Asia Times: Asian capital: Hiding and fleeing


	August 19, 2001	atimes.com

Editorials

ASIAN CRISIS DIARY, Vol II
Asian capital: Hiding and fleeing
By Uwe Parpart, Editor

Any way you look at it, the East Asian economic picture isn't pretty. If anything, it's downright perverse: Interest rates are at historical lows ("super-zero" in Japan), the banking system is awash with money - and, guess what, nothing is moving, not up, at any rate.

Most unhappily, in these circumstances, that old Keynesian conundrum, the liquidity trap, has made a comeback in the arguments of economists and the - ahh, so knowledgeable - babble of politicians. We politely say "unhappily" when, more plainly, we should say, stupidly. The concept explains little or nothing. Policy prescriptions based on it likely will only make a bad situation worse.

What's a liquidity trap? Economic dictionaries define it as a situation in which the rate of interest is so low that no one wants to hold interest-bearing assets (ie bonds), but only cash. Why? Well, interest rates can fall only so far - zero. Then, or well before that, everybody - reasonably enough - will expect it to rise. But bond prices fall when interest rates rise and, because no one wants to hold an asset whose price will fall, everyone will hold cash rather than bonds. In this situation, the interest rate can fall no further - liquidity preference is absolute.

Now are you any wiser? We doubt it - and you won't be alone. And at least some of you will have noticed that at least on the above classical definition of the liquidity trap that's not what East Asia is experiencing in reality. Banks - from Japan to Thailand - are snapping up government bonds in large chunks. In 2000, Thai commercial banks' claims on government bonds rose by some 45 billion baht (about US$1 billion), an 18 percent increase over the level at the end of 1999.

What banks are not doing is lending, and from the standpoint of the productive economy that is hardly best described as a liquidity trap. It's a credit crunch. In 2000, commercial bank lending in Thailand contracted by 9.1 percent and the contraction is continuing this year. Meanwhile, deposits in 2000 increased by 5.3 percent and are still piling into the banks. The loan-to-deposit (LTD) ratio, which just a few years back stood at around 100 percent, has dropped to around 70 percent. So, yes, there's plenty of liquidity. But what traps it is not some new and improved liquidity trap, but the lack of investment opportunities.

And while a good deal of East Asian money is hiding in savings accounts and banks are not lending it out for lack of opportunity at acceptable risk factors, plenty of it is also fleeing the region altogether. It's not trapped; worse than that, to the chagrin of central bankers, it appears quite un-trappable. It seeks not just safer havens; it seeks higher returns in far-away places, mostly the United States.

It's high time to stop gabbing about liquidity traps and to face the fact - and do something about it - that unreformed economies do not offer the investment opportunities prudent investors seek.

The first step in that, liquidation of what the Austrian school of economists calls malinvestments, should have been taken over the past several years. It wasn't. Heavily distorted capital structures have been protected by bank bail-outs and failure on the part of banks to foreclose on unsound investments. Markets haven't cleared, resources have been trapped, savings withheld, and profit margins depressed or wiped out altogether. Don't blame liquidity; blame politics.

The second step, much talked about, but moving at a snail's pace in terms of implementation, is creation of new domestic demand. To get that off dead center, new supply-side measures to stimulate investment must be taken - ranging from privatization of state enterprises (break-up of chaebol in Korea) to tax relief. Keynesian demand stimulation measures, paying people to dig holes and fill them up again, will not do the trick.

As long as political opposition to drastic foreclosure of failed investment positions continues and public debt is piling up in further bank bail-outs and idle demand stimulation, East Asian capital (and we won't blame it) will continue to hide or flee.

For those more theoretically inclined, we offer this comment on interest rates and liquidity traps by Sir Dennis Robertson, a shrewd critic of Keynes, "Thus the rate of interest is what it is because it is expected to become other than it is; if it is not expected to become other than it is, there is nothing left to tell us why it is what it is. The organ which secretes it has become amputated. And yet it somehow still exists a grin without a cat."

((c)2001 Asia Times Online Co, Ltd. All rights reserved. Please contact content@atimes.com for information on our sales and syndication policies.)

back to the top

©2001 Asia Times Online Co., Ltd.

Building B - 5th Floor, 102/1 Phra Arthit Road, Chanasangkhram, Bangkok 10200, Thailand