US economy seems unsettled !

The US economy appears mired in a troubling limbo, not weak enough to signal an imminent downturn and not sufficiently sturdy to give businesses confidence to begin hiring again.

The latest economic data highlights the shifting fortunes on either side of the Atlantic, with a robust Germany propelling the eurozone as the US outlook looks bleaker.

A sharp widening in the US trade deficit has forced economists to revise down estimates for second-quarter growth, indicating the slowdown has come even more quickly than pessimists expected.

'It's somewhat ironic but significant that the US slowdown appears to have been triggered by debt concerns in Europe and in the end European growth is showing a pick-up,' said Jim O'Sullivan, chief economist at MF Global in New York. 'The question we're left with now is, 'Did this turmoil just set back or really short-circuit the recovery?'

Answers were not forthcoming, but data over the coming week should help steer forecasters in the right direction. Among key releases are industrial production for July and, even more timely, the Philadelphia Federal Reserve's survey of regional manufacturing activity. Both are expected to show further firming, with output for US industry projected to have climbed about 0.5 per cent.

Ground-breaking on new homes, which after a four-year slump is now at under a quarter of its boom-time peak, likely stabilised at around a 560,000 unit annual rate after some see-sawing related to the expiration of housing tax credits.

Steadfast weakness in housing, along with a stubbornly high unemployment rate of 9.5 per cent, were some of the factors that last week led the US Federal Reserve to try to offer even more monetary stimulus to the economy.

The Federal Reserve said it will funnel cash from maturing mortgage-backed securities it acquired during the financial crisis into further purchases of Treasury bonds in an effort to keep long-term rates low and spur more lending.

The US central bank's policy has inadvertently created headaches for the Japanese government, which is trying to figure out what to do about an ever strengthening yen that threatens to derail the country's already-meek recovery.

Even Europe's improving fate is not without its caveats. The countries at the centre of the debt worries that generated global market turbulence in the spring, such as Greece, Ireland and Spain, all fared pretty dismally in the second quarter. This puts even more pressure on Germany to maintain a growth rate strong enough to pull other eurozone members along.

Today, investors will get a look at the ZEW economic sentiment survey, which took a steep dive as the European crisis heated up. It is expected to hold just about steady at a respectable reading of 21.

But Germany is simply not large enough to go it alone. Without a healthy US expansion, say analysts, Europe's prospects would likely sour as well.

In the United States, few indicators are as important as jobs. Unfortunately, weekly applications for unemployment benefits spiked again last week to 484,000, the highest level in nearly six months.

Be prepared for another market turmoil 2011

Creating wealth could be easier if you have invested your time, energy and money in the right places for the right purposes and of course with some "smart logical thinking" and following up with the world news around you. The day we cross from the stage of dependency to the stage of independence, no longer under our parents' charge, we automatically assume responsibility of our own time-line. This requires a sense of duty and care to plan and be responsible for our own futures as well as ensuring our self-discipline is always up on our head and levelled.

Nonetheless, there are many who simply live day-to-day, without much thought and preparation for the future. Unless you are contended with what you are presently doing and no worry or concern about your future and heck care, then simple life would do you better with no stress at all and probably you live life up to a century.

Some steps to taking charge of your future include having a plan, identifying your present resource position and allocating your resources to the right places. You should also establish a series of capital preservation programmes to enhance your savings as you move towards the retiree stage, and institute a proper distribution and succession plan for your loved ones.

In many instances, when reality finally catches up, people are caught off-guard and suffer the painful consequences of their careless attitude and you may find it too late to turn your steering around to miss the deadly corner.

One of the keys to achieving lifetime success financially is to engage in any higher level of education. Example, Financial education, which is more than just acquiring information and knowledge. Financial education is more than just knowing the facts if you want to make sure your financial portfolio continues to grow ( look at remisier king, Peter Lim, his wealth management is certainly up to mark with his piggy bank non stop growing ).

The real process of financial education should entail:

• Acquiring financial knowledge

• Being connected to the financial community

• Being engaged in financial development

• Being mentored by financial experts

• Being courageous to explore financial options

• Being clear about your own financial destiny

Financial planning creates a well-planned and well-organised time line that can withstand three major shocks:

Time-line shock

A proper risk management portfolio (RMP) must be established for your time line to manage all your risk exposure efficiently and efficiently. A RMP is the combination and coordination of a portfolio of risk management programmes to manage the different aspects, levels and degree of impact of the risks that you are exposed to everyday.

You may have purchased insurance policies without much consideration and coordination as to the scope of coverage, level of coverage and cost of coverage. As a result, you may be implicated in one of the following:

• Coverage that is not comprehensive enough - risks that you should have been covered for, but are not.

• Too low coverage amount - risks that you are currently covered for, but at too low a level.

• Too high in overall premiums paid - paying a larger premium than necessary.

These inefficiencies can be avoided by insisting that you are given a thorough financial health check before any insurance plan is recommended or purchased.

You should also insist that you are given a comprehensive selection of the insurance plans from different companies to compare and choose from so that you can have the best option in terms of coverage and premium costing, and insist too on being given a complete report on how your overall risk management portfolio can withstand the three shocks described here.

Self-funding shock :

One of the most overlooked aspects in risk management is the risk of 'self-funding shock'.

A classic example can be found in the way most people manage their medical risks. The cost of medical insurance plan increases every three to five years, depending on the medical plan.

If you are struck with a critical illness like cancer or heart attack, most probably you will be out of work for some time, and maybe even a long time. This could create a great challenge - who is going to pay the premiums for the medical insurance plan which is rising every three to five years?

The premiums can reach an unaffordable level after a few rounds of adjustment, so unless a funding mechanism is structured within the overall Risk Management Portfolio, your savings or cash reserves will be wiped out rather quickly.

Therefore, it is important to ensure that your overall risk management portfolio is able to withstand the self-funding shock and at the same time, provide you and your family with lifetime financial security.

Market shock :

A risk management portfolio without any element of protecting you against market shock can only be as good as temporary protection. We have seen so many cases in which the risk management portfolio was wiped out completely due to the inability to keep the program going in the midst of an economic or market crisis.

Market shock can only be managed through proper strategic planning. Understanding how the various impacts that inflation, economic data, interest rate and liquidity have on the market is vital to the successful management of your money in the capital market, be it fixed income, collective investments or direct investments.

Depending on your risk profile, your funds can be invested into tactical growth, balanced and income funds. The percentage of allocation into each of these investment categories will depend on your risk appetite, investment objectives, time horizon, capital desired to be accumulated and the portfolio returns needed to achieve your investment objectives.

