The Great Slump of 1930 revisited.  

Posted by ipv6

This essay was written by John Maynard Keynespre in 1930 about the general economy teory and the Great Depression; as he was groping toward an integrated framework for thinking about depressed economies his observations on the crisis remain stunningly insightful, while we are not quite there yet, it's enlighten to read what he says almost eight decades before. I know it a bit long piece but perhaps you might want to spend a few minutes to understand the economy as most of his words fit current events all too well. Pluss it's in simple english, as not much financial jargon, thus the layman could digest it pretty easily than those from Paul Krugman/Nouriel Roubini or anyone their stature. Economics is central to everyones lives and yet very few have a grasp on their basic fundamentals/understanding, how strange? Finally, for those of you working on economic/finance papers, term papers and so forth, I hope these article help.

The Great Slump of 1930.  

I. 

The world has been slow to realize that we are living this year in the shadow of one of the greatest economic catastrophes of modern history. But now that the man in the street has become aware of what is happening, he, not knowing the why and wherefore, is as full to-day of what may prove excessive fears as, previously, when the trouble was first coming on, he was lacking in what would have been a reasonable anxiety. He begins to doubt the future. Is he now awakening from a pleasant dream to face the darkness of facts? Or dropping off into a nightmare which will pass away? 

He need not be doubtful. The other was not a dream. This is a nightmare, which will pass away with the morning. For the resources of nature and men's devices are just as fertile and productive as they were. The rate of our progress towards solving the material problems of life is not less rapid. We are as capable as before of affording for everyone a high standard of life—high, I mean, compared with, say, twenty years ago—and will soon learn to afford a standard higher still. We were not previously deceived. But to-day we have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand. The result is that our possibilities of wealth may run to waste for a time—perhaps for a long time. 

I doubt whether I can hope, in these articles, to bring what is in my mind into fully effective touch with the mind of the reader. I shall be saying too much for the layman, too little for the expert. For—though no one will believe it—economics is a technical and difficult subject. It is even becoming a science. However, I will do my best—at the cost of leaving out, because it is too complicated, much that is necessary to a complete understanding of contemporary events. 

First of all, the extreme violence of the slump is to be noticed. In the three leading industrial countries of the world—the United States, Great Britain, and Germany—10,000,000 workers stand idle. There is scarcely an important industry anywhere earning enough profit to make it expand—which is the test of progress. At the same time, in the countries of primary production the output of mining and of agriculture is selling, in the case of almost every important commodity, at a price which, for many or for the majority of producers, does not cover its cost. In 1921, when prices fell as heavily, the fall was from a boom level at which producers were making abnormal profits; and there is no example in modern history of so great and rapid a fall of prices from a normal figure as has occurred in the past year. Hence the magnitude of the catastrophe. 

The time which elapses before production ceases and unemployment reaches its maximum is, for several reasons, much longer in the case of the primary products than in the case of manufacture. In most cases the production units are smaller and less well organized amongst themselves for enforcing a process of orderly contraction; the length of the production period, especially in agriculture, is longer; the costs of a temporary shut-down are greater; men are more often their own employers and so submit more readily to a contraction of the income for which they are willing to work; the social problems of throwing men out of employment are greater in more primitive communities; and the financial problems of a cessation of production of primary output are more serious in countries where such primary output is almost the whole sustenance of the people. Nevertheless we are fast approaching the phase in which the output of primary producers will be restricted almost as much as that of manufacturers; and this will have a further adverse reaction on manufacturers, since the primary producers will have no purchasing power wherewith to buy manufactured goods; and so on, in a vicious circle. 

In this quandary individual producers base illusory hopes on courses of action which would benefit an individual producer or class of producers so long as they were alone in pursuing them, but which benefit no one if everyone pursues them. For example, to restrict the output of a particular primary commodity raises its price, so long as the output of the industries which use this commodity is unrestricted; but if output is restricted all round, then the demand for the primary commodity falls off by just as much as the supply, and no one is further forward. Or again, if a particular producer or a particular country cuts wages, then, so long as others do not follow suit, that producer or that country is able to get more of what trade is going. But if wages are cut all round, the purchasing power of the community as a whole is reduced by the same amount as the reduction of costs; and, again, no one is further forward. 

Thus neither the restriction of output nor the reduction of wages serves in itself to restore equilibrium. 

