Global Economies and Markets: From Debt Deflation To Creative Destruction?

``Yet “revolutions” every generation, as was recommended by Thomas Jefferson, are not the solution. We know that “revolution” is not achievement and the new dawn. It results from senile decay, from the bankruptcy of ideas and institutions, from a failure of self-renewal. The only way in which an institution – whether a government, a university, a business, a labor union, an army – can maintain continuity is by building systematic, organized innovation into its very structure. Institutions, systems, policies, eventually outlive themselves, as do products, processes, and services. They do it when they accomplish their objectives, and they do it when they fail to accomplish their objectives. Innovation and entrepreneurship are thus needed in society as much as in the economy, in public service institutions as much as in business. The modern organization must be a destabilizer; it must be organized for innovation.-Peter Drucker, Modern Organization Must Be a Destabilizer

The mainstream has argued sternly about the “myth of decoupling”, when the term decoupling has been a palpable misnomer.

In the globalization heyday of yesteryears, which means the integration of finance, trade, investment and labor, “convergence” was obviously the natural outcome. Thus, global markets and economies had been mostly coordinated or harmonized as the bubble blossomed.

But when the US originated global credit bubble imploded, this globalization platform have effectually been reduced, as world trade is expected to decline by more than 2% (usatoday.com), and capital flows around the world is also expected to crater- world Foreign Direct Investment (FDI) is expected to slump by 21% (Dailystar.net) and capital flows to Emerging Economies is likewise expected to tumble to $165 billion from $466 billion according to the Institute of International Finance (Marketwatch.com).

In addition, ongoing debt deflation in major economies have been reversing capital flows, as major financial institutions vie to meet capital requirements hence repatriate capital from liquidated overseas investments.

And as we previously argued, the recent surge of the US dollar’s price against most of the world’s currencies has been a function of dollar shortage in the system, the BIS recently issued a report which essentially validates our view [see The US dollar's Vitality Stems From Debt Deflation Prompted US Dollar Shortage]

Worst, the rising protectionist sentiment seen in many diverse forms are being resurrected and may further add to negatively impact trade and financial flows [as discussed in Will Deglobalization Lead To Decoupling?].

Hence, the natural incipient impact from deglobalization was also a synchronous meltdown seen late last year.

Now a new trend seems to be evolving.

In contrast to the macroeconomic perspective, whose penchant is to view the world in terms of aggregates and who seem to believe that people behave like automatons and tend to think alike, we think that people respond differently to the circumstances, hence may lead to diverse reactions. In short, people act based on purposeful behavior or incentives.

The carnage in October of 2008 instigated by the institutional run or “electronic run” in the US banking system seems to have posed as a severe mental shock known as the Posttraumatic Stress Disorder (PTSD) to the world economic activities and the financial markets. In some accounts, such mental discord has been labeled as the “After Lehman” syndrome [see our latest post, Global Posttraumatic Stress Disorder (PTSD): The After Lehman Syndrome].

And as the world fell in into a transient suspended animation from such anxiety disorder, the consequent spillover to the real economy have been transmitted through a deep retrenchment of the credit driven demand and the subsequent sharp downside adjustments in the global supply chain, which reflected on the abrupt dismantling of the production structure built around the bubble global paradigm.

This means that the compression of the supply chain had been equally manifested in the mass closure of relative excess capacities, the efforts to reduce existing surplus inventories and the reduction of labor and or rationalization of wages. Likewise, expected valuations in on diverse asset markets during the bubble days are being intensely reappraised, as the once euphoria outlook seems to have transmogrified into a depression mentality.

In short, as explained in Fruits From Creative Destruction: An Asian and Emerging Market Decoupling?, the world’s financial markets and economies appear to be undergoing ‘creative destruction’, where the speculative excesses from the bubble structure is being undone by market forces, despite government’s exhaustive travails to futilely sustain them.