Your objective here is to construct an investment portfolio that can withstand market shocks and also give you a decent rate of return of between 8 per cent to 12 per cent annually.  Do note that profit earnings do not come free of risk and the higher returns (ROI) you expect, the higher risk you would be facing when you plough your liquid assest into some investment.  Make sure your portion of buffer is sufficient in your reserves with part of your dollar thrown into risk investment.  The risk here we are not referring to the recent risk that a businessman has taken at the Resort World casino making a loss of over $26mil, that kind of irrational gamble deserve no pity at all.

Next year 2011 a bumpy economy ?

The global economic recovery since the severe recession of 2008-2009 was artificially boosted by various countries massive monetary stimuli and hoping to bailout their country's economy out of the financial turmoil. But the fundamental excesses that led to the crisis - too much debt in the private sector - have not been addressed, for private sector deleveraging has barely started. Now there is massive re-leveraging of the public sector in advanced economies, as a result of massive budget deficits driven by automatic stabilisers, counter-cyclical Keynesian fiscal stimulus and the socialisation of private losses.

Thus, a protracted period of anaemic sub-par growth in advanced economies as the deleveraging of households, financial institutions and soon governments, starts to kick in.

Moreover, countries that spent too much - the United States, Britain, Spain, Greece and others - now need to deleverage, and are thus spending, consuming and importing less, some may seem to be going into the "protectionism" effect although free-market does not endorse such practice. Countries that saved too much - those in emerging Asia, China, Germany and Japan - are not spending more to compensate for the fall in spending of the first group and in a world of excess supply, global aggregate demand will be weak, pushing global growth much lower.

The global economic slowdown for the second quarter of this year, will accelerate in the second half of the year. The fiscal stimulus will become a drag on growth as austerity programmes in most countries kick in. Inventory adjustment, which boosted growth for a few quarters, will run its course. The effects of tax policies that stole demand from the future - such as the 'cash for clunkers' scheme in the US, investment tax credits, tax credits for home buyers, or cash for green appliances - will fizzle. Labour market conditions will remain weak; a sense of malaise will spread among consumers.

The likely scenario for advanced economies is a mediocre U-shaped recovery, even if a W-shaped double dip is avoided. In the US, growth was already below trend in the first half - 2.7 per cent in the first quarter and a mediocre 2.2 per cent in the second quarter. It will slow down further to 1.5 per cent growth in the second half of this year and into next year. Thus, even if the US technically avoids a double dip, it will feel like a recession, given mediocre job creation, larger budget deficits, a further fall in home prices, larger losses by banks on mortgages, consumer credit and other loans, and the risk that the US Congress will take protectionist action against a China that has allowed only a token appreciation of its currency.

In the euro zone, the outlook is even worse. Growth is likely to be close to zero by the end of this year, as fiscal austerity takes hold, along with an increase in the cost of capital. Increases in risk aversion as well as sovereign risk will further undermine business, investor and consumer confidence in Europe. And the weakening of the euro will hurt the growth prospects of the US, China and emerging Asia.

Even China is showing signs of a slowdown as the tightening to deal with asset inflation takes effect. The slowdown in advanced economies and the weakening of the euro will further dent Chinese growth in the second half of this year. The world's leading growth locomotive is thus slowing, from over 11 per cent towards a 7 per cent rate by year's end. This is bad news for exporters in the rest of Asia, especially commodity exporters, who rely on Chinese imports.

Japan where domestic demand is anaemic will be hit hard. It suffers from low potential growth, given the lack of structural reforms and ineffective governments, a large stock of public debt, an ageing demographic and a strong yen that tends to get stronger during bouts of global risk aversion.

A scenario where US growth slumps to a mediocre 1.5 per cent, where euro zone and Japan growth slows to zero per cent, and where China slows below 8 per cent is not a global double dip but it will feel awfully close to one. Also, any additional shock could tip this fragile global economy, growing at close to stalling speed, into a full fledged double dip. The sovereign problems of the euro zone could get worse, leading to another round of asset price correction, global risk aversion, and financial contagion. Also, one cannot exclude the possibility that Israel might strike Iran within the next 12 months. Then oil prices could rapidly spike and tip the global economy into a recession.

Major policymakers are running out of policy ideas. If the risk of a double dip rises, some additional quantitative easing will not make much of a difference. Also, there is little room for further fiscal stimulus in most advanced economies; consequently, the ability to bail out financial systems that are too big to fail, but also too big to be saved, will be sharply constrained, given the fiscal deficits.

Thus, as the delusions of a rapid V-shaped recovery go out of the window, the advanced world will, at best, be in a long U-shaped recovery. In some cases - the euro zone and Japan, in particular - the U may stretch into an L-shaped near-depression, struggling to avoid a W-shaped double dip recession. Even the V-shaped recovery in stronger emerging markets will be dented, for no country is an island and many emerging economies - including China - are dependent on now-anaemic advanced economies.

With all said, both Europe and America seem to be suffering from delusions—of strength and weakness respectively. In Europe it is far too early to say of sign of recovery on at least two counts. First, Germany apart, the euro area remains weak. Spain, whose economy is barely growing and where the jobless rate is 20%, would love to have America’s problems. Second, Germany relies on exports, not spending at home: the home market is one of the few places where sales of Mercedes cars have fallen this year and obviously in bad times, such luxury items would be least wanted as they are not "needs".

How real are the risks of a double dip in the United States? The recovery has lost momentum in part because shops and warehouses are fuller, so that the initial boost to demand from restocking is fading. The housing bust still casts a shadow. Households must save to work off excess debts. Firms fearful of weak consumer spending are cautious about investing. Bank credit is scarce. All this stands in the way of a full-blooded recovery. But a slide into a second recession would require firms to cut back again on stocks, capital spending and jobs. The cash buffer corporate America has built up in case of harder times makes a fresh shock of that kind unlikely.

Yet even without a double dip, America could plainly be doing better. Its firms might be more willing to spend their cash if they had a clearer sign from Mr Obama how he intends eventually to close their country’s fiscal deficit (and the extra taxes that might entail). But in the short term eyes are fixed on the Federal Reserve. On August 10th the central bank acknowledged that the recovery had slackened and said it would reinvest the proceeds from the maturing mortgage securities it owns in government bonds. This was a small shift back towards “quantitative easing”—but less than the bears wanted.

Anxiety about deflation remains justified: any sign of it would require much bolder measures from the central bank. However, for the moment the Fed has sent the right signal: concern but not panic. Apart from anything else, it is not clear that yet more monetary stimulus would have created many new jobs. The relatively high level of job vacancies in America seems consistent with far lower unemployment. Some firms have complained that the available workers do not have the skills that they want. Unemployment, sadly, may thus have deep roots, with more people this time remaining out of work for longer. It will be a hard slog. But on the current evidence don’t expect America’s recovery to grind to a halt.

Next year 2011 may seem to be another critical performing year for the global economy and top policy makers better wake up from their comfort zone and start to think what else to do about the current "sick" economy condition.

