Subject:	The Economic Context Of Y2K
Date:	1999/07/18
Author:	Paul Milne <fedinfo@halifax.com>
	Posting History

CONFIDENCE: Jitters in Latin America By Thomas Catan in New York and Richard Lapper in London   For a brief period this week it appeared that financial contagion was back with a vengeance in Latin American markets.   Reports that Eduardo Duhalde, the candidate of the governing Peronist party in coming presidential elections in Argentina, was advocating a moratorium on foreign debt prompted investors to sell Argentine stocks and bonds, triggering an 8.66 per cent fall in the stock market - the largest one day fall since mid-January - and a rise of nearly one percentage point in the yields on the country's international bonds.     But it was not just Argentina that suffered. Brazil, which has close links with the Argentine economy, was particularly badly hit, with bond yields rising by a full percentage point.     Even Mexico, which has only limited links with its southern neighbours, saw bond yields rise by 0.5 per cent.     Since Monday, shares and bonds have bounced back. By yesterday morning Argentine bonds had regained all the ground they lost on Monday. On average, Latin American bond yields dropped by 35 basis points between Monday and Wednesday evening.     But the region's markets are by no means out of the woods. Political uncertainty in Argentina is continuing to cast a shadow over prospects.     Although it is one of the region's smaller economies, Ecuador is a particular cause of concern. The country is struggling with a banking crisis and some investors fear that it may not be able to make interest payments on Brady bonds that come due next month.     Its bonds now offer a spread - or difference in yield - of nearly 24 percentage points above US Treasuries. A default or forced restructuring would be the first ever in the Brady market and could have far-reaching consequences for the area as a whole.     "It would be difficult to isolate the effects to Ecuador," says Thomas Trebat, economist at Salomon Smith Barney. "It could contaminate the entire Brady universe," says Arturo Porzecanski, economist at ING Barings.     The market also remains vulnerable to any possible future rise in US interest rates.     A further increase would make it harder to attract money to the region.     The millennium (Y2K) bug poses additional dangers, with some analysts predicting investors will pull money out the region for fear of a New Year's Eve financial meltdown.     "We fully expect a rush of private capital out of emerging markets sometime before the Y2K bug evolves into a problem," says Carl Weinberg, chief economist at High Frequency Economics. "If so, huge capital outflows from emerging markets before the end of this year will cause monetary implosion across the developed world and reverse all the incipient economic recoveries."     ===============   The world's economies are in horrendous shape. They can not sustain a shock like Y2K.  Too much debt.  House of Cards.   http://www.ft.com/hippocampus/q117c02.htm   Paul Milne

-- a (a@a.a), July 20, 1999

Answers

Paul Milne... now an expert in the economics of LDCs.

Right.

Oh, and you are right, 'a.' I'm not very interested in jitters.

Regards,

-- Mr. Decker (kcdecker@worldnet.att.net), July 20, 1999.

Wow, Mr. Decker, it always amazes me how thorough your analyses are! You really examine the arguments presented, and brilliantly analyze and counter, point by point.

Lesser trolls, oops, I mean men, would have just responded with some half-baked fluff. Even make some snide comment about the messenger rather than the message. Wow, I am really in awe.

I'll bet that was one of the things that you learned from your dear old Grandfather, wasn't it? Thanks for sharing.

-- King of Spain (madrid@aol.com), July 20, 1999.

EEEE Gads, I just love the way Milne brings out the best in everyone. ROTFLMAO

They simply read his name and go into multiple orifice pucker. They studder and can't even think straight.

-- Will continue (farming@home.com), July 20, 1999.

Please... Milne's economic analysis ought to be written in crayon. I just shook my head when he discovered we have multinationals that actually generate revenue in other countries. Egads! Forget the fact that U.S. companies who are ahead in the Y2K race might grab market share from lagging foreign competitors. Forget the nuances of currency exchange rates and their effect on global trade flows or the potential disruptive influences of protectionist policies from struggling LDCs. I am not a specialist in international economics, but I know enough to say Milne's not quite ready for prime time.

Of course, you two might take a break from incessant attacks and actually produce something of substance. How about it? Or will it be six more months of, "nyah, nyah, nyah?"

