US Federal Reserve Chairman Ben Bernanke is due to step down from his post at the end of this month. The whole world is watching to see how his successor will go about ending the Fed’s policy of quantitative easing (QE) and what impact and influence this policy change will have on financial markets around the world.
As the global economy undergoes a general recovery and moves back into growth, everyone in Taiwan is wondering how this nation, which has been dragged down by the global recession, will respond to the challenges of the post-QE period.
During his two consecutive terms as Fed chairman over the last eight years, Bernanke has faced the challenge of the financial crisis and has borne the pressure of a serious economic recession in the US.
Without a doubt, QE has been Bernanke’s weapon of choice for responding to the financial crisis, but its effectiveness remains uncertain.
Furthermore, the US’ implementation of its QE policy has had an earthshaking impact on financial markets around the world. Notably, it has led to a large amount of US dollars flooding into international markets, which in turn has caused the value of the US dollar assets that other countries hold to decline considerably.
Although this beggar-thy-neighbor currency policy resolved the US financial crisis in the short-term, its after-effects on the US should not be overlooked.
First, the US dollar’s status as the world’s international currency has come into question, while that of the Chinese yuan has been strengthened.
Second, how the QE policy is brought to a close will have an impact on the US property bubble crisis and it could sow the seeds of a second financial crisis.
Finally, the US national economy as a whole has been weakened, making QE and property bubbles into twin phenomena that could come and go in cycles.
A building on the verge of collapse cannot be propped up by a single beam, and although Bernanke has done an outstanding job as Fed chairman, he alone cannot stem the inevitable, continuing decline of US economic power.
The US used to be the biggest market in the world for Taiwan’s exports, but after being battered by the financial crisis, it must give way to China in that respect.
By chance, the US financial crisis took place soon after Ma Ying-jeou (馬英九) took office as president. Under Ma’s presidency, relations across the Taiwan Strait have improved. Consequently, China has taken over the key role formerly played by the US in relation to Taiwan. Of that there can be no doubt.
In a world in which US power and influence is getting weaker — while China is getting stronger — special attention should be paid to the different kinds of influence that China and the US have on Taiwan.
In the past, when the US was Taiwan’s biggest export market, Taiwan accepted its export orders onshore and did all its manufacturing onshore too. However, time has moved on and things have changed. These days Taiwanese businesses generally take their orders in Taiwan, but make the goods in China.
As a result of this shift, Taiwan suffers from high unemployment and consumer spending power keeps falling. Apart from having an impact on Taiwan’s gross national product growth, this situation has also caused the nation’s household savings rate to keep falling.
In other words, people in Taiwan are getting poorer and poorer.
In view of the central government’s poor performance, companies’ unwillingness to invest and the constant flow of Taiwanese talent westward to China, when the US’ QE policy comes to an end, it will cause Taiwan’s currency supply to go from easy to tight and cause interest rates to rise. That will bring about a further fall in willingness to invest and cause the housing bubble to burst — in other words, we are very likely to see a Taiwanese version of the US financial crisis.
Government authorities must prepare for the worst by tightly controlling the risk involved in banks providing mortgage loans, so as to prevent bad loans from becoming the first domino that triggers a Taiwanese financial crisis.
While mortgages impose an extremely heavy burden on the public, there is insufficient impetus for economic growth, making it impossible for people’s incomes to rise.
As soon as the US launches policies that put an end to QE, it will have a heavy impact on Taiwan and its extremely weak economy.
Considering the government’s poor performance and the lack of improvement in Taiwan’s investment environment, many manufacturers and other businesses will prefer to invest their money overseas, while talented Taiwanese continue to move to China in droves.
In such a situation, what cards can Taiwan possibly have to play when the threatened end of QE finally arrives?
Hwang Dar-yeh is director of National Taiwan University’s Center for the Study of Banking and Finance.
Translated by Julian Clegg
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