U.S. overspends and Asia over-saves," he said. "The U.S. dollar is not going to collapse. Where else will investors go? Japan holds US$1 trillion of U.S. debt and China US$500 billion. The more you are invested in an asset like this, the more vulnerable you are to collapses so you are reluctant to let that happen."

The Chinese banker added that the U.S. remains the best investment bet.

"We believe there will be a dollar depreciation of 3 to 5% gradually at current interest rates," said Mr. Min. "But the Euro and Yen are not strong currencies."

What's more worrisome to the world's economy is not Asia's surpluses, which encourage U.S. consumption for the benefit of the entire world, but the fact that the petrodollars being earned as a result of high oil prices are not being recycled into the larger world economy as before. And these surpluses will only grow as oil prices remain high.

"In 2005, the U.S. had an US$800 billion current account deficit. Asia and Japan had total surpluses of US$350 and OPEC's 11 countries plus Russia had surpluses of US$300 billion," said Mr. Frenkel.

An explosion of spending in OPEC countries, plus dramatic increases in their stock markets, are the result of keeping many of those petro-dollars at home, he said. "Where will that money go in future?"

The good news is that the world's engine of growth - the U.S. economy is expected grow by 3% in 2006, Japan by 2% and China/India by 9%.

Much political noise is made about this difference in growth rates, but 3% of America's US$11.7 trillion GDP is still more than 2% of Japan's US$4.67 trillion economy plus 9% of China's US$1.65 trillion economy.

Trade figures aside, what was truly unsettling about this year's panel consensus - given its track record as incorrect - was that most believe that 2006 will be a "goldlilocks year" economically.

Exception to this view was the perennial "Cassandra" Stephen Roach, Chief Economist with Morgan Stanley in New York. He has been a doom-and-gloomer for five years now and remains steadily so.

All of which means that if the exception turns out to the rule, as it has in panels past, the Americans will experience a meltdown, a la Stephen Roach.

Here's his take: "The dollar rose last year after falling for three years which was an act of desperation on the part of the asian central bankers who hold U.S. T-bills and are convinced things can go on this way."

"There is a dangerous degree of complacency out there and the weakest link in 2006 is the American consumer and there was no increase in consumption in the last quarter in the U.S. Zero."

Other commentators have suggested that the slight consumption slowdown means there is "rust but not bust" lurking around the U.S. economy.

But Roach says this could be "the end of the great American spending binge."

He added another negative in 2006 which is the departure of Alan Greenspan as Chair of the Federal Reserve Bank.

"He has inspired 18.5 years of confidence and is leaving the building in six days," said Roach. "Just months after Greenspan took over in 1987, the stock market crashed. Just months after Paul Volcker took over in 1979, the bond market crashed."

But the Bank of China's Mr. Min said there may be volatility in the past following such handovers, but China and others have confidence in the Federal Reserve and US$ because in 18 years it has managed to grow the U.S. GDP by 258% and the U.S. stock market by 500%.

1 Comments:

At 12:03 PM, Blogger Chris said...

Shilling for the eugenicist agenda must be very beneficial to your career. You, madam, are a wicked piece of human filth and a traitor to the people of the earth.

If these people you work for are successful in their quest for a 90+ percent reduction in population they will turn on and devour one another in their insatiable quest for power and domination.

Useful idiots, such as yourself, will be cast aside and eradicated way before it gets to that point.

Read your history, you fool!

 

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