Moreover, even if we were to succeed eventually in re-establishing output at the lower level of money-wages appropriate to (say) the pre-war level of prices, our troubles would not be at an end. For since 1914 an immense burden of bonded debt, both national and international, has been contracted, which is fixed in terms of money. Thus every fall of prices increases the burden of this debt, because it increases the value of the money in which it is fixed. For example, if we were to settle down to the pre-war level of prices, the British National Debt would be nearly 40 per cent. greater than it was in 1924 and double what it was in 1920; the Young Plan would weigh on Germany much more heavily than the Dawes Plan, which it was agreed she could not support; the indebtedness to the United States of her associates in the Great War would represent 40-50 per cent. more goods and services than at the date when the settlements were made; the obligations of such debtor countries as those of South America and Australia would become insupportable without a reduction of their standard of life for the benefit of their creditors; agriculturists and householders throughout the world, who have borrowed on mortgage, would find themselves the victims of their creditors. In such a situation it must be doubtful whether the necessary adjustments could be made in time to prevent a series of bankruptcies, defaults, and repudiations which would shake the capitalist order to its foundations. Here would be a fertile soil for agitation, seditions, and revolution. It is so already in many quarters of the world. Yet, all the time, the resources of nature and men's devices would be just as fertile and productive as they were. The machine would merely have been jammed as the result of a muddle. But because we have magneto trouble, we need not assume that we shall soon be back in a rumbling waggon and that motoring is over. 



II. 

We have magneto trouble. How, then, can we start up again? Let us trace events backwards:— 

1. Why are workers and plant unemployed? Because industrialists do not expect to be able to sell without loss what would be produced if they were employed. 

2. Why cannot industrialists expect to sell without loss? Because prices have fallen more than costs have fallen—indeed, costs have fallen very little. 

3. How can it be that prices have fallen more than costs? For costs are what a business man pays out for the production of his commodity, and prices determine what he gets back when he sells it. It is easy to understand how for an individual business or an individual commodity these can be unequal. But surely for the community as a whole the business men get back the same amount as they pay out, since what the business men pay out in the course of production constitutes the incomes of the public which they pay back to the business men in exchange for the products of the latter? For this is what we understand by the normal circle of production, exchange, and consumption. 

4. No! Unfortunately this is not so; and here is the root of the trouble. It is not true that what the business men pay out as costs of production necessarily comes back to them as the sale-proceeds of what they produce. It is the characteristic of a boom that their sale-proceeds exceed their costs; and it is the characteristic of a slump that their costs exceed their sale-proceeds. Moreover, it is a delusion to suppose that they can necessarily restore equilibrium by reducing their total costs, whether it be by restricting their output or cutting rates of remuneration; for the reduction of their outgoings may, by reducing the purchasing power of the earners who are also their customers, diminish their sale-proceeds by a nearly equal amount. 

5. How, then, can it be that the total costs of production for the world's business as a whole can be unequal to the total sale-proceeds? Upon what does the inequality depend? I think that I know the answer. But it is too complicated and unfamiliar for me to expound it here satisfactorily. (Elsewhere I have tried to expound it accurately.) So I must be somewhat perfunctory. 

Let us take, first of all, the consumption-goods which come on to the market for sale. Upon what do the profits (or losses) of the producers of such goods depend? The total costs of production, which are the same thing as the community's total earnings looked at from another point of view, are divided in a certain proportion between the cost of consumption-goods and the cost of capital-goods. The incomes of the public, which are again the same thing as the community's total earnings, are also divided in a certain proportion between expenditure on the purchase of consumption-goods and savings. Now if the first proportion is larger than the second, producers of consumption-goods will lose money; for their sale proceeds, which are equal to the expenditure of the public on consumption-goods, will be less (as a little thought will show) than what these goods have cost them to produce. If, on the other hand, the second proportion is larger than the first, then the producers of consumption-goods will make exceptional gains. It follows that the profits of the producers of consumption goods can only be restored, either by the public spending a larger proportion of their incomes on such goods (which means saving less), or by a larger proportion of production taking the form of capital-goods (since this means a smaller proportionate output of consumption-goods). 

But capital-goods will not be produced on a larger scale unless the producers of such goods are making a profit. So we come to our second question—upon what do the profits of the producers of capital-goods depend? They depend on whether the public prefer to keep their savings liquid in the shape of money or its equivalent or to use them to buy capital-goods or the equivalent. If the public are reluctant to buy the latter, then the producers of capital-goods will make a loss; consequently less capital-goods will be produced; with the result that, for the reasons given above, producers of consumption-goods will also make a loss. In other words, all classes of producers will tend to make a loss; and general unemployment will ensue. By this time a vicious circle will be set up, and, as the result of a series of actions and reactions, matters will get worse and worse until something happens to turn the tide. 