By following Textbook strategy, we could try some luck below  :


One strategy is to buy long-term Treasury bonds, which many people already appear to be doing as a hedge against general economic troubles. Yields on 10-year Treasury securities have plunged to 2.8 per cent from about 3.8 per cent in late April.

Strategists who've expressed concerns about deflation aren't necessarily predicting a return to protracted, Depression-era downward price spirals. Robert Arnott, chairman of the asset management firm Research Affiliates in Newport Beach, California, said that while a brief bout of modest deflation was a threat in the short run, inflation - or rising prices that eat away at consumers' purchasing power - remained the bigger long-term menace. As a result, Mr Arnott isn't focusing entirely on near-term deflation. Rather than buying long-term Treasuries, he suggests an investment in Treasury inflation-protected securities.

Need to be choosy

Among corporate securities, investors should pay attention to companies' balance sheets. 'You want to avoid highly leveraged companies,' said Carl Kaufman, manager of the Osterweis Strategic Income fund. In a deflationary environment, a debt-ridden company would have to pay back obligations with increasingly valuable dollars.

In inflation, you're cheapening the value of dollars over time. In deflation, it's the opposite: dollars become dearer over time. Fixed-income investors may want to focus on high-quality companies that routinely generate tons of cash. The same argument goes for equity investors as well.

Standard & Poor's, says that in deflationary times, some stocks could actually post gains. Throughout the 1990s, when the Japanese stock market began to crater under the weight of deflationary forces, technology, telecommunications and healthcare shares rose on local markets.

Go for blue chips

Investors who want to maintain their stock weightings should consider high-quality, large, blue-chip companies that have balance-sheet strength. Companies like Google and Microsoft often have an added advantage: dominance over their industries, enabling them to maintain their prices even if others in the industry start to lower theirs.

Stocks that pay dividends would also make sense, because the cash thrown off by these shares would be quite valuable in a deflationary environment.

If investors really fear deflation, they might consider increasing the cash in their portfolios. There's a strong case for building up dry powder. If something bad happens economically - whether it's deflation or inflation - that generally provides a good buying opportunity for investors who have some cash

Why 2010 business and economic outlook still gloomy ?

Why are many firms still currently so cautious in business outlook? One likely factor is that they regard the present stale economy as highly uncertain, particularly in the US and Europe. The recent combination of volatility and a declining trend in developed-world stockmarkets has reinforced concerns that already abounded in companies’ executive suites, that the recovery so far has relied too much on government spending. That, given all the recent political talk about the need for public austerity to fend off bond-market vigilantes, may not continue. Meanwhile, private-sector demand remains anaemic.

A second factor is that firms have much less need to invest now because their capacity utilisation remains at historically low levels, so you do not need more resuorces as you got nothing much to output as demand is still slow in picking up. Currently, for example, industrial-capacity utilisation in US is 73%. That is up from the recessionary low of 69%, but well below the 80%-plus level it was at in the years before the economic meltdown in September 2008, and during much of the 1990s. Since plants still have so much spare capacity, managers see little justification for capital spending. It is forecasted that in developed countries, industry’s capital spending will fall by 3% this year after a 10% fall last year. In emerging markets, capex is expected to grow by 8% this year but far short of last year’s roaring 21% growth.

MARKETS seem to be emerging from a bad patch of turbulence and the past two months have seen wild swings across global financial markets that would have unsettled even the most seasoned of investors. Europe may have averted disaster but its sovereign debt problems are far from over. In China, the yuan is finally unshackled from the dollar but it remains to be seen how far it will be allowed to gain on the greenback.

For sure, a range-bound market characterised by much volatility was pretty much a given this year as the global economy faced its biggest test since the depths of March 2009. With government stimulus petering out, the question was always whether private investment and consumption had mended sufficiently to take over the mantle of championing global growth. Strong emerging market growth is set against lagging expansion in the West, while Asia's inflation-fighting policy-makers square off against Europe's fiscally tied hands.

As it stands, Asian governments, faced with the threat of inflation, have started to normalise fiscal and monetary policies. China, in particular, has moved fairly aggressively to curb the rapid rise of real estate prices. In contrast, those in the West have been fairly content to retain stimulatory policies - at least until Europe's sovereign debt crisis erupted. Beginning with what seemed like a peripheral problem, the continent - and the world - was sucked into a spiral of anxiety as sovereign solvency fears spread beyond Greece. Efforts by EU policy-makers appear to have successfully stabilised the contagion.

In second half of 2010, the global recovery could be on track and fears of a double-dip recession are likely overstated. Concerns that Europe's fiscal problems may spark a liquidity crunch of post-Lehman proportions might be fast fading, and upcoming stress-test results for the region's banks should go some way towards nullifying those fears. While banks are lending to one another at higher interest rates, perceiving greater counter-party risks, the actual risk premiums demanded are not worryingly high by historic measures. In any case, the European Central Bank appears committed to pump in as much liquidity as is needed to prevent a shortage.

On the other hand, medium-term worries about an over-leveraged global economy are probably warranted. Public debt in the developed world has ballooned as governments deploy massive amounts of fiscal stimulus to prop up economic activity. Fiscal deficits are starting to reach unsustainable levels that necessitate spending cuts that are likely to be a drag on economic growth, especially in the industrialised nations, for many years to come. Still, the effects of such fiscal tightening are unlikely to be felt immediately and may well be overcome eventually by gathering momentum in the global recovery.

Indeed, emerging markets, especially in Asia, are likely to continue to grow strongly, and that seems to be underscored by China's move to allow greater flexibility in the yuan exchange rate. While actual latitude for yuan appreciation has been fairly limited and gradual, the policy change seems to signal that policy-makers are at least more confident about the outlook for the domestic economy. In addition, monetary tightening in Asia may be delayed. Europe's sovereign debt problems are likely to prompt policy-makers to be a tad more circumspect about global growth, and hold off raising rates until later in the year, or even next year. In the US, momentum from the first half of the year is expected to be sufficient to keep activity growing through the rest of the year, albeit at a more moderate pace. Unsurprisingly, Europe is set to bring up the rear. Growth is expected to be sluggish as fiscal tightening is expected to be a significant drag even into 2011.

Economic contraction is often thought to cause corporate revenue and earnings to fall sharply, missing current forecasts. On examining major double dips in various markets in the past 30 years, it is believe that markets may be too focused on the top line. Company profits, then, are likely to be more resilient than expected, even if the economy tanks again.

Current price-earnings valuations seem to imply a brutal double dip in which the economy contracts even more than in 2008-009, down one per cent in nominal GDP terms in both 2011 and 2012. Even in such a severe scenario, corporate earnings would be expected to grow more than 10 per cent in 2010, before declining 10 per cent in 2011 and 2 per cent in 2012 - much less than the 56 per cent plunge in 2008-09.

Still, it could take some time for markets to realise that a double dip is not a probable scenario and that corporate earnings are likely to be more resilient if it does happen. In the meantime, volatility is likely to persist, calling for nimble toes - and fingers, while an uneven recovery warrants judicious market selection and stock-picking.  These moments of volatility may yield good trading opportunities - and are unlikely to derail the fundamentally bullish long-run outlook for emerging markets. Even if China, and Asia overall, prove unable to escape the cycle of bubble, these economies remain well-placed to continue strong growth over the next few decades. Against this backdrop, emerging markets remain preferred over developed ones, as investors are likely to recognise their strong economic fundamentals and keep capital flowing into these more vibrant markets. Among the developed markets, the US is looking the most attractive, buoyed by robust economic momentum of its economy.

In conclusion, balancing risk to opportunity is going to be key to portfolio performance where equity markets are expected to remain volatile and range-bound for at least the rest of the year. Even though we remain optimistic about the long-term prospects for emerging markets, especially in Asia, and remain cyclically positive on the US, events in Europe do present significant short-term threats to the recovery. In this scenario, it is even more important to ensure that diversification and regular risk assessments remain a fundamental anchor to ensure balanced growth in one's portfolio in these interesting times.

Foreign Currency potential and local loan interest rates

The financial crisis of 2008 brought to an end one of the longest periods of sustained global growth experienced in modern times.

While many Western economies experienced unsustainable, property-fuelled consumer booms, which boosted both their growth rates and their exchange rates, the prolonged phase of expansion allowed many emerging market economies to expand their shares of world trade, increase their currency reserves and improve their fiscal balances to a remarkable degree.

The end of that global expansion was certainly not good news for emerging markets, but its aftermath has revealed this remarkable shift in relative structural fundamentals between the economies of the old and new industrialised worlds.

As the world economy now picks up again, we expect favourable cyclical forces to combine with relative structural improvements to generate significant further capital inflows to emerging markets, driving notable potential strength of their currencies.

Of the cyclical forces, interest rates antheir likely future course are of course critical, but so too the resilience of domestic economic growth, or prospects for commodity prices in the case of the larger resources exporters. Brazil, Indonesia and Turkey offer such cyclical appeal here.

Combining these factors, here are some currencies which offer the most appealing blend of value, yield and cyclical attractions:

 The Mexican peso is among the cheapest of major emerging currencies. It should also be supported by economic recovery, a moderate interest rate pick-up of 4.5 per cent versus the US, and a relatively firm oil price, as Mexico is an oil producer.

 The South Korean won offers value on all metrics and should remain supported by the economic recovery and Korea's current and capital account surpluses.

 The Indian rupee is cheap on most, though not all, value metrics. The currency should be supported by a pick-up in foreign direct investments and overseas corporate borrowings, as well as a policy preference to use the currency to contain imported inflation.

 The Turkish lira is reasonably valued at current levels, and should remain supported by economic recovery and one of the highest yields among the liquid emerging market currencies.

 The Russian ruble is not overvalued and should remain supported by a significant economic recovery, a continuation of firm oil prices and a high interest rate.

 The Indonesian rupiah is neutrally valued, and should remain supported by economic recovery and an improving domestic political situation.

 The Brazilian real has already appreciated significantly, such that it offers no outright value appeal, but the currency remains well placed to benefit from a positive commodity market and good domestic growth. High interest rates are likely to attract foreign capital inflows.

These currencies have the potential to show total returns (interest rate carry plus potential spot currency appreciation versus the US dollar) in the region of 7-10 per cent in the coming year.

As individual currencies always carry certain political and idiosyncratic risks, it important to approach currency investment in a well-diversified manner, spreading exposure across a number of favoured currencies. In this way, a portfolio approach can gain exposure to the overall theme of favourable cyclical and structural drivers of emerging market currency appreciation, while limiting the drawdown risk from any individual currency.

THE credit crisis has brought about a lowering of local interest rates across the board for loans to Singapore SMEs. We have certainly taken advantage of this opportunity by procuring bigger loans for our local company's expansion and development.

LOWER interest rates are indeed a boon to SMEs during good and bad times. Lower interest rates translate into lower cost of capital and ultimately lowers the cost of doing business and improve cash flow.

Pursuit was able to generate our own working capital from internal sources and so did not have to borrow from banks. However, as we continue to grow and expand in the region, we may have to tap appropriate available external financing options to fund our expansion plans. Hopefully interest rates will continue to remain low and attractive. Interest rates to remain at the current level for probably the next six months. However, as the economy continues to grow, pushing up prices and nudging inflation upwards, interest rates may rise in 2011.

Furthermore, the government's Special Risk-Sharing Initiative (SRI) scheme which was introduced during the recession will be discontinued in January 2011 and there is expectation interest rates for bank loans to gradually trend up.

Why the single EURO currency fail to work?

THE crisis in Greece and the debt problems in Spain and Portugal have exposed the euro's inherent flaws. More than ten years of smooth sailing since the euro's creation, the arrangement's fundamental problems have become to surface with obvious reasons.

The single currency for 16 separate and quite different countries seem to have failed and the shift of single currency meant that individual member countries lost the ability to control monetary policy and interest rates in order to respond to national economic conditions. It also meant that each country's exchange rate could no longer respond to the effects of differences in productivity and global demand trends that have accumulated. The single currency weakens the market signals that would otherwise warn a country that its fiscal deficits were becoming excessive. A country with excessive fiscal deficits needs to raise taxes and cut government spending, as Greece does now, the resulting contraction of GDP and employment cannot be reduced by a devaluation that increases exports and reduces imports.

Why the United States is able to operate with a single currency, despite major differences among its 50 states? There are three key economic conditions - none of which exists in Europe - that allow the diverse US to operate with a single currency: labour mobility, wage flexibility and a central fiscal authority. When the textile industries in America's north-eastern states died, workers moved to the west, where new industries were growing. Unlike the unemployed workers of Greece, Portugal and Spain they do not move to faster-growing regions of Europe because of differences in language, history, religion, union membership, etc. Moreover, wage flexibility meant that substantially slower wage growth in the states that lost industries helped to attract and retain other industries.

US fiscal system collects roughly two-thirds of all taxes at the national level, which implies an automatic and substantial net fiscal transfer to states with temporarily falling incomes.

The European Central Bank (ECB) must set monetary policy for the euro zone as a whole, even if that policy is highly inappropriate for some member countries. When demand in Germany and France was quite weak early in the last decade, the ECB reduced interest rates sharply. That helped Germany and France, but it also inflated real estate bubbles in Spain and Ireland. The recent collapse of those bubbles caused sharp downturns in economic activity and substantial increases in unemployment in both countries.

The introduction of the euro, with its implication of a low common rate of inflation, caused sharp declines in interest rates in Greece and several other countries that had previously had high rates. Those countries succumbed to the resulting temptation to increase government borrowing, driving the ratio of government debt to GDP to more than 100 per cent in Greece and Italy.

Until recently, the bond markets treated all euro sovereign debts as virtually equal, not raising interest rates on high-debt countries until the possibility of default became clear. The need for massive fiscal adjustment without any offsetting currency devaluation will now drive Greece and perhaps others to default on their government debt, probably through some kind of International Monetary Fund-supported debt restructuring.

The euro was promoted as necessary for free trade among the member countries under the slogan 'One Market, One Money'. In reality, of course, a single currency or fixed exchange rate is not needed for trade to flourish. The US has annual trade turnover of more than US$2 trillion (S$2.8 trillion), despite a flexible exchange rate that has seen sharp ups and downs in recent decades. The North American Free Trade area increased trade among Canada, Mexico and the US, all of which have separately floating exchange rates. Japan, South Korea and other major Asian trading countries have flexible exchange rates. And obviously, only 16 out of EU's 27 member states use the euro.

Despite its problems, the euro may survive the current crisis but not all of the euro zone's current members may be there a year from now. In retrospect, it is clear that some of the countries were allowed to join prematurely, when they still had massive budget deficits and high debt-to-GDP ratios. Moreover, some countries' industrial composition and low rates of productivity growth mean that a fixed exchange rate would doom them to large trade deficits.

Some mechanism of enhanced surveillance and control may be adopted to limit future fiscal deficits. But even with a smaller group of member countries and some changes in budget procedures, the fundamental problems of forcing disparate countries to live with a single monetary policy and a single exchange rate will remain.


The euro rulebook doesn't work !

Business Times, Sept2010

WHAT does a country need to do to make a success of the euro? The European Commission and the European Central Bank would say the recipe is simple: Cut your budget deficit, slash wages, keep taxes competitive, boost your exports, and live with austerity.
There is just one problem: Ireland has been following precisely that formula and it hasn't done much good. The government is being squeezed at a time when the cost of bank bailouts is soaring. Blame it on the banks.
If there is one country that proves what a mess the single currency has become, it isn't Greece, or even Spain or Portugal. It's Ireland. When countries break the rules and then get into trouble, it isn't that surprising. But if they stick to the rulebook and still run into as many problems, it suggests there is something badly wrong with the system itself.

There was a stark reminder that Ireland is still a long way from market redemption, almost two years after the credit crunch burst the real-estate and asset bubble that had been building up in the country for most of the past decade.

Ireland now has its lowest rating since 1995. Irish bonds plunged on the news. The spread over German bunds widened to a record.
It isn't hard to understand why the decision was made. Ireland ran a budget deficit of 14.3 per cent of gross domestic product last year, the largest of any euro-area country. The gap will narrow to about 11 per cent this year, according to European Commission forecasts. That is a slight improvement, but hardly enough to reassure the bond market.

There is a mountain of debt building up and the economy remains in a terrible state. Over the past two years, it has shrunk about 10 per cent, one of the worst recessions in the developed world. There isn't much sign of a bounce back, either. The Irish central bank predicts the economy will expand 0.8 per cent this year, a figure it revised up from the 0.5 per cent contraction it forecast in April.

And yet, Ireland has been exemplary in its austerity drive. Public-sector salaries have fallen by an average of 13 per cent. Taxes have been raised where necessary, but not in a way that will hurt business. The Irish have been willing to tighten their belts and adjust to hard times. There was no sign of the street riots, strikes and political protests that took place in Greece.

Ireland is doing exactly what it has been told it should be doing. It is following the path laid down for Greece, Portugal and Spain, and doing so with admirable self-restraint and discipline. There ought to be some reward for all that effort. But there is very little sign of it.

Ireland had one of the most successful economies in the world when it joined the euro in 1999. All it has got out of monetary union is massive financial and real-estate bubbles, the collapse of which will scar the country for a generation.

If austerity doesn't work for Ireland, it is hardly going to help Greece, Portugal or Spain. The whole experiment with monetary union is doomed if the euro's leaders don't jettison their simple recipe.

More to learn from the economic crisis....

A sober message for some of those whose businesses struggling to pull out of the financial crisis: Don't forget the hard lessons, don't let up on efforts to effect change, and don't think of short-term hoping there is a quick escape from facing the crunch.

For one thing, it's still far from plain sailing for many companies, the tough times are not over yet, many companies still have orders levels below those before the crisis. And capacity utilisation in a number of industries is still quite low. Obviously, Asia is growing faster again. But in Europe, with current Greece and some other euro zones in trouble, it may take 2-3 years more before we probably could reach pre-crisis levels.

It's very important to use the crisis to take on the structural challenges that many industries and companies are facing, and to really act upon them now, these could be legacy structures or activities that are not creating value. [ I think Keppel O&M has done a great deal in setting up research group to look into niche areas where potential offshore industry has not been yet developed or explored, eg. like the artic, this may take some time but once the feasibility of going into the area is close to reality, we will likely see the flooding of orders requiring special classed rigs with equipment capable of handling such extreme cold conditions in those places ]

The recent various crisis has created a window for change – in which most companies must grasp: This crisis made people more willing to accept change and to undertake those changes, so it could be very important opportunity to move. There are also very good opportunities for acquisitions, for driving consolidation within industries, for acquiring additional customers, new assets and top talent. We shouldn't say, let's protect the status quo. We should use the crisis to change the status quo - and maybe to change the business model. That is why some MBA schools are trying to adapt to the lesson learnt and making some curricula subjects change and relate more closer to the necessary understanding of business dynamics and some school topics may be too rigid without thinking through the respective sensitivity of the issues in the current crunch facing many big old wealthy companies. It is understandable that many companies cut costs during the downturn. Sales had plummeted, and in some cases survival was at stake. Cost cutting per se is not a bad thing, but the bad thing is when you cut talent even when you will need it again in the medium to long term. You have to be thoughtful about what to cut - and what not to.

Even with economies recovering from the worst of the crisis, companies should continue with restructuring efforts: It's very important to clean up balance sheets, not just for banks but also for other companies. It's also time to invest in marketing and advertising to increase sales, enter new markets or outsource certain operations. The opportunities to benefit from the uptick in the global economy are significant. One needs to reorientate. Going back to the old status quo will not work. If China is booming, go all out to entice and collaborate with them, know their culture and drink and handshake with them on deals and learn “kuan xi”, the non-relevant business theory but works in the chinese culture, of course, you need to watch your step with generating a closer “kuan xi” and do not get your pocket burn…. 

