Baseball91's Weblog

June 24, 2009

A New Asian Contagion?

Unrest. Unease about the economic outlook. There was a lot of restlessness out there. Unrest beyond the stories out of Iran. Unrest in the market. Marketwatch reported that the dollar gained against the Euro but declined against the yen, “in a pattern that has frequently emerged when traders grow nervous about the outlook.”

The World Bank said that the global economy will shrink by 2.9% in 2009, a revised outlook from a previous forecast of a 1.7% contraction. That mean the deflation animal was loose around the world.

Money always seemed to affect the outcome of elections. Japan is now in the throes of its worst post-World War II recession. I think we all were, actually. As fate would have it, the prime minister must call elections by September 2009.

Last week there was a summit of the world’s four largest emerging economies, as leaders from of China, India Russia, and Brazil met in Yekaterinburg, Russia to discuss reforming the global financial system and lessening reliance on the United States. These four countries hold nearly 40 percent of the world’s currency reserves and make up 15 percent of the global economy.

A joint BRIC (Brazil, Russia, India, China) statement issued before the summit expressed a commitment to advance the reform of international financial institutions so as to reflect changes in the world economy. The statement said. “The emerging and developing economies must have a greater voice and representation in international financial institutions,” calling for a greater role for developing nations in global financial institutions and the United Nations.

Leaders discussed investing their reserves in one another’s bonds, swapping reserve currencies and increasing the role of Special Drawing Rights, an international reserve asset. Discussions took place earlier in the day in the Urals city at a meeting of the Shanghai Cooperation Organization about the creation of a supranational currency and lessening global reliance on the U.S. dollar. President Dmitry Medvedev was an outspoken a critic of the current world financial system, reserving his most bold comments for the Shanghai Cooperation Organization. “There cannot be a successful global currency system if the financial instruments it uses are denominated in only one currency, which is the case today. And that currency is the dollar.”

But the idea of replacing the dollar found little traction with China, which holds $2 trillion in foreign currency reserves and which did not offer any comment in support of the proposal. Back in February 2009 at the Davos, Chinese premier Wen Jiabo, looking at the system of capitalism, lashed out at the ‘blind pursuit of profit’ in some countries in what he called the ‘American financial crisis.’ The view from China was that stocks and bonds were an American system.

In Japan, exports were down 40.9% from May 2008, adding to doubts about the possibility of a quick recovery from the global recession.

In Japan, the Democratic Party of Japan (DPJ) hopes to topple Japan’s prime minister Taro Aso’s Liberal Democratic Party which has been in power for almost all of the past 50 years, seeing Japan rise to become the world’s number 2 economy, Asia’s largest economy. If he becomes the next finance minister, Masaharu Nakagawa of the Democratic Party of Japan would like to make changes to reshape Japan into a kinder gentler place.

Saying the dollar may no longer reign supreme in the future, Nakagawa envisions “in the course of the region’s forming a single economic zone,” as he told AFP, an Asia united by a single common currency. With possibility the dollar might not function as the key currency any more in the medium term, Nakagawa said, “Now is the time for Japan to say what kind of world it would like to create. Not to adapt itself to the given circumstances as it has,” since the end of World War II. People must take change into account as the world seeks a new order in the post-Cold War era.

Speaking more broadly about his vision for Japan, he said his country had followed the liberalism of the United States in the past, but the time had come for the nation to be “more Asian.”

In an article by Miwa Suzuki, he said the Japanese government could extend lending to the International Monetary Fund on condition that it is in yen, while guaranteeing bonds by Asian countries if they are denominated in the Japanese currency. “Until an Asian common currency emerges,” he said, “the Japanese government should make efforts to have the ‘Asia zone’ use the yen, not the dollar, for trade settlements. It’s time for Japan to launch this plan.”

Money and fate. And relationships. On June 17, 2009, President Dmitry Medvedev and Chinese President Hu Jintao signed an agreement in which Russia will sell 300 million tons of oil to China over 20 years at $57 per barrel or $100 billion. In order for Russia to deliver that oil, a new pipeline has to be built by Yukos to China which was originally planned at a cost of $4 billion for the mid-2000s, but by March 2008, the price had risen to $29 billion. Given oil prices of at least $80 per barrel, Russia has no plan to recoup this cost at the agreed to price of just $57 per barrel. This is the same Russia that has been using oil as a weapon against it Slavic brethren in Belarus and Ukraine.

Money and fate and relationships. These were the major ingredients in a love story. Any love story. Money and the times always provided the ambiance to the story. In all relationships, actually. Even with the new BRIC nations. Amidst this unrest and unease about the economic outlook.
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