This is an unduly simplified picture of a complicated phenomenon. But I believe that it contains the essential truth. Many variations and fugal embroideries and orchestrations can be superimposed; but this is the tune. 

If, then, I am right, the fundamental cause of the trouble is the lack of new enterprise due to an unsatisfactory market for capital investment. Since trade is international, an insufficient output of new capital-goods in the world as a whole affects the prices of commodities everywhere and hence the profits of producers in all countries alike. 

Why is there an insufficient output of new capital-goods in the world as a whole? It is due, in my opinion, to a conjunction of several causes. In the first instance, it was due to the attitude of lenders—for new capital-goods are produced to a large extent with borrowed money. Now it is due to the attitude of borrowers, just as much as to that of lenders. 

For several reasons lenders were, and are, asking higher terms for loans, than new enterprise can afford. First, the fact, that enterprise could afford high rates for some time after the war whilst war wastage was being made good, accustomed lenders to expect much higher rates than before the war. Second, the existence of political borrowers to meet Treaty obligations, of banking borrowers to support newly restored gold standards, of speculative borrowers to take part in Stock Exchange booms, and, latterly, of distress borrowers to meet the losses which they have incurred through the fall of prices, all of whom were ready if necessary to pay almost any terms, have hitherto enabled lenders to secure from these various classes of borrowers higher rates than it is possible for genuine new enterprise to support. Third, the unsettled state of the world and national investment habits have restricted the countries in which many lenders are prepared to invest on any reasonable terms at all. A large proportion of the globe is, for one reason or another, distrusted by lenders, so that they exact a premium for risk so great as to strangle new enterprise altogether. For the last two years, two out of the three principal creditor nations of the world, namely, France and the United States, have largely withdrawn their resources from the international market for long-term loans. 

Meanwhile, the reluctant attitude of lenders has become matched by a hardly less reluctant attitude on the part of borrowers. For the fall of prices has been disastrous to those who have borrowed, and anyone who has postponed new enterprise has gained by his delay. Moreover, the risks that frighten lenders frighten borrowers too. Finally, in the United States, the vast scale on which new capital enterprise has been undertaken in the last five years has somewhat exhausted for the time being—at any rate so long as the atmosphere of business depression continues—the profitable opportunities for yet further enterprise. By the middle of 1929 new capital undertakings were already on an inadequate scale in the world as a whole, outside the United States. The culminating blow has been the collapse of new investment inside the United States, which to-day is probably 20 to 30 per cent. less than it was in 1928. Thus in certain countries the opportunity for new profitable investment is more limited than it was; whilst in others it is more risky. 

A wide gulf, therefore, is set between the ideas of lenders and the ideas of borrowers for the purpose of genuine new capital investment; with the result that the savings of the lenders are being used up in financing business losses and distress borrowers, instead of financing new capital works. 

At this moment the slump is probably a little overdone for psychological reasons. A modest upward reaction, therefore, may be due at any time. But there cannot be a real recovery, in my judgment, until the ideas of lenders and the ideas of productive borrowers are brought together again; partly by lenders becoming ready to lend on easier terms and over a wider geographical field, partly by borrowers recovering their good spirits and so becoming readier to borrow. 

Seldom in modern history has the gap between the two been so wide and so difficult to bridge. Unless we bend our wills and our intelligences, energized by a conviction that this diagnosis is right, to find a solution along these lines, then, if the diagnosis is right, the slump may pass over into a depression, accompanied by a sagging price-level, which might last for years, with untold damage to the material wealth and to the social stability of every country alike. Only if we seriously seek a solution, will the optimism of my opening sentences be confirmed—at least for the nearer future. 