As Friedrich Hayek once wrote, ``The thing which is most needed to secure healthy conditions is the most speedy and complete adaptation possible of the structure of production. If the proportion as determined by the voluntary decisions of individuals is distorted by the creation of artificial demand resources [are] again led into a wrong direction and a definite and lasting adjustment is again postponed. The only way permanently to 'mobilise' all available resources is, therefore to leave it to time to effect a permanent cure by the slow process of adapting the structure of production.” (bold highlight mine)

Signs of Positive Impact From Creative Destruction?

However, considering the scale and depth of collapse, much of these precipitate changes may have been overdone. Yet, combined with the idiosyncrasies of the political, capital and production structure of each nation, signs of creative destruction may have started to reinforce signs of “divergence dynamics”- in a world where globalization trends have apparently been on a descent.

Proof? See figure 1.

Figure 1: Danske Bank Weekly: Last In, First Out

China appears to be leading the way out of the global economic morass, as industrial (manufacturing) activity, credit growth and car sales appear to be markedly recovering even as the US remains in doldrums.

According to Steen Bocian Chief Economist of Danske, ``China was one of the last countries to be dragged into the global financial crisis, and now looks set to be one of the first to come out the other side.”

And it's not only China but other East Asian countries as well.

And this development seems congruent to what we wrote in July of 2008 in Phisix: Learning From the Lessons of Financial History,

``This I think is what the global financial market has thus far priced in, aside from the ongoing delevaraging process that has fomented the forcible selling of most liquid asset classes by institutions caught in the web of illiquidity stasis.

``And if Asia is not a bubble then the likelihood is that the bear market arising from the present contagion conditions as mentioned above could be likewise be cyclical and temporary in nature. If our analysis is correct then we should see the rendition of the same patterns even amongst our neighbors.”

While much of Asia’s equity markets hasn’t been lifted by these developments yet, but instead dragged by dreary global sentiments, China’s Shanghai index remains as the world’s market leader up 5.29% for the week and up 20.4% over the year.

It should be a reminder that in every cyclical transition there will always be a change in market leadership and perhaps, China could be assuming such a role, if the recovery will be sustained.

Economic Restructuring Will Restore Global Growth

Nevertheless, it would be a misguided collectivist notion to think that China would even attempt to save the world. China will only act to protect its political, financial or economic self-interest. And any spillover will mostly be coincidental than intended, except perhaps for extraordinary circumstances which is exigent to their self-interest.

Take this report from Chinastakes.com, ``Chinalco’s $19.5 billion capital injection into Rio Tinto, so far the largest foreign investment of any Chinese enterprise, is believed to signal China’s holding’s transition into strategic resources. Officials and leaders of state-owned enterprises also suggest the government inject some of the reserve into state-owned enterprises to help them invest overseas or establish funds for overseas acquisition.”

Ironically, common sense tell us, where everyone wants to be saved, the world is simply too enormous and too complex to be saved with restricted resources.

And the harsh reality is that world will have to undergo an economic restructuring than continue to survive on a farcical political economic landscape dependent on sustained bubble blowing.

Otherwise what may seem like a temporary recovery may even lead to a malevolent nightmare, as Joseph Schumpeter in the The Economics of Recovery Program observed, ``"Depressions are not simply evils, which we might attempt to suppress but-perhaps undesirable-forms of something which has to be done, namely, adjustment to previous economic change. Most of what would be effective in remedying a depression would be equally effective in preventing this adjustment. This is especially true of inflation, which would, if pushed far enough, undoubtedly turn depression into the sham prosperity so familiar from European post war experience, but which, if it be carried to that point, would, in the end, lead to a collapse worse than the one called in to remedy.”

Global Posttraumatic Stress Disorder (PTSD): The After Lehman Syndrome

We opined that the collapse in world economic and market activities in the last quarter of 2008, which was principally an outgrowth of the seizure in the US banking system, engendered a psychological "shock and awe" trauma for the world.

