The TAIEX has suffered a heavy negative impact from the weakened US economy, lackluster company statements and the withdrawal of overseas capital from Asian markets. Having tumbled past 6,708 points, the lowest level of the last downturn, it has continued its downward trend, falling below the 10-year moving average of 6,500 points to reach its lowest point in two years.
Further afield, financial research firm MSCI Barra’s Asia-Pacific Index (excluding Japan) has fallen nearly 30 percent from its high point — an even bigger fall than the losses of 12 percent on the US S&P 500 and around 20 percent for developed markets outside the US.
As everyone knows, aside from the US Federal Reserve’s policy of allowing the US dollar to weaken and the effect on the US and global economies of long-term low interest rates, the main culprit behind the current US economic recession has been the end of the real estate bubble, including the sub-prime mortgage crisis and the troubles faced by the “mortgage twins” — the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, known as Fannie Mae and Freddie Mac.
Further, this financial crisis has had a knock-on effect on the entire global economy. Putting this account and the statistics together, the question arises of why it is that when the US sneezes, Europe and other advanced countries get a fever and newly emerged markets like those of Taiwan and other Asian countries come down with a heavy cold.
It was last year’s sub-prime mortgage crisis that started the domino effect of falling growth rates around the world, as low-deposit home loans were securitized and sold to investors in other developed countries with the promise of high rates of return. First we saw reputable banks suffering heavy losses or even facing collapse, and then central banks injecting funds to keep the disaster from spreading. The situation is so serious, however, that no amount of aid could stop these countries’ economies from experiencing a big slowdown under the onslaught of the sub-prime crisis.
Another effect of the sub-prime troubles has been a drop in US import demand, resulting in the spread of cheap currencies and falling exports for newly industrialized countries. As a result, the economies of these emerging markets, which account for a half of total world GDP, have slowed down considerably.
As developed and emerging markets, interconnected as they are, drag each other down, the global economy has become engulfed in bearishness. The international nature of the current crisis is proof of the global economy, and the question of why a sneeze in the US economy has led to fevers and colds in other countries can be explained by the three-stage process of first, the transfer of risk arising from financial innovation in the US to other regions, second, the re-import of the crisis and third, the snowball effect and re-export.
US sub-prime lending risk has, by means of financially innovative securitization of assets, been spread out among investors all over the world, and Europe, as the main market for collateralized debt obligation (CDO) financial products, has also been the biggest buyer of sub-prime mortgage securities. This year’s mid-year report from the Institute of International Finance (IIF) shows that European banks have lost US$200 billion since the beginning of last year because of the credit crunch, outstripping the US$166 billion lost by US banks.
This clearly shows how the transference of US financial risk to other countries has allowed the sub-prime crisis to spread and cause connected and derivative financial products to lose value. This has created a global credit squeeze, and that is how this US economic virus has come to infect Europe, Australia and other advanced countries.
Besides, most Americans have gone into consumption overdraft on the basis of the “wealth drive” of rising real estate prices. In other words, the rising value of their homes inspired consumers to increase their consumption to the extent of negative savings. The sub-prime mortgage crisis has on the one hand shrunk personal wealth, cutting Americans’ consumptive capacity dramatically and, on the other, directly caused a big fall in real estate prices. As a result, Americans are now plagued by shaky personal credit and debt. Since consumption accounts for 70 percent of US GDP, negative growth in consumption is bound to lead to a recession in the US economy.
Falling consumption leads in turn to a rapid fall-off of imports from emerging economies, which are the factories of the modern world, and so the US’ trade deficit has begun to narrow. Since exports have always been the main engine for emerging economies to earn foreign exchange and drive economic growth, slowing or falling imports are bound to push such countries toward recession, and so they are the ones coming down with heavy colds. Moreover, transnational companies account for a large part of newly industrialized countries’ export markets.
These countries’ exports, therefore, make a definite contribution to the earnings of US transnationals. When US transnationals abroad are not making money, they have no money to send back to their parent companies in the US. This has a negative impact on growth, and that is what we mean by “re-importing the crisis”.
The financial storm sparked by the sub-prime crisis has, via the global production chain, caused substantial economic repercussions at home, which then snowball and are “re-exported.” As a result, the whole world is now facing a three-pronged assault of financial crisis, a sagging real-estate market and economic recession, none of which shows any sign of going away. The global economy is groaning as bears go on the rampage.
As for Taiwan, in trade relations it is positioned between two major economic powers — China and the US. Given the sorry state of the global economy, Taiwan is bound to have a hard time. In other words, there are two reasons Taiwan’s stock market keeps plumbing new depths — on the one hand, it is being dragged down by the sluggish performance of the US and other developed economies and, on the other, the rapidly growing economies of China and other emerging markets are now slowing down, which can only hurt investor confidence in Taiwan.
As the main economic powers on either side of the Pacific falter, Taiwan is getting squeezed like the filling in a sandwich. Added to this are the factors of political interference and disappointment over the Ma government’s retreat from “Ma will turn things around right away” to “Ma will turn things around gradually.” In such an environment, the stock market has nowhere to go but down. The “heavy cold” we are suffering is understandable and, sad to say, unavoidable.
Jeff Wu is a doctoral candidate and a manager in the service industry.
TRANSLATED BY JULIAN CLEGG
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