It is beyond the scope of this article to indicate lines of future policy. But no one can take the first step except the central banking authorities of the chief creditor countries; nor can any one Central Bank do enough acting in isolation. Resolute action by the Federal Reserve Banks of the United States, the Bank of France, and the Bank of England might do much more than most people, mistaking symptoms or aggravating circumstances for the disease itself, will readily believe. In every way the more effective remedy would be that the Central Banks of these three great creditor nations should join together in a bold scheme to restore confidence to the international long-term loan market; which would serve to revive enterprise and activity everywhere, and to restore prices and profits, so that in due course the wheels of the world's commerce would go round again. And even if France, hugging the supposed security of gold, prefers to stand aside from the adventure of creating new wealth, I am convinced that Great Britain and the United States, like-minded and acting together, could start the machine again within a reasonable time; if, that is to say, they were energized by a confident conviction as to what was wrong. For it is chiefly the lack of this conviction which to-day is paralyzing the hands of authority on both sides of the Channel and of the Atlantic. 

Central banks stumble upon defending their currency yet again!  

Posted by ipv6

Currency Defense Drops on Ringgit, Won on Exports
March 9 (Bloomberg) -- Asian central banks are abandoning a six-month campaign of defending their currencies, reversing course to cheapen exports that are falling the most in a decade.

Policy makers from India to Malaysia to Taiwan are letting their currencies depreciate after South Korea gave companies an edge by allowing the won to weaken 19 percent against thebail out dollar this year. Shipments from South Korea, Indonesia, Taiwan and Malaysia fell 17 percent in January to $79 billion, twice the drop of April 1998, when the Asian financial crisis was wiping out a third of the region’s economy, according to data compiled by Bloomberg.

“Export markets have been forced to let their currencies weaken to try and keep up with the competitive depreciation in the won,” said Dwyfor Evans, a strategist in Hong Kong at State Street Global Markets LLC, which has $12 trillion under custody.

The won, India’s rupee and Taiwan’s dollar will decline against the U.S. dollar by 12, 13 and 6 percent, respectively, by the end of June, according to Stephen Jen, a Morgan Stanley currency strategist. Goldman Sachs Group Inc. says Singapore’s dollar will depreciate 3 percent by April. Malaysia’s ringgit will slip 5 percent by Sept. 30, says Calyon, a Credit Agricole SA unit in Paris.

Devalued currencies may throw a lifeline to exporters getting clobbered by South Korean competitors. Oppenheimer & Co. predicts Taiwan-based AU Optronics’s share of the global market for liquid-crystal displays in television sets and computers will drop to 15 percent this year, from 16.8 percent in 2008. The company posted a record loss of NT$26.6 billion ($764 million) for the fourth quarter.

Outperforming Taiwan

Its South Korean rivals, Samsung Electronics Co. and LG Display Co. will boost their combined LCD share to 44.9 percent, from 41.9 percent, Oppenheimer said in a research report to clients last month. Shares of those two companies have outperformed their Taiwan competitor by at least 21 percentage points since Sept. 30.

“There will no longer be meaningful interventions to prevent Asia-outside-Japan currencies from falling,” Jen said in a March 2 report from London. “There’s a genuine change in the currency policies of many Asian economies. A severe contraction in the trade surpluses clearly affects the relative supply and demand for dollars in these countries.”

Central banks intervene when they buy or sell currencies to influence exchange rates.

‘Stable’ and ‘Functioning’

Malaysia’s Bank Negara bought ringgit four months ago, helping it strengthen 4.5 percent Malaysian Ringgitagainst the dollar in December. The central bank said March 5 that the currency is now “stable” and “functioning on its own.” The ringgit fell 6.8 percent this year to 3.7203 today as it slipped toward the 3.80-per-dollar peg abandoned in 2005.

The Philippines won’t intervene to shore up the peso, Deputy Governor Diwa Guinigundo said March 4 as it approached the lowest level since Dec. 5. The peso ended a three-month slide in November after the central bank drew down its reserves by 2 percent the previous month, the biggest drop since 2005. The currency declined 2.5 percent to 48.620 per dollar this year.

Foreign reserves in India barely changed in February at $239 billion, indicating the central bank didn’t sell dollars to prop up the currency as the rupee shed 4.7 percent in its worst monthly performance since October.

Adnan Akant, foreign exchange chief in New York at Fischer Francis Trees & Watts, which oversaw $22 billion as of December, predicts Singapore’s central bank will widen its trading band to let the currency fall when policy makers hold their biannual meeting in April. He’s selling the city-state’s dollar, which depreciated 6.5 percent this year to S$1.5442 per greenback.

‘Engine’ for Growth

South Korea was the catalyst for the shift away from defensive intervention. After spending 22 percent of foreign reserves from August to November to stem won losses, South Korean Finance Minister Yoon Jeung Hyun said Feb. 25 that its weakness may be an “engine for export growth.”