Let me know when you ready for another lesson on marginal utility, "Spain."

Regards,

-- Mr. Decker (kcdecker@worldnet.att.net), July 20, 1999.

Decker, Paul Milne's quoting and interpretations of the business press aside, I ask you two simple questions, and I'd appreciate you not giving a pat, snide answer:

1. Do you know just how close the global economic system came to a meltdown during the LTCM hedge fund crisis?

2. What makes you think a similar problem, now on the horizon and scheduled to come to a head between now and 2000, will be avoided?

-- a (a@a.a), July 20, 1999.

Hey Decker,

For a know-it-all piece of shit yourself, you made a major boo-boo in commenting that "Milne's economic analysis ought to be written in crayon."

This wasn't Milne's economic analysis you moronic shill, this was Thomas Catan in New York and Richard Lapper in London's report of the situation in South America.

Proves what a biased pollyanna idiot you are. Read before you comment.

Oops, wrong....you are Decker after all, one who engages mouth before brain and often finds himself feasting on foot.

-- INVAR (gundark@sw.net), July 20, 1999.

"We fully expect a rush of private capital out of emerging markets sometime before the Y2K bug evolves into a problem," says Carl Weinberg, chief economist at High Frequency Economics. "If so, huge capital outflows from emerging markets before the end of this year will cause monetary implosion across the developed world and reverse all the incipient economic recoveries."

Think about it Decker. Give me some grounds for optimism here.

-- number six (Marcia,Marcia,Marcia!@contaminatedBradyuniverse.com), July 21, 1999.

It is becoming very clear why Decker is "FROM" Montana.

-- (people@montanarunhim.off), July 21, 1999.

Milne's analysis was two sentences at the end of an article where the source publication was not cited. The thrust of the article is that Latin American economies are weak, particularly in light of POTENTIAL regional political developments. The issue of U.S. interest rates also create speculation of "flight to quality" issues. At the end of the article, there's a quote from an unknown economist from an unknown firm suggesting there may be another "flight to quality" due to Y2K issues. From this one article, Milne suggests the Latin American economies are the verge of ruin AND Y2K will will ruin.

Invar, you missed your medications. Two "business journalists" from an uncited source writing a speculative piece on the Latin American economies (a few paragraphs) is not comprehensive analysis of the situation. Nor is Milne's conclusion that Latin America is "toast."

If Milne wrote "Y2K is bad" on the back of napkin, you'd give it greater credence than ANYTHING written saying Y2K was not the "end of the world." Now there's bias. And be careful, Invar. The new moderators don't like foul language.

If you want to discuss the Latin American economies, I suggest we consider more than one article. There's good news (and bad), but it does not do justice to the situation to base arguments on one article.

Finally, 'a.' Yes, and I disagree with the decision to bail out the LTCM. It should have been allowed to fail. If it had failed, there would have been economic impacts, but life would have gone on. We probably would not have this overvalued market. If the Fed decides to let a hedge fund fail... good. It will make hedge fund operators more prudent in the future.

Regards,

-- Mr. Decker (kcdecker@worldnet.att.net), July 21, 1999.

Decker, please give us some good reasons for disagreeing with this unknown economist from an unknown company.

-- number six (Iam_not_a_number@hotmail.com), July 21, 1999.

The problem is, Decker, you may know a lot about the economics of making and trading widgets, but the fundamental dynamics of the situation the world now finds itself in seem to escape you. Because of the bailout (which incidentally I believe would have had consequences much more severe than you allude to), the next "round" will be terminal not just for the derivative market, but for the entire global economy as well.

-- a (a@a.a), July 21, 1999.

Mr. Decker, I posted this article to this forum a couple of days ago (see uncategorized - then South American Markets and Y2k).

The source for this article is now archived at The Financial Times. Perhaps you have heard of this publication. If not, then allow me to re-post the comment Old Git made at the time:

"Mike, I'm pretty sure you know the Financial Times is a highly respected newspaper in Britain (perhaps THE most highly respected now that the Times has gone Murdoch)."

Paul's source is correct. A little research would have prevented you from being such a doomer.

