Mon, Mar 31, 2003 - Page 8 News List

Quick war no economic panacea

By Jason Ye 葉信良

The recent performance of the US, European and Japanese economies has been far from ideal. This has led to a weakening of the economies in other countries. The policy of lowering interest rates adopted by many central banks does not seem to have been effective, and calls to lower interest rates continue. The US-Iraq war is generally believed to be the main economic uncertainty factor.

Investors are adopting a wary attitude and refrain from stock market investments, instead turning to the bond market in an attempt to stabilize profits. It is also generally believed that a quick end to the war would eliminate the uncertainty and minimize regional conflict, which would be the only way to bring the prices of oil and other raw materials to stability, and give the global economy a chance to recover.

A comparison between US and Iraqi military capabilities leaves the US highly confident that it will be capable of quickly conquering Bagdad. But does this imply a swift global economic recovery?

Even if the US were able to quickly end the war, that would only take care of the information side of uncertainty. On the fundamental side, judging from official US statistics, US unemployment rates remain high with employment in non-agricultural industries at its lowest level in four years, and consumer confidence indices are plummeting. Nor have we seen a solution to the problem of industrial overcapacity that came with the new economy in the 1990s.

The public is pessimistic about the future and afraid to spend, and the ability of manufacturers to negotiate prices is declining due to overcapacity, putting further pressure on profits. The only way for manufacturers to rein in expenditures is therefore to cut down on staff. With the addition of concerns for potential terrorist attacks and other external factors, this leads to further public pessimism about the future, thereby creating a vicious circle.

Even if the US manages a quick victory over Iraq, these problems remain unresolved for corporate America, and the industry's outlook is still not bright. The godfather of investors, Warren Buffett, stressed that most manufacturer stocks still are overvalued and devoid of investment potential.

He prefers to invest in high-yielding bonds. Due to the low interest rate policy, there is no shortage of market capital, but structural problems remain unresolved. A revival of the economy cannot be accomplished by a war alone. This is the US situation.

Europe and Japan have similar fundamental issues. Europe still hasn't recovered from the burst of the new economy bubble. Japan's decade-long recession has left economic doctors helpless. Even if these three big economies recover from their new problems (the US-Iraqi war), full recovery still lies in a distant future if they cannot solve their old ones.

The war will certainly not solve existing problems, but it may bring with it a host of negative effects. The threat of terrorist attacks may further envelop the US, expanding the scope and extending the period of these effects. The lingering fears from the burst new economy bubble and the shadow of looming terrorist attacks will affect the willingness of capital to remain in the US.

The US account deficit has been growing after the Sept. 11 terror attacks. After the US-Iraq war, capital outflows may increase further.

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