Similar to infamous 9/11 tragedy, such anxiety disorders overwhelmed the public's psychological defenses, wherein the subsequent reaction have been to dramatically undertake massive adjustments in the ecosystem as fear governed. [See discussed in "What Posttraumatic Stress Disorder (PTSD) Have To Do With Today’s Financial Crisis."]

This is what I think the world is presently enduring.

And we seem to have found clues to support our thesis. Mr. Andrew Foster, Chief Investing Officer of Matthews Asia/Matthews International capital noted of a "Before Lehman and After Lehman" stigma, in his recent sojourn in 4 Asian countries.

This is his observation (all bold highlights mine)...

``I would venture to guess that many of the managers I met on my trip would have struggled to recognize the name “Lehman” prior to last September, and very few could claim to have suffered directly as result of Lehman’s collapse (e.g. exposure as a creditor or an investor). Yet what was interesting about the phrase was the universal way that these managers were using “Lehman” as a means to explain (or excuse) the frustrating downturn in the performance of their companies. For me, this highlighted the external nature of the current crisis: these managers were not coping with changing technologies, heightening competition or demand destruction; rather, a strange and unseen external shock had suddenly crippled the outlook for their businesses. It was as if all the managers were struggling simultaneously to understand the nature of this invisible shock, and had picked up the same newspaper on the same day, read the same headline, and said to themselves, “Oh, that’s what it is.”

``One illustration of this comes to mind: a newspaper company in Delhi that I visited publishes two editions, one in English and the other in Hindi. The former was seeing ad revenues decline by roughly a 20% annual clip, presumably because gloomy headlines in the English-language press were reverberating around the world, robbing confidence, and with it, economic prospects. Meanwhile, the Hindi version was seeing growth of nearly 30% in its ad rates. This growth may not be sustained; the global shock may come to roost in the Hindi segment as well. I asked management about this anomaly. They had asked the same question of some of their customers, to which the somewhat ironic reply was, “What recession?” Apparently the dour headlines had yet to penetrate those parts of India."...

Here is the clincher...

Again from Mr. Foster...

``But interestingly, most are simply frozen in stasis, paralyzed by a sort of uncertainty about what the future might hold. People everywhere are struggling to cope with what the headlines mean for them. While the shock Lehman precipitated was severe, the uncertainty—even fear—it generated has been more widely felt."

Like us, Mr. Foster believes that time will heal such mental stresses...

Again from Mr. Foster, ``Yet it is my experience that with time and stability fear tends to pass. And here is a possible silver lining: when the present fear does pass, many of these Asian companies might find that the fundamentals they once enjoyed (save perhaps easy access to financing) have not deteriorated to the same extent as they have elsewhere in the world, especially here in the United States. "B.L. / A.L." will undoubtedly be scorched in investors' memories permanently. Yet with a bit of luck, it will become more of a catch phrase rather than destiny itself."

So I'd be wary of any analysis, which omits the context of human psychology to deal with anxiety disorders such as the PTSD, and utilize the "After Lehman syndrome" to project into the future.

What Posttraumatic Stress Disorder (PTSD) Have To Do With Today’s Financial Crisis

``The most popular method of deprecating capitalism is to make it responsible for every condition which is considered unsatisfactory. Tuberculosis and, until a few years ago, syphilis, were called diseases of capitalism. The destitution of scores of millions in countries like India, which did not adopt capitalism, is blamed on capitalism. It is a sad fact that people become debilitated in old age and finally die. But this happens not only to salesmen but also to employers, and it was no less tragic in the precapitalistic ages than it is under capitalism. Prostitution, dipsomania, and drug addiction are all called capitalist vices. Ludwig von Mises Economic Teaching at the Universities

Lessons from Nassim Taleb

There are two important things I’ve learned from my favorite iconoclast Nassim Taleb, the chief proponent of the Black Swan Theory.

One is that he cautions the public to indulge in the study of markets or economies centered upon highly flawed but popular econometric models which are nothing but algorithms designed to operate on sterilized environments similar to classroom or laboratory conditions.

