Thursday, 12 November 2009

Role Reversal

While the financial markets continue to worry about the impending monetary tightening, the world's central banks are busy tightening. This is possible because the various policy initiatives consisted of myriads of activities which each contributed to the overall result. An extended credit line here, a swap line there, a reduced collateral requirement somewhere. And then of course the icing on the cake, the low mainline interest rates. Across the world, central banks are now sending clear signals that they are just about to pare back various elements as it increasingly becomes clear that they are not necessary any longer. Of course, central bankers say that they will not tighten monetary policy until the recovery has taken hold. They are tightening already, they just do not want to unsettle neither markets nor businesses. Obviously, the speed of the tightening will depend on the underlying economic reality.

Which brings me to the next observation. In a past life I was busy marketing products investing in Asian companies, and one of the sales pitches was that the region was moving towards an increased economic integration and hence would become more dependent on domestic demand rather than Western demand as a driver of their economic growth.

It might have been premature 10 years ago, but statements from central bankers over the past week or so are telling a revealing story about the changing roles in the world economy. What we are experiencing is a role reversal on a grand scale. In the past two decades the gospel has been that the US has been the world's growth leader and the rest of us have been pulled along in the slipstream of this technological juggernaut. When looking into the details a lot of this actually proves not to be entirely true – the sub-story of the superior US productivity growth is a case in point. But the storytelling has been clear: USA with its clear capitalistic system has again and again proven superior to any other society in the world.

Dreams are hard to kill, including the American one. But the current situation shows that the US is now lagging woefully behind in recovering from the recession. The growth leaders are the emerging economies, with China as the pace-setter. In between, we find Europe, who was worse hit than I expected, but is also quicker to recover than feared. Yesterday's statements from a raft of US federal bankers and from the German member of ECB's board told a clear story. The US Federal Reserve fears that the recovery will be weak and hesitant, while the German economy is likely to surprise on the upside in the coming quarters. Fresh statistics out of China indicates a GDP growth around 8 per cent.

There are a lot of conclusions to be made from this development. One is that the laggards appear to be the economies where the household sector carries large debts relative to their incomes. Another is that the allegedly bloated public sectors in Europe indeed function as stabilisers. A third lesson is that even command economies are able to react swiftly and decisively in the face of major economic trouble. The most important lesson to be learned is however that the emerging economies are finally delivering on their promise of becoming self-sufficient in terms of growth.

Investors should embrace this new reality. It is unlikely to go away anytime soon. The US may be the world's technology leader. Europe may lead in terms of being clever regarding organisational design and efficient infrastructure. But we are getting increasingly dependent on the ability of the emerging countries to produce the clever devices we surround ourselves with. Who talked about a "post-industrial society"?

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