Wednesday, May 25, 2011

World Financial Security and the U.S.

Last week, I attended an international symposium on “Financial Security: China and the World,” held in Beijing and sponsored by China Institute for International Strategic Studies and the Katie Chan Foundation. Speakers came from all over the world including a former President of the European Commission, a former First Secretary of State of the UK and a former President of China’s Export and Import Bank.

Chen Fengying, George Koo & Katie Chan

Inevitably, the status of the U.S. financial health was on the minds of most of the speakers. They raised concerns over the mounting national debt and expressed skepticism as to whether any real solution has been proposed. One economist pointed out that interest payment could take up 20% of the US government revenue now and debt service by 2040 could amount to 58% of the total revenue, clearly an unsustainable proposition.

The US budget deficit continues to increase with no end in sight and counting on foreigners to continue to buy 70% of the US debt remains a keystone to the US strategy. But the foreign appetite for US treasuries cannot keep up with growing supply. As America having to print more money as the only resort becomes more obvious, foreign buyers will avoid buying rather than increase their purchase which will exacerbate the debt crisis.

Concerns were also raised over the prospects of the financially strong nations in the European Union having to bail out the weak yet again. The Germans in particular may face having to bail out the bad debt nations or bail out the over-exposed German banks that carried too much sovereign bad debt in their books. Eventually, the EU will have to create a bail out mechanism that does not look like bail outs in order to overcome domestic political pressures among donor nations.

The speaker from Australia announced that his nation suffered least from the financial tsunami and experienced no recession from 2007 to 2010. Australian banks continue to lend and provided the highest shareholder return among the world’s leading banks. In addition to having China as its major customer, he attributed strong regulation and close government supervision as the cause of the success of the banking sector.

There was universal agreement among the speakers that the world needs regulatory reform in order to prevent another financial meltdown. The speaker from Singapore pointed out that having Standard & Poor or Moody’s provide sell side credit rating for a fee is basically flawed. He offered a not-for-profit organization to compute creditworthiness based on scientifically sound methodologies and offer access to the ratings free of charge to users.

Comments by Mme Chen Fengying, Director of World Economic Studies, China Institute of Contemporary International Relations made quite an impression on me. She said while 9-11 radically changed the U.S. perspective on terrorism, 9-15 (the date Lehman Brothers filed for chapter 11) has led to financial terrorism. Heretofore the world looked up to the US financial model. Now the world needs to look for another.

Ms. Chen went on to say the US debt has now exceeded its GDP by over 30 fold*. She wondered how this could be sustainable but then she professed not to understand how 98% of dot com companies in the US could lose money and not suffer in the price of the their stock. She labeled the US as a credit card economy.

Only 11% of the US GDP comes from manufacturing while nearly twice that percentage comes from financial services sector of the economy. “Wall Street is supposed to serve the economy,” Ms. Chen said, “And not to hold the White House hostage.”

One veteran America watcher from China commented on the current US budget and debt service crisis and speculated that the two political parties will begin by taking on extreme and polarized positions but hopefully in the last minute the Congress will end brinksmanship and do the right thing. If the US government actually collapses, the financial terror that will strike the collective hearts of the world would be beyond comprehension.

I spoke by comparing the economies of Macao with Singapore and it is reported on Peoples’ Daily Online.

* A friend who read the blog commented that total US debt, public + business + financial + household, amount to approximately 52 trillion, which is 3.6 times GDP. Accounting for all public and private sector assets, US probably has a net worth about 5 times its GDP. In other words, the US debt crisis is serious but not so dire as presented by Ms. Chen.

No comments: