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THE other day, the world’s major stock markets
teetered on the brink of collapse. This prompted the US Federal
Reserve Board to cut by 75 basis points the interest rate for money
the federal government borrows to 3.5 percent. Since the Fed fund
rate is used as basis by the banks in pricing their loans, the cut
has the effect of reducing interest rates for borrowers—for home
and car buyers and businesses so they get cheaper loans.
The Fed cut enabled Asian markets
to rise yesterday with the Philippines showing a 2.6-percent gain.
But US stocks continued their collapse.
The rate reduction should also
lower the cost of money in the Philippines; otherwise, foreign money
will flow into the country in search of higher short-term yields,
thus boosting foreign reserves (now at record high) and the peso
rate against the dollar. The peso has appreciated by 26.7 percent
from its low of P56 per dollar.
Cheap money, however, has the
effect of triggering inflation because more money in consumers’
hands when there is not enough supply of goods (which is our case in
the Philippines) results in higher prices.
One wonders how long the Fed Open
Market Committee rate reduction will have a positive impact. The
gnawing feeling is that a US recession is inevitable. That is why
global markets are tumbling because a slowdown has a grave impact,
real and imagined, on most economies, including the Philippines.
Said the FOMC in taking the
surprise and massive rate reduction Tuesday morning: “The
Committee took this action in view of a weakening of the economic
outlook and increasing downside risks to growth. While strains in
short-term funding markets have eased somewhat, broader financial
market conditions have continued to deteriorate and credit has
tightened further for some businesses and households. Moreover,
incoming information indicates a deepening of the housing
contraction as well as some softening in labor markets.
“The Committee expects
inflation to moderate in coming quarters, but it will be necessary
to continue to monitor inflation developments carefully.
“Appreciable downside risks to
growth remain. The Committee will continue to assess the effects of
financial and other developments on economic prospects and will act
in a timely manner as needed to address those risks.” Translation:
It is getting more difficult (for consumers and businesses) to
borrow money because banks are tightening in their lending. If you
cannot borrow, you don’t consume or you don’t produce. The
result is layoffs or “softening in labor markets.”
The Fed cut doesn’t solve
America’s fundamental economic problem. The US government is
overborrowed, overextended and has overreached. The Bush
administration has very little respect and credibility overseas.
America has no longer a moral ascendancy because of human rights
violations and abuses committed against prisoners kept in Guantanamo
and Abu Ghraib prisons, the behavior of mercenary American security
guards in Iraq, and the wiretapping of overseas calls of Americans.
Also, Bush, a Harvard MBA, has
mismanaged the American economy to a point it no longer is
competitive. America has become dependent on Arab oil but has little
money to pay for it. It has devalued the dollar against most
currencies to cheapen American exports. The Arabs, the Chinese and
even the Singaporeans are making an economic invasion of America,
gobbling up US financial and corporate crown jewels.
The Abu Dhabi Investment
Authority poured $7.5 billion and Singapore $12.5 billion into
Citigroup, Nokia Finland $7.6 billion into Navteq, Canada $7.8
billion into Thomson Learning, Iberdrola of Spain $8.1 billion into
Energy East, Toronto Dominion Bank $8.6 billion into Commerce
Bancorp., Sabic of Saudi Arabia $11.6 billion into GE Plastics,
AstraZeneca of Britain $14.7 billion into Medimmune, Banco Bilbao
$9.9 billion into Compass Bancshares, and Petrochemical Industries
of Kuwait $9.5 billion into Dow Chemical. These are New York Times
figures.
The US is the best place in the
world to invest or spend your money. For Filipino tourists, the
prices of iPhones, iPods, Macs, plasma and LCD tvs, cars, and yes,
homes, are about 20 percent cheaper now than they were a year ago,
thanks to the appreciation of the peso against the US dollar and the
collapse in home prices. You can buy on sale big-ticket items like
large screen plasma TVs from Costco, ship it door to door (you pay
probably from $100 to $500, depending on the size of the TV), and
after a month, you have the latest Sony Bravia or Samsung flat panel
at 30 to 50 percent lower than Manila prices in your bedroom or
living room.
The White House is talking of
stimulus for the economy, like tax rebates and tax cuts. To some
analysts, however, the best stimulus is for Bush and the Republicans
to leave the presidency.
biznewsasia@gmail.com
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