Not just business models, but corporate cultures, too, need to change, what we see is that institutions in general are regarded with more distrust than ever before as a result of the crisis.It is important not just to maximise shareholder value but also to maximise values, and to clearly adhere to the values we all claim to have one way or the other.

'I think the stress on values is not wrong if you think of long-term value creation. Long term, you'll find that the best value creators are those that have emphasised growth. These firms would have created jobs, paid their share of taxes and done well for their customers. They also play an important role in society. So in the long term, stakeholder and shareholders' values will be aligned.

Where there is a disconnect is when people focus on short-term value maximisation. The true long-term value creators are those that emphasise growth much more than profitability.

Companies need strong leaders with a clear idea of how they want to progress in creating value: It's very important that compensation be linked to long-term value creation and not just to short-term profitability. The key is to devise systems so that it is long-term value creation that is being measured.

Consultants provide ideas, support to implement these ideas, and act as coaches to strengthen the people within the client company.While some companies are reluctant to rock the boat, many are very successful companies that are self-critical, want to know more and want to change, these are the ones that could be a few steps ahead of those reluctant to make improvements.

According to CEO of BCG says, 'There are a lot of methods and tools you can apply. But in the end, it's the engagement with people that is important. So we need to find the right interaction. The chemistry must be right - and there must be respect and trust.'

Singapore rising wage costs soon ?

Come next month, no longer wage subsidy from the Jobs Credit scheme which was mooted by our NTUC chief Mr Lim. July, higher levy for foreign workers, or pay more to hire local workers as the inflow of foreigners starts reducing. September, slightly higher contribution to the workers' Central Provident Fund (CPF) accounts.

And above all to heed national call to boost productivity and pay packages. Is this right timing to be payback time looking at the situation of European crisis sparking ?

For years, companies have creamed off a larger share of economic gains - larger than those in other developed countries or industrialising economies in Asia. As a result, workers get a slice of Singapore's gross domestic product (GDP) that is considered unusually small compared with their counterparts' share in those countries.

Workers' wages account for less than half of Singapore's GDP. In contrast, wages take up more than half of GDP in developed countries.

This means that Singapore may have achieved one of the highest per capita GDPs - at $51,656 last year. It has led some analysts to wonder if Singapore is a First World economy with what is closer to a 3rd World wage structure. Indeed our wage levels are much higher than 3rd world economies, otherwise, so many foreign workers would not be flooding into Singapore.

The issue is not our wage levels, which are reasonably high, but whether we are paid or commensurate with our per capita GDP level. So are wage levels keeping pace with economic growth? Or is Singapore's low wage share of GDP an indication that workers have been losing out? Look at our wage structure comparing to the increases in necessities, like housing or transportation cost,etc…….

THE issue of Singapore's low wage share has surfaced time and again.

In 2000, a paper by the Singapore Statistics Department highlighted this anomaly, noting that it could be due in part to conscious efforts by the Government to moderate wage increases and maintain high returns to investment largely from multinational companies. The GDP is split three ways: One share is paid out in wages, another to companies as profits, and lastly, to the Government as taxes.

In 1980, the wage share was a low 38 per cent, climbing to a peak of 48 per cent in 1985, due to high wage policies during that high-growth period. But recession hit in the mid-1980s, and the high wage policies were seen as adding to the severity of the situation as they eroded the profitability of companies.

Since then, the wage share has moderated to an average of 43 per cent to ensure a competitive wage structure. It is, however, not on a par with that in other countries with similar GDP rates.

In 2000, Singapore's wage share was 42 per cent, lower than the United States' (58 per cent), Japan's (57 per cent) and France's (52 per cent), according to the paper by the Statistics Department. In contrast, Singapore's profit share was 48 per cent, higher than these countries', which were closer to 35 per cent.

In fact, countries such as South Korea, New Zealand and Spain have a higher wage share than Singapore even though they have lower per capita GDP.

Yet, a decade later, the wage share has not risen much. At last count, it was 44.9 per cent in 2008.

In March last year, economist Linda Lim said Singapore's economic growth model has tried to 'do too much, and achieved too little' in delivering returns for Singaporeans, relative to foreign firms and foreigners. She cited the low wage share (41 per cent in 2007) and high share of profits, interest and dividends (more than 50 per cent). Foreign share of domestic production and income has also increased.

Similarly, a survey by Swiss bank UBS on prices and earnings last year showed a sobering picture for Singapore workers.

On a list of 73 cities, Singapore is the 24th most expensive city - moving up eight spots from the previous survey in 2006. It is costlier than Chicago, Hong Kong and Sydney.

But when it comes to wage levels, Singapore slipped two notches to 40th position. It is just one rung above Moscow, which is way down the 'expensive cities' list at No. 56 - or 32 places below Singapore.

With prices rising more than wages, Singapore workers cannot afford to buy as much as people in many other cities. Purchasing power in Singapore declined 10 spots to 50th place, behind cities like Bratislava in Slovakia, Johannesburg in South Africa and Kuala Lumpur in Malaysia.

While some observers question the accuracy of such comparative studies, one inescapable conclusion is that wage increases have not been on a par with economic growth.

IT GOES back to the issue of low wage share - for two main reasons.

One, the dominance of foreign multinationals, which are likely to repatriate a large proportion of their profit rather than distribute it back to workers as wages.

The success of Singapore's efforts to attract foreign investments meant that foreign investors also earned a larger proportion of the returns to capital in Singapore...Partly reflecting this, the growth in personal disposable incomes, from which households could finance their consumption, was lower than GDP growth in Singapore.

Two, an increase in the number of lower-skilled jobs created over the last decade, many of which are filled by foreign workers who depress the wages of the bottom fifth of workers here. Both trends are worrying.

‘It would be misleading to suggest that because Singapore's wage share is low, its workers' wages are stagnant despite economic growth,' says the Singapore Management University professor.

BUT whatever the difference in views, there is consensus on one issue: How the gains of growth are spread among the different groups of workers is critical. In this regard, low-skilled workers tend to get the short end of the stick compared with their higher-skilled peers, as their wages have stagnated while salaries of the rest have improved over the years.

For instance, the median monthly wage of cleaners and labourers was $1,270 in 2008, lower than the $1,389 in 1998. They were the only group of workers whose wages did not progress, according to the Manpower Ministry's report on wages last year.

The result is a widening wage gap between occupations at the top (managers) and bottom (cleaners and labourers). Those at the top earned four times more than those at the bottom in 1998; this grew to 5.12 times in 2008. This means the low-skilled workers have a less than equal share in the fruits of rapid economic growth. Income distribution is a key concern and this might be driven by economic shocks as skilled workers are better equipped to ride the business cycles as compared to the unskilled. Other developed countries have also not been spared the spectre of a growing income gap, with wages rising rapidly for the top 10 per cent - especially the top 1 per cent - at a much faster pace than for the rest.

