Fri, Oct 17, 2008 - Page 8 News List

The financial woes are here to stay

By Bert Lim 林建山

The world is in a panic, trying to respond to the financial tsunami put in motion by the collapse of the financial system in the US and other countries. It has been called the first depression since the 1930s. Although the US government passed a US$850 billion rescue package on Sept. 26, it still isn’t enough to revive the US economy.

A CNN report said that 59 percent of respondents to a CNN/Opinion Research Corp poll believed we are facing a global recession. On Oct. 8, the G7 financial heads simultaneously announced they were drastically cutting interest rates, while the UK government announced a £50 billion (US$86 billion) emergency bank bail-out.

The effects of this financial crisis, which were initially limited to the parts of the securities and financial sectors affected by the US subprime crisis, have now spilled into international real estate markets as well as US commercial real estate and high-tech manufacturing.

Internationally, it is even more worrying, as it will have an impact on consumer demand on a national or even regional level. Once consumption shrinks, we can expect the global economy to take a heavy blow.

It is frightening to see how Iceland, a Nordic country praised as one of the more exceptional emerging economies, a few days ago declared it was on the verge of bankruptcy — the first sovereign country to raise a warning as a result of the financial crisis.

This is no longer a matter concerning only individual manufacturers or industries.

Most problems are still restricted to the securities markets and the financial industry. All rescue plans and measures, or interest and exchange rate adjustments, have been aimed at saving financial institutions and guaranteeing depositors.

The fact of the matter is the third wave of the global economic crisis is gathering, as steeply rising unemployment rates are beginning to interact with another wave of inflation set in motion by sharp wage adjustments around the world.

Global inflationary pressures — big news for almost a year — have shown signs of abating in the past two weeks as oil, food and metal prices have stabilized, but sharply rising risk during the third quarter is now pushing these pressures toward a second peak.

The risks for the real economy brought by the explosion in metal, oil and food prices early this year has instantly been transformed into a political stability crisis in newly developing countries. This will of course have a substantial impact on the development of newly industrialized countries.

By the end of the second quarter, the prices of several key products had slowed. As we entered the third quarter, workers in different countries felt the sharp increase in cost of living and demanded wage hikes that had been frozen for a long time.

This set off a second wave of global inflationary pressures and it is estimated that global inflation will increase by more than 6 percent as a result.

The central banks in several emerging economies have taken anti-inflationary measures, mainly by restricting the money supply, which immediately resulted in flagging confidence and slowing exports. The central banks in many advanced countries, including Taiwan, had to deal with a different policy problem: Relaxed policies aimed at stimulating export confidence created new inflationary pressures. In microeconomic terms, the greatest impact came from sharply rising unemployment figures, reaching almost 7 percent, which created three new global economic risks.

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