Since these computer models unrealistically operate on the assumption that every factor can be anticipated, examined and evaluated, risks are therefore assumed to be under control. Yet, the complex nature of our world can lead to manifold variables which can’t be read, evaluated or anticipated. The impact of which is known as randomness or the BLACK SWAN, a low probability but HIGH impact event, and is the nemesis of these ‘quant’ models. For instance the humongous losses in today’s financial crisis have been be partially blamed on the failure of quant models to anticipate risks from statistical fat tails.

Second, the other lesson taught by our unorthodox savant is to avoid getting trapped with cognitive biases such as projecting past connections and outcomes into the future.

The Sanctity of Delusion

Today we are told that the world is going to the sewer.

That is because the US, which has functioned as the only major ‘aggregate demand’ of the world, can’t live up to its role as it is undergoing a deep recession. In corollary, these experts further assert that the world won’t be able won’t replace the US as the provider of demand because of its sheer size. In other words, past performance guarantees tomorrow’s outcome.

Based on their economic premise, where supply exists only as a function of demand, then with today’s imploding private sector credit bubble, which has deeply dented the demand equation, must be replaced and absorbed by the government. Therefore, the government’s role MUST be to create artificial demand by printing up as much money in order to sustain the bursting bubble structure.

Tersely said, from the private sector, the credit bubble now is being reconfigured to one known as a government credit bubble. And this seems to be what we are seeing all around the world. From nationalization, “bad bank” or other means of government interventions, the idea is to transfer the leverage and the attendant losses to the government.

The same logic says that if Bernard Madoff was a fraud, and had operated on an unsustainable platform which didn’t last, the government’s insistence of operating on the same an unsustainable platform, but charged to the taxpayers and meant for the “good of the citizenry”, MUST SUCCEED. The difference was that Madoff was a felon, while governments sustaining bubbles for chimerical prosperity, are deemed as legitimate and for a good cause.

Unfortunately for Madoff, he was an individual and not privileged to conduct the same scheme which is equally being thrown to the public by governments. But the underlying principle of both Madoff and the governments is the same: to get something from nothing!

In other words, you resolve the problem of drug addiction by providing more drugs. If you are Madoff you get charged with drug pushing. But if you are the government, you receive plaudits for a fighting for a good cause.

In a reality check, unsustainable trends which can’t last, won’t! NO amount of the printing press nostrums will make illusions a reality.

Reality has finally landed in Zimbabwe. The Mugabe-Gono government finally capitulated to the marketplace realities by allowing the depressed African economy to trade in foreign currencies which in effect jettisoned the local currency, the Zimbabwe dollar. This also means the Mugabe-Gono government will fall soon. And in the same vein, all nationalizations or government guarantees are only as good as the real capital standing behind these.

Does the words of Karl Marx in Das Kapita in 1867…``Owners of capital will stimulate the working class to buy more and more of expensive goods, houses and technology, pushing them to take more and more expensive credits, until their debt becomes unbearable. The unpaid debt will lead to bankruptcy of banks, which will have to be nationalized, and the State will have to take the road which will eventually lead to communism"…ring a bell?

Fairy Tales Cures and Self Righteousness

Yet popular opinion believes in fairytale cures.

To call for market forces to rectify the situation, one risks being labeled as insane, inhuman or bloodless.

Nevertheless just look at level of desperation policymakers are into so as to consider ridiculous ideas to restore an unsustainable structure of economic growth:

-In déjà vu to the hog reduction program of the Great Depression of the 1930s, US policy makers are considering to boosts car sales via a program known as "cash for clunkers". (CNNmoney) Yes, the US government plans to buy and junk old cars so as to motivate its populace to buy new ones. If the policy gets enacted, this is going to be a waste of productive resources.

-Moreover, they are considering “to renegotiate mortgages it owns that might otherwise enter foreclosure” (Washington Post) or allow “bankruptcy judges to modify the mortgages of troubled homeowners” (Washington Post) all at the expense of the property rights of American people.