Part of the explanation again leads back to how the profit share of GDP has risen at the expense of wages, as some top earners such as business owners also reap a bigger proportion of profits.

In the meantime, the profit share of GDP in these countries increased from around 11 per cent to more than 15 per cent in the same period. This shift is due in part to the massive surge of workers from developing countries such as China and India into the global market, which has weakened the bargaining position of workers in the advanced economies.

Does the solution for more even growth distribution lie in increasing the wage share of GDP, to tilt the balance in favour of all workers, including the low-income earners?

Great European Debt !

Web of Debt

So, is Greece, Spain, or Italy either one going to be the next Lehman Borthers ? Maybe they are not huge enough to cause global financial markets to freeze up the way US and Asian crisis did in 2008. Is it seriously that we're seeing the start of a run on all European government debt. United States borrowing costs actually plunged on Thursday to their lowest level in months. And while worriers warned that Britain could be the next Greece, British rates also fell slightly. Greece's problems are deeper than European leaders are willing to acknowledge, even now - and they're shared, to a lesser degree, by other European countries.

Many observers now expect the Greek tragedy to end in default; probably they're too optimistic, that default will be accompanied or followed by departure from the euro. The problem, as obvious in prospect as it is now, is that Europe lacks some of the key attributes of a successful currency area. Above all, it lacks a central government.

Consider the often-made comparison between Greece and the state of California. Both are in deep fiscal trouble, both have a history of fiscal irresponsibility. And the political deadlock in California is, if anything, worse - after all, despite the demonstrations, Greece's Parliament has, in fact, approved harsh austerity measures.

So is a debt restructuring - a polite term for partial default - the answer? It wouldn't help nearly as much as many people imagine, because interest payments account for only part of Greece's budget deficit. Even if it completely stopped servicing its debt, the Greek government wouldn't free up enough money to avoid savage budget cuts.

The only thing that could seriously reduce Greek pain would be an economic recovery, which would both generate higher revenues, reducing the need for spending cuts, and create jobs. If Greece had its own currency, it could try to engineer such a recovery by devaluing that currency, increasing its export competitiveness.

But Greece is on the euro and to survive the crisis, Greek workers could redeem themselves through suffering, accepting large wage cuts that make Greece competitive enough to add jobs again. European Central Bank could buy lots of government debt, and accepting - indeed welcoming - the resulting inflation; this would make adjustments in Greece and other troubled euro-zone nations much easier. Or Berlin could become to Athens what Washington DC is to Sacramento - getting enough aid to make the crisis bearable. The trouble, of course, is that none of these alternatives seems politically plausible.

What if bank runs happened, and just like the Argentine government imposed emergency restrictions on withdrawals. This left the door open for devaluation, and Argentina eventually walked through that door. If something like that happens in Greece, it will send shock waves through Europe, possibly triggering crises in other countries. But unless European leaders are able and willing to act far more boldly than anything we've seen so far, that's where this is heading.

EU leaders have insisted for days the Greek financial implosion was a unique combination of bad management, free spending and statistical cheating that doesn't apply to any other eurozone nation, such as troubled Spain or Portugal. They said the bailout should contain the problem by giving Greece three years of support and preventing a default when it has to pay 8.5 billion euros in bonds coming due on May 19.

Again yesterday, European leaders were almost desperately trying to talk away the problems. Agreement on rescue for Greece will be a demonstration of Europe's force, of solidarity. The markets have taken little heed. Stocks, Greek bonds and the euro plunged even yesterday. Along with the eurozone meeting, the G-7 finance ministers will hold a teleconference yesterday on the crisis, according to Japan's finance minister.

And on top of the eurozone summit, key leaders like France's Nicolas Sarkozy, German Chancellor Angela Merkel and ECB president Jean-Claude Trichet will huddle ahead of time seeking a common strategy to soothe the markets. Well these new leaders have to work harder before they can enjoy their lead in either running the government office or at home relaxing with their spouse and children....


16 May 2010 Sunday report on paper,
Yet financial experts say the Greek crisis is unlikely to spark another global meltdown.

The European Union (EU) rescue package (worth $1.4 trillion) is sufficiently large and wide-ranging as to put an end to concerns over a liquidity crisis that could have threatened contagion in global markets but many EU countries will likely see very slow growth for a number of years because the package requires nations with unsustainably large budget deficits to implement strict spending cuts and tax rises.

Greek crisis
Greece is at the centre of the storm. Credit agencies like Moody's questioned the state's ability to meet its debt obligations and downgraded its credit rating with an accompanying negative outlook.
There were already concerns over the high level of deficit-to-gross domestic product (GDP) ratio for Portugal, Ireland, Italy, Greece and Spain - known collectively by the acronym Piigs, noted First State Investments. The European Commission set a rule that this ratio should be kept at 3 per cent or lower but it turned out that the ratio for the Piigs exceeded a great deal. For instance, Greece, Portugal and Spain have a deficit-to-GDP ratio of 13.6 per cent, 9.4 per cent and 11.2 per cent respectively.

Contagion effect
Contagion risk is the fear that financial problems in one nation will spread to others which are linked to one another in some way. This happened during the Asian financial crisis when the currency turmoil in Thailand brought volatility in Indonesia and other neighbouring nations.
The contagion effect from the debt issues in Greece has hit other European countries, including the other Piigs. The potential contagion effect of any of these countries defaulting on their debts becomes clearer when we take a look at their loans to one another.

For example, Greece and Spain borrowed externally from many other European countries, in particular France and Germany. Germany and France are Spain's largest creditors with more than US$500 billion (S$694 billion) of exposure between them.
So the contagion risk is very real given that if any of the Piigs were to default, it would adversely impact the balance sheets of other EU countries.

Impact on stock markets
Stock markets have headed south in recent weeks and are experiencing significant volatility.
But experts are confident that this is a short-term reaction. 'Our 12-month fair value for the STI is 3,200. In the short term, we think the market will be range bound from 2,750 to 2,930,' she said. 'We will be buyers if the index falls back to 2,750 as further downside risk from there should be limited.'
While the weakened euro and current economic conditions in Europe may spell weaker demand for Asian exports, exports could still be supported by US demand and intra-regional trade. 'We do not believe that recent sell-off is a renewed bear market.'
While the short- to medium-term outlook is expected to remain cautious, the selldown has brought valuations to more attractive levels. Calling the selling a 'knee-jerk' reaction, smart money to gradually return to the market once the initial selling is over, as liquidity in the market remains strong.
In addition, equities continue to be good, long-term investments especially since current corporate results have generally been in line with or above expectations.

