Can Korea Learn From Wall Street Folly?
Soft Landing Consulting
Since my last column, a great deal has happened on Wall Street and in Washington, D.C. As someone who makes his living in Seoul, the natural question is what and when will be the impact of this financial development here.
Since even players on Wall Street do not have an accurate idea of what's happening in their neighborhood, it is not fair to expect anybody else to. An $80 billion financial firewall has been erected by the ASEAN+3 nations, which includes Korea, in hopes of minimizing the global credit crunch's impact. How effective even $80 billion may be in the face of a catastrophe of this size is questionable.
Asian economies, such as Korea's, have benefited for decades from the exchange of cheap Asian credit for American consumption of Asian products. But should this arrangement significantly falter or fail, we could see America's weakening economic leadership position being filled in part by China.
Considering we are at best only about half way through this global credit crunch, we need to look at how the US got to where it we are today, and what lessons Korea may learn from it.
Consider Kevin Phillips' book, Bad Money: Reckless Finance, Failed Politics and the Global Crisis of American Capitalism, where he identifies the Seven Sharks of the American economy:
1. The US economy has become overly dependent on the finance industry as opposed to being better balanced with a manufacturing base, as America had up to the mid to late 1960's.
2. American home prices are a collapsing crisis.
3. For decades Americans have been building up both national and personal debt beyond any prudent measure. Americans have a poor negative average savings rate. Too many Americans feel it is their God-given right to buy an excess of goods at cheap prices, thanks to cheap overseas manufacturing. The US national trade deficit is, and has been, running at about $700 billion a year.
4. Global commodity pricing build-ups have skyrocketed.
5. US Government statistics have proven to often be flawed and deceptive so that many Americans have been led down the garden path with unrealistic assurances from SEC, the Fed and the US Treasury Department.
6. Globally, we have peak oil prices that go beyond commodity inflation, suggesting a serious shortage of oil compared to growing demand. While there has been the relative recent price drop, cheering for slightly less than $100 a barrel levels is nothing to be sanguine about.
7. The collapsing dollar may eventually give pause to some of America's major overseas lenders when considering further extending to the US an open line of credit that Americans have come to take for granted. Cheap American exports may sound positive to some Americans, but that may be true only if America still has an adequate and competitive manufacturing base large enough to take sufficient advantage
Now, if one or a few of the above factors coincided, the overall situation could be rationalized away as being problematic and not be cause for serious alarm. But, of course, all seven are present and some have been with America for a good part of the past decade.
To say the fundamentals of the economy are strong shows the distance between academic economics and actual market conditions. The days of the American empire are not over, but since 9-11, Americans have allowed their president to assume more of an imperial form of power by voluntarily surrendering some of their civil rights. If one looks how other empires have ended, there are some disturbing parallels. I'm not saying we Americans are at that point, but to pretend there is no such danger is simply dangerous to this and future generations.
America's War on Terror has been a folly, given that it has been compared to WWII, but without calling on this generation of Americans for real sacrifices such as mobilizing the economy to a wartime footing or the conscription of soldiers. All this talk of more boots on the ground is a bit of a joke. I know from here in Korea that the 8th Army and the rest of the US Army is overstrained. For several months, every officer leaving the US military has not been replaced fast enough to maintain current force levels. Is it any surprise that the very same crowd that brought America into Iraq, in addition to Afghanistan, often includes those who denied the combined significance of the above seven issues until it was too late?
The difference between a dogmatist and a realist is moderation. There is always the oft-neglected middle way, an approach that makes for a better good than controversial extremes. But too often America has become polarized into the "reds" and the "blues," so that America's legislative branch often looks more like the food fight scene out of "Animal House" than an example of a functioning democracy.
Getting back to Korea, what can we expect? We will see a drop in market demand for Korean products not only in America but in other markets that are often fueled by their exports to America. And though I hope to be wrong about this, it seems only a matter of time until this credit crunch has a major impact on the Korea economy.
Recently over dinner, I was asked by a high profile foreign diplomat about what may be the next cause for anti-Americanism. After a moment's thought, I replied that we could see downtown Seoul streets again clogged with demonstrators, this time against America's financial recklessness that has led to the demise of the Korean economy. As an American and as member of the Korean marketplace, I really hope I'm wrong about that. But should I be so unfortunate as to be right, remember you read it here first.