To add, not content with plans to impose tons of regulations on the national level, the statists have been contemplating on to expand impositions abroad. Signs of protectionism, which had greatly contributed to the Great Depression of the 1929, are surfacing in the political arena. At the confirmation hearing, Treasury Secretary Tim Geither unleashed what he “believes that China is manipulating its currency” (Wall Street Journal). In addition, the stimulus bill which was recently passed by Congress contained a “Buy America” rider (Washington Post).

All these actions seem to agitate for a mutually devastating global trade war.

And why would authorities engage in such potentially calamitous actions? We understand 3 possible things: economic ignorance, messianic complexity or plain political rhetoric.

Realities say that the US doesn’t produce enough, that’s why it incurs trade deficit. And a trade war would mean massive catastrophic shortages. Think oil. The US imports 60% of its oil requirements (CNNmoney). If world trade shuts, the economic implication would be a collapse in the US economy with a geopolitical implication of a possible World War 3.

And also considering that the US is the largest debtor nation in the world, it wouldn’t be far where a trade war would also extrapolate to an equally internecine debt default. And what’s to stop these interventionists fools from inciting a war economy or the misguided belief that only war, after everything else fails, can stimulate the economy?

Now we turn the tables and wonder who is insane, inhuman or bloodless? Does provoking a trade war which has dire consequences similar or worst in scale than the Great Depression a humane and charitable option? How altruistic is it, if the world goes into war out of the desire to stimulate the economy? How does hyperinflation as in the case of Zimbabwe lead to progress? How charitable can it be to live a world of self delusion?

Does the 2008 Global Trade and Production Collapse Signify Posttraumatic Stress Disorder?

If a bubble structure can be characterized by unrestrained credit creation, speculative excess seen in asset inflation and unparalleled concentration of financial wealth and power, then in as much as the massive wage or income disparities or “Shameful bonuses” in Wall Street relative to the average Americans had been a function of a bubble structure, the world’s production-supply chain structure have also been partly been built around the same bubble environment.

And today’s bursting bubble which has prompted for “demand destruction” has been met by more “supply destruction”.

Yet what seems to be remarkable has been the sharp collapse in global production and trade.

Figure 3: IMF World Economic Outlook: Collapse of Global Industrial Production and Merchandise Trade

The chart IMF’s World Economic Outlook demonstrates the seeming peculiarity of the last quarter’s world trade and production activities.

If you are to compare with the dot.com days or the previous bubble bust and its ensuing recession, you’d notice that the same trends went into a steady decline over a period of time (years). But this hasn’t been the case last year. The outright collapse in just ONE MONTH by both economic variables suggests that world suddenly stopped doing anything and merely watched in shock and awe!

And why would the world do that? The obvious answer is the shock emanating from the near meltdown of the US banking system subsequent to the Lehman debacle. This has been prompted for by the institutional bank run in the US banking system as discussed in last October’s Has The Global Banking Stress Been a Manifestation of Declining Confidence In The Paper Money System?

So contrary to mainstream views which ANCHORS upon this collapse as their basis for prediction, we suggest instead that this could be a function of a Posttraumatic stress disorder (PTSD) where according to Wikipedia.org, ``is an anxiety disorder that can develop after exposure to one or more terrifying events that threatened or caused grave physical harm.”

As an example, the 9/11 terrorist attack on the World Trade Center was graphically captured in living color by media. The repeated airing of the deplorable terrorist event heightened the fear of air travel which thereby caused a shift or substitution in some of the public’s traveling patterns.

And the shift emanating from the fear, resulted to more casualties from the higher risk land transportation.

According to a study The Impact of 9/11 on Driving Fatalities: The Other Lives Lost to Terrorism by Garrick Blalock, Vrinda Kadiyali, Daniel H. Simon, ``We find that driving fatalities increased significantly following the terrorist attacks of September 11, 2001, an event which prompted many travelers to substitute less-safe surface transportation for safer air transportation. After controlling for time trends, weather, road conditions, and other factors, we attribute an increase of 242 driving fatalities per month to additional road travel undertaken in response to 9/11. In total, our results suggest that about 1,200 driving deaths are attributable to the effect of 9/11. We also provide evidence that is consistent with the 9/11 effect on driving fatalities weakening over time as drivers return to flying. Our results show that the public response to terrorist threats can create unintended consequences that rival the attacks themselves in severity.”

