US securities market outlook for 2008

It is none other than the very high volumes of foreign exchange reserves, in the form of US securities that have saved several Asian economies, during the global economic recession of 2008. So you must be thinking that may be Asian countries should consider continuing to maintain a policy of consistently increasing their vast foreign exchange reserves at the same or at a better rate. Isn’t that justified? Well, no it is not.

It is exactly this extreme hoarding of foreign exchange reserves/ US securities that has given way to the global economic meltdown that the world faced in 2008. No arguing the fact that it is true that these reserves buffered Asian countries from unruly consequences during the 2008 economic crisis.

But the fact remains that the excessive hoarding of foreign reserves by Asian countries, went above and beyond the purpose of safety and security. It created steep global economic imbalances that led to a chain reaction, spreading like an inferno across the economies of the world, and bringing them burning down.

A major and undeniable fact that faces the Asian countries post the 2008 recession is the Asian persistence on huge forex reserves. This implied that dollars were being pumped into the US
economy like never before, in the name of purchasing US securities. The excessive supply of US dollars, made them cheaper in their home land, thereby eroding interest rates. So now that evasive little dollar was so much more affordable to borrow, all thanks to the attractive new lows in interest rates.

US stood spectator to an era of rampant and unprecedented borrowings that any proliferated, civilized and developed economy of its stature, may have ever witnessed. This meant all that borrowed liquidity was being pumped into other financial market segments, such as equities, commodities, and real estate. This boosted an artificially large bubble in these segments. What was liquid was becoming illiquid by the moment. As a result, it was only a matter of time when these bubbles were waiting to burst at any uncertain moment.

When poor nations have economic surpluses, rich nations accommodate for their poor compatriots by taking a trade deficit in their stride, in the name of compassion. However, this time around the ball was in the US court. Asian surpluses began breaking upper circuits consistently, while the US trade deficits were breaking lower circuits.

This gaping hole of economic disparity between the US and the Asian countries, coupled with the gigantic purchases of US securities by the Asian economies, caught the US
economy off guard. One fine day, the top five American investment banks of the world, and several other major ones, filed for bankruptcy. The US found it hard to limp through this hard blow under its belt, but it had to sail through, and it is still in the process.

China leads as the Asian culprit, hoarding the maximum extent of US securities and treasuries. It is guilty of exploiting the undervalued exchange rates to create manipulative trade surpluses that were systematically invested in US securities. Could the Asians do so without their wealthier counterparts accepting enormous trade deficits? No, but “Hail US”! Why not? US is rich!

US has been compassionate with the global economies, ever since the great depression around the third world war. It has been a US policy to be tolerant and supportive of the less privileged global economies. But this time around, it was not needed. This is because most Asian economies were already strong on their feet. They were strong enough to pose a threat to the US economy. Yet US irresponsibly chose to turn a blind eye on the impending dangers of propelling trade deficits. They forgot the basic fact that “If you can’t save yourself, you can’t save another”.

What followed was an American borrowing and spending mania. US imports sky-rocketed while their exports crumbled to accommodate for their Asian counterparts, and in turn the third world countries as well. This is what gave rise to a systematic economic boost that engulfed the global economies in its entirety. But it was only a matter of time, before this time-bomb was waiting to explode.

Now that the US is in the post-explosion, rehabilitation and reconstruction mode, its sole agenda must be to “save”, “curb its spending ways”, and “boost its exports”. It is also a responsibility of the Asian economies to stop hoarding US securities in the name of forex reserves. For, if they don’t stop on their tracks now, the world will witness an economic catastrophe, the onus which, will be on Asia. And the stain on its integrity will be permanent.

If the Asians refuse to change their policy and do not become more accommodating of global economic welfare, like the US has been all the way; and if the American and Europeans retaliate to adopt a similar policy as well. Then that day is not far, when the human race reads, in its local morning newspapers one fine day that, “We are facing an unparalleled GLOBAL ECONOMIC DEPRESSION”. All thanks to the fact that the concept of “demand” has been wiped out of the dictionary of economy.

All fingers shall point at Asia. And we do not need to define the possible consequences and scale that an economic depression can take on, in a modern day world like ours, when all economies of the world, are so intrinsically intertwined with each other. The consequences will be far-reaching and very tricky, if not altogether impossible to revoke.