-- Mike Lang (webflier@erols.com), July 21, 1999.

Once more Mr. Decker,

Your back of the napkin response implies that you were referencing Laffer's use of such to first draw his "curve". Just because Milne hasn't acquired the training in the tools of the profession that you have, does not make his assertion about heating bread incorrect.

I know that you know that capital flows out of Latin America before rollover are likely as the wealthy in those countries hedge their bets in the same way that you already have.

Will this not put tremendous pressures on their currencies and hence their banks? Do you have any happy-face articles about Latin America which you would like to post on this thread or elsewhere. I'd be glad to read them and comment.

Don't just argue for the purpose of hearing yourself speak, Mr. Decker. Please have a point as well.

-- nothere nothere (notherethere@hotmail.com), July 21, 1999.

First, the "unknown" economist is making an offhand remark about "flight to quality." I don't disagree with the economist, just Milne's unsupported conclusion about the effects of Y2K on the economies of Latin and South America.

As for 'a,' I have not seen your analysis of the economic impact of failed hedge fund(s). I also think "terminal" for the global economy is a typical "Milnism," overstatement to the nth degree. A U.S. recession will hurt the global economy. Terminal, however, implies the global economy will NOT function. This is gross hyperbole. Even in a global depression, the economy functions... just not very well.

Yes, Mike, heard of "FT." (laughter) It helps to know where the article came from, but it is still largely speculative. And Milne's concentration on the Y2K angle ignores the "incipient economic recoveries" highlighted in the article. Latin and South America have problems, but compare now to the 1980s. There were times when folks thought we might NEVER see prosperity in those LDCs.

To the final comment, no. The Laffer reference was not implied. And "heating bread?" I'm not sure I follow.

Investments have already flowed out of Latin and South America into the U.S. equities markets. Some of the current overvaluation is due to foreign investors piling on U.S. equities. If foreign investors feel U.S.-based companies are more "Y2K ready," they ought to consider buying the stock. If they feel the U.S. government is better prepared than their native government, they should buy U.S. bonds. As in any competitive marketplace, performance should be rewarded.

This view, however, does not completely reflect the reality of the multinational corporation. U.S. firms operate widely in Latin and South America. These firms compete with "native" companies to provide goods and services. If Y2K bites "native" companies hard, I am confident U.S.-based firms will eagerly look toward capturing greater market share. Prosperity of U.S.-based firms operating in Latin and South America does have a positive impact on those economies.

This said, the economies of Latin and South America may tank. They are currently mired in recession. A longer, deeper recession may exacerbate our current trade deficit, i.e. they will not purchase U.S. exports. See the following link for a discussion of the trade imbalance:

http://www.dismal.com/todays_econ/te_072099.stm

Of course, a "depression" in Latin and South America will strain the financial (and political) infrastructure. Of course, these countries have seen hard times before. They also appear to have learned some lessons along the way. Witness the recent actions in Brazil:

http://www.dismal.com/thoughts/fake.stm

While this is speculation, 20 years ago Brazil's central bank would have not exerted the necessary discipline to keep the economy from running over a cliff."

The real danger is a serious U.S. stumble because we have been the engine of the global growth.

"An uneasy calm is settling over the global economy. The contagion of Brazilian devaluation that threatened to destabilize the Latin American region appears to have been contained. The first shoots of growth are beginning to emerge in certain Asia economies, and the U.S. is continuing to expand at a torrid pace. So what does the year ahead hold for the global economy? Related Info The U.S. is and will continue to be the primary engine of growth in the global economy. Under the current global crisis the U.S. is shouldering much of the responsibility for generating the growth. As many industrialized countries slowed recently, the U.S. economy picked up the slack, generating 40% of world growth last year. With the U.S. expansion continuing under a full head of steam, 1999 promises to see more of the same. The IMF has revised up its growth forecast for the U.S. to 3.3%." Simon Condliffe

Finally, the adjective "happy-face" suggests a bias. Let's find objective articles on Latin and South America. You can start with the links and I can provide more. And I always have a point, even when people miss it entirely.

Regards,

-- Mr. Decker (kcdecker@worldnet.att.net), July 21, 1999.