Why is this so? According to Trevor Butterworth, ``Because fear strengthens memory, catastrophes such as earthquakes, plane crashes, and terrorist incidents completely capture our attention. As a result, we overestimate the odds of dreadful but infrequent events and underestimate how risky ordinary events are. The drama and excitement of improbable events make them appear to be more common.”

So given Mr. Butterworth’s tread, could we be “overestimating the odds of dreadful but infrequent events and underestimating how risky ordinary events are”?

Evidences of PTSD

Some evidences show we are.

One, global barter trade has been picking up. [see Does Growing World Barter Trade Suggests Of Bigger Cracks In Today's Monetary Order?]

According to the Financial Times, ``Officials estimated that they ranged from $5m for smaller contracts to more than $500m for the biggest.” It could be more. There have been accounts of barter since this episode has unraveled.

And the reported cause? ``Failure to secure trade financing as bank lending has dried up.”

The fact that governments have traded OUTSIDE the financial system, means demand and supply seems intact for basic necessities for them to conduct trade. The fundamental problem lies within the traditional means of facilitating payment and settlement via the banking system.

Two possible reasons why governments have been undertaking barter, which is a primitive method of trade:

One, the banking system remains dysfunctional despite the heavy interventions by global governments and

Two, there is a growing distrust for the present medium of exchange. The second finds a voice in Russian Prime Minister Vladimir Putin’s speech in Davos, ``Excessive dependence on a single reserve currency is dangerous for the global economy. Consequently, it would be sensible to encourage the objective process of creating several strong reserve currencies in the future. It is high time we launched a detailed discussion of methods to facilitate a smooth and irreversible switchover to the new model.”

The next evidence could be seen via the surging Baltic Dry Index see figure 4.

Figure 4: stockcharts.com: Rising Baltic Index=Rising Oil and Copper?

The Baltic Dry index according to the wikipedia.org is ``a number issued daily by the London-based Baltic Exchange. The index provides "an assessment of the price of moving the major raw materials by sea. Taking in 26 shipping routes measured on a timecharter and voyage basis, the index covers Handymax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain.”

Plainly put, the Baltic Index is the cost of freight to move raw materials or basic commodities. It could be seen as a leading indicator.

So far the Baltic Index has risen by 60%, whereas oil and copper appears to be consolidating or “bottoming” even as the US dollar index has been going up. To recall, during the October-November collapse, the US dollar has inversely accompanied the rapid declines of the Baltic index as with the oil and copper.

The seeming divergence could be added signs of the diminishing influences of debt deflation.

Furthermore, even in the US, there are signs that production and inventory or supply destruction have been catching up with its counterpart demand destruction see figure 5.

Figure 5: Danske Bank: Is the US Manufacturing Sector Beginning to Recover?

These observations from the Danske Team (bold emphasis mine),

``First, prior to the recession the US manufacturing industry ran very lean inventories. Second, the liquidity squeeze from the credit crisis has led to an unusually fast alignment of production to demand fundamentals.

``Consequently, the pace of production is now undershooting the slowdown in demand. Hence, it will merely take stabilisation in demand growth to spark an industrial recovery.

The Danske team suggests that the first signs of recovery will be manifested over the ISM index which may stabilize and recover over the coming 3-6 months. In addition, a recovery in the ISM index will most likely add pressure to long US bond yields and signal stabilization in corporate earnings.

While I don’t necessarily share the optimism of the Danske team, the point is that the recent collapse have meaningfully adjusted both the demand and supply equation possibly enough to generate some market based (and not government instituted) revival.