Impact on Asia
Though Asian investors may not be directly affected by the crisis, there are several indirect implications, such as declining demand for Asian exports.
The weakening of the euro means that European consumers have lower purchasing power, and with the EU being a key export market for Asian (economies) like China, Hong Kong, South Korea, Singapore and Malaysia, exports for these Asian economies could see a negative impact.
Financial experts pointed out that as an export market, Europe is as important as the US is, to Asia.

Asia's export exposure to Europe constitutes about 12 per cent of its total exports on average, with India and China having the largest export exposure of close to 20 per cent. Singapore has a 9.4 per cent export exposure to Europe.
The implementation of austerity measures in Greece is likely to be followed in weaker European economies like Portugal while larger economies like Britain are looking to rein in spending to avoid similar debt problems. This could signal a longer-term shift to weaker consumer consumption, and that is a negative for export-oriented Asian economies.

Other factors
Besides the Greek debt crisis, other possible headwinds for investors include the ongoing Goldman Sachs case where the US investment bank is facing a number of related lawsuits and investigations over the sale of mortgage-related investments. Another concern is the move by the Chinese government to curb rising property prices through tightening credit.

Well, what do we do with our cash, not worth to deposit in the bank and we need to make it growth with annual rate of few percentage point in order to benefit on it's cash value? Think twice to buy stocks at this moment, I suppose.

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The real reasons for the euro-led collapse are: an over-reliance on debt to grease the wheels of growth; countries and people living beyond their means, largely through borrowing and poor regulation by governments and central bankers; and excessive risk-taking - or greed, if you prefer - by inadequately capitalised investment banks which, it has to be said, ran many a hugely profitable scam in the past decade selling junk to a hapless public, often with the blessing of complacent regulators.

Perhaps just as relevant has been the inability of various government-led support measures to have an impact - from the US$1 trillion safety net announced by euro zone finance ministers a fortnight ago to German bans on naked short-selling.

Will Euro survive ?
The euro, the common currency of 16 European Union nations, is undergoing its severest test since its inception in 1999. Now at a four-year low against the dollar, the euro's credibility has been hammered by the slow and confused European response to the debt crisis in Greece, which has now spread to Spain and Portugal.

European stock markets have retreated and a massive US$1 trillion rescue programme announced on May 9 has thus far failed to calm investors nerves. Suddenly people are asking what was unthinkable - will the euro survive, might the currency union fall apart? Since January, Europe has dawdled while Greece - one of the eurozone's weakest members - had to pay progressively higher interest rates on a debt that was growing faster than bond holders had been led to believe.
While Greece pleaded for help, Germany, the eurozone's biggest economy, resisted, saying the profligate Greeks had to clean up their own mess and cut government spending.

By April, Greece sought emergency help not only from its European Union partners but also from the International Monetary Fund. At the centre of the storm is 'Mr Euro', Jean-Claude Trichet, the astute 67-year-old Frenchman who has headed the ECB since 2003. By holding too long to the view that there was no possibility that Greece could default, Mr Trichet like others underestimated the magnitude of the Greek problem.

As the euro tumbled on exchange markets, government leaders finally realised that not just Greece but the entire euro currency project was at risk. At an emergency meeting in Brussels on May 7th eurozone leaders outlined the massive rescue package that emerged two days later from an 11-hour long meeting of finance ministers.

President Obama is not a passive bystander to the euro crisis. Alarmed that a double-dip recession and credit squeeze in Europe would derail the US recovery, Mr Obama telephoned the French, German and Spanish leaders urging prompt, decisive action. Mr Trichet, sobered by the crisis, is calling for 'a quantum leap in the governance of the euro area', meaning enforceable rules to assure fiscal discipline.


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Change of Fortunes :
HOW times change. It was fashionable even as recently as January this year, to proclaim that the euro would emerge as the world's key reserve currency because the United States was weighted down by its huge trade and fiscal deficits.

It was held as an article of economic faith that saver nations will, at some point, become unwilling to subsidise the penchant of Americans to consume far more than they produce. A disastrous fall in the value of the US dollar would end the unique advantage the US has enjoyed in possessing the global reserve currency since World War II.


Many lent their names to this theory. Even the former Federal Reserve Board chairman, Alan Greenspan, had an inkling of the US dollar's doom. It is 'absolutely conceivable that the euro will replace the (US) dollar as the reserve currency, or will be traded as an equally important reserve currency', he told the weekly, Stern, in 2007.
For now at least, all these views seem misplaced. The euro is gasping for air. In a dramatic reversal, the euro has fallen nearly 22 per cent from its peak reached in July in 2008.

When it was launched in January 1999, the euro was placed at a slightly stronger level against the dollar. Then, it fell through parity and languished for three years. It went down as low as US$0.82 in October 2000, before soaring to a high of US$1.60 in July, 2008. This remarkable surge helped to spread the optimism about the euro's dominant future. Conspiracy theories began to take shape. Wasn't the euro a factor behind the invasion of Iraq?
As the US dollar began to crumble, talk was rife that Opec would finish the job, delivering a deadly blow to American prestige and economy.


There were reports of a secret understanding among the big oil producers to dump the US dollar.
Indeed, across the world, central banks stepped up their holdings of euros in their reserves. According to the International Monetary Fund, euro-denominated reserves with central banks, excluding China, rose to 672 billion at the end of last year, from 97 billion in the first quarter of 2002. While China intends keep to diversifying its holdings, Russia has trimmed its euro reserves and Iran is having a rethink of its reserves.
For years, the euro seemed to defy the question of how a common currency could run without a common government. Many economists indeed thought that, after the initial years, a recession would wreck eurozone cohesion.
The scenario put out was that when a recession affects weak areas of Europe, it would lead to a conflict of interest vis-a-vis countries committed to disciplined economic policy.

Weak economies with populist governments, wanting low interest rates, would be willing to put up with some inflation. But strong economies like Germany, serious about maintaining price stability at all costs, would not oblige. And Europe would struggle to handle 'the asymmetric shocks' that would follow. Language barriers and a general reluctance of European labour to move within the eurozone would further handicap the governments.

The result would be a vicious political row and a potential financial crisis, as market players start to discount the bonds of weaker governments.
That script is now being played out. Germany's unilateral ban on naked short-selling - which was immediately opposed by France - has exposed a lack of cohesion in the EU nations. Worries are growing about the contagion spreading. The prospect of widespread government spending cuts is raising the spectre of social unrest and political turmoil in Europe. Analysts and chartists are predicting further falls in the value of the euro, which is trading at about US$1.23 now, or close to a four-year low.
So for now, and what for it is worth, the American dollar is back again as the top reserve currency and a safe haven.
However, while Europe is indeed in the midst of a major crisis, the economic shockwaves can travel beyond European shores. Moreover, the US has enormous budget deficits and debts as well. And many US companies have major exposures to the European continent - all of which makes the US economy also vulnerable.