At 5:45 a.m. today CNBC had an interview with a British gentleman who was speaking about the Asian financial situation. I only caught the tail end of the interview, but thought I heard him say "...the Asian financial recovery is unsustainable." I've looked on CNBC's website, and nothing has been reported.

Has anyone else seen this report.

-- Deb M. (vmcclell@columbus.rr.com), January 24, 2000

Answers

The usustainability is a given, made a certainty by the fact that as soon as things improved slightly they abandoned the reform of the issues that caused the collapse in first place. On of the prime reasons for bond prices falling is the repatriation of Asian capital. They know what's coming.

-- James (brkthru@cableone.net), January 24, 2000.

To a very large extent, the Asian recovery is based on an export strategy. That strategy is founded on the premise of weak Asian currencies in relation to a strong USA dollar, a strong USA economy, and strong USA import demand. A look at the record-breaking balance of trade deficit from 1999 will quickly convince you that a USA import binge has been fueling the Asian recovery.

The next fly to land in that ointment will be the weakening of the USA dollar. This seems inevitable, based on the fast rise in both the USA money supply and the price of oil during the past year. The Federal Reserve will be forced to raise interest rates in 2000 to combat these developments. Higher interest rates would shore up the dollar, but weaken the USA economy. If the Fed does not raise rates sufficiently, a drastically weaker dollar will be imposed on us by the global financial community, willy-nilly. There is a good chance that some combination of these two will occur: interest rates up, US dollar down.

Either way, Asian exports will be hurt. The big question is how much. Asian manufacturing still enjoys a huge cost advantage over US-manufacturing, but their *real* competitors are each other. A slackening demand for Asian goods in the USA could reignite another round of competitive currency devaluations in Asia. That would collapse the Asian recovery in short order.

The core problem is an oversupply of cheap Asian goods that cannot be absorbed by local demand. All that factory capacity in Asia was financed by bank debt - much of it from Japan. All that factory capacity in Asia was predicated on the idea that Asia would provide a larger local market than it has. So far, the USA has been taking up the slack by importing more. But, the USA cannot suck in enough cheap goods to keep Asia afloat unless we keep running our credit cards at maximum and pumping up the stock market bubble. Our credit, contrary to present USA belief, is not inexhaustible.

Sometime or other it will all fall apart. When it does, a completely new relationship will have to emerge between the USA, Japan and China. At least, that is how I read the situation.

-- Brian McLaughlin (brianm@ims.com), January 24, 2000.