So from growing world barter activities, buttressed by the rising Baltic Dry index, and a potential run down of inventories and similar downside adjustments in the supply side production could mean a semblance of restoration of global trade.

And if indeed the Danske Team is right about their forecast about the manufacturing recovery in the US, then this could signal a potential trough or nearing close of the US recession.

But then again, as a reminder, the cardinal sins in policymaking that could lead to prolonged bear markets: protectionism (nationalism, high tariffs, capital controls), regulatory overkill (high cost from added bureaucracy), monetary policy mistakes (bubble forming policies as negative real rates), excess taxation or war (political instability). Except for the last threat, the 4 seems likely a clear and present danger.

Will An Easing PTSD Lead To A Resurgent Asia?

Nonetheless, if the US supply side has adjusted to counterbalance the sharp fall in demand, then it is likely that the spate of sharp declines in the economic activities in most of Asia can be construed as the same degree of supply/production side adjustments.

Figure 6: DBS Bank: Asia’s Industrial Production Recovered earlier during the .com recession

Like in 2001, Asia’s heavy exposure to the technology sector hit exporters. Today, the sharp decline in US consumer spending has equally affected Asia’s exports as much as it also affected production. However, the sharp drop late last year could likely be explained by the Posttraumatic stress disorder (PTSD) emanating from the distress in the banking system.

But unlike in 2001, which saw Asia as floundering from the nasty side effects of the Asian Crisis, where there essentially had been no domestic demand, this isn’t the case today. Asia has simply grown bigger and more dynamic and with ample shield from its high savings enough to potentially generate its own demand.

The recent DBS bank outlook says it best, ``Asia now generates almost as much new demand every year as the US- and it is that fresh demand that’s the very definition of global growth. The US is still a key driver and will remain so for a long time. But it is not the driver it used to be.” (bold emphasis mine)

And the Economist seems to agree, ``The question is, might domestic demand now take up some of the slack? There are reasons to think so. Falling commodity prices are boosting consumers’ purchasing power, just as they squeezed it last year. More important is the impact of monetary and fiscal expansion…(bold emphasis mine)

And the Economist sings to be singing a tune similar to ours, ``Asia has never before deployed its monetary and fiscal weapons with such force. Every country across the region has cut interest rates and announced a fiscal stimulus. In previous downturns, Asian governments were often constrained by dire public finances or the need to support currencies. But most countries entered this downturn with small budget deficits or even surpluses. All the main Asian emerging economies apart from India have relatively low ratios of public debt to GDP.” (bold emphasis mine)

In our Will “Divergences” Be A Theme for 2009?, we brought up the Austrian economics explanation that ``market rate of interest means different things to different segments of the structure of production.”

In essence we believe that convergent actions by global central banks will ultimately lead to divergent responses based on the capital and production structure of every economy.

Where the same amount of rain is applied to a desert land, forest land or grass land, the output will obviously be different. And to complement the DBS and Economist outlook, we recently said ``this crisis should serve as Asia’s window of opportunity to amass economic, financial and geopolitical clout amidst its staggering competitors. But this will probably come gradually and develop overtime and possibly be manifested initially in the activities of the marketplace.”

So to refrain from overestimating the odds of dreadful but infrequent events and underestimate how risky ordinary events are, we revert to the study of Garrick Blalock, Vrinda Kadiyali, Daniel H. Simon who concludes, ``Although we are unable to identify precisely reasons for either the 9/11 effect or its weakening, the existence of the effect is consistent with theoretical models in behavioral economics and psychology of inaccurate assessment of risks by consumers and exaggerated adjustments to risk assessments. The fortunate weakening of the 9/11 effect may be attributable to consumer learning over time in response to environmental changes. For example, the perceived risk of flying may have declined with the absence of any further terrorist incidents since 9/11, or travelers may have become accustomed to the increased inconvenience of flying.”

No we don’t just read past data and project them to the future like most of the experts. Instead, we try to understand that human action, to quote Ludwig von Mises, is a purposeful behavior!