The won’s 17 percent slide this year versus Asian counterparts is its steepest annual start since 1995, when Westpac Banking Corp. started to track the value of the currency on a traded weighted basis.

China’s $585 billion stimulus plan may halt or reverse Asian currency losses by spurring growth across the continent. Christy Tan, a currency strategist at Bank of America Corp. in Singapore, said the region’s economies and currencies are ready for a recovery.

‘Positive Implications’

“Asia as a whole continues to enjoy rather healthy trade surpluses,” Tan said. “We have an above-consensus forecast for China growth at 8 percent. That’ll probably have positive implications for the Asian currencies going forward.”

Malaysia, Southeast Asia’s second-largest oil and gas producer, has had trade surpluses every month since 1997. Singapore’s current account surplus will fall to 15 percent of its economy this year from 24 percent in 2007, according to forecasts of economists surveyed by Bloomberg News.

Akant said China’s stimulus will have limited impact because that country “can only help itself, but not enough to help all non-Japan Asia.”

The region is twice as dependent on exports as other parts of the world. Excluding imported components, international sales account for two-thirds of Singapore’s $161 billion gross domestic product, almost half of Malaysia’s $181 billion and Thailand’s $246 billion and a third of Taiwan’s $356 billion and South Korea’s $970 billion, according to Credit Suisse Group AG.

Malaysia’s exports fell the most in 15 years in January, down 27.8 percent from a year earlier after slipping 14.9 percent in December, the trade ministry said March 6.

Falling Exports

A Taiwan government report today showed exports fell 28.6 percent last month from a year earlier, following January’s record 44 percent drop, according to economists surveyed by Bloomberg News.

Taiwan, Singapore, Hong Kong and South Korea, once called the Asian Tigers, have entered recessions as Westerners cut spending on cars, TVs and semiconductors.

Singapore’s Chartered Semiconductor Manufacturing Ltd., the world’s third-largest maker of customized chips, said in January it may report record losses of between $142 million and $152 million in the first quarter and will cut 600 employees, 8 percent of its workforce.

The export-fueled “boom is going bust,” said Henrik Pedersen, the London-based chief investment officer at Pareto Investment Management Ltd., which oversees $46 billion. “The countries will survive, but not without a big adjustment in their currencies. They don’t mind seeing their currencies weaker.”

Leveraged to Growth

Singapore’s economy contracted at an annualized 16.4 percent rate in the fourth quarter, Singapore Dollarthe most in at least 33 years. It will shrink another 3.5 percent in the first quarter, according to the median prediction in a Bloomberg survey of four economists. Taiwan’s gross domestic product is forecast to slow 2.7 percent this year, following a record 8.4 percent decline in the final three months of 2008.

“There’s a realization that the region is leveraged to global growth,” said Paresh Upadhyaya, who helps manage $50 billion in currency assets as a senior vice president at Putnam Investments in Boston. “Exports and industrial contraction are worse than the Asian crisis in 1997, 1998. They may have to debase their currencies.” He said he has “underweighed” the Taiwan dollar, the won and other Asian currencies since January.

After the bust of the housing bubbles in the region and the devaluation of Thailand’s baht prompted investors to flee the markets in 1997, industrial production in South Korea declined 13.5 percent in July 1998, from a year earlier. This past January, output dropped 25.6 percent, the statistics office said March 2.

Lower Interest Rates

Central banks from Indonesia to the Philippines are also weakening currencies by lowering interest rates. Though intended to boost growth, rate cuts also dim the appeal of their assets. The Reserve Bank of India reduced its benchmark repurchase rate to a record low of 5 percent from 5.5 percent on March 4, and from a seven-year high of 9 percent in September.

Investors are shunning emerging markets amid concern that the global recession will hurt these countries more than bigger economies. A combined $643 million evaporated in the South Korea, Taiwan and Thailand stock markets on March 2 alone, the most in three months, according to Calyon. The MSCI World Index fell 24 percent this year, compared with 14 percent for the MSCI World Index of developed nations.

“The same-old demand won’t come for the next five, 10 years,” said Scott Ainsbury, a money manager at FX Concepts, the world’s largest currency fund at $12 billion. “People may underestimate how far these currencies can fall.” Ainsbury said he’s selling the Taiwan and Singapore dollars and the won.

Worst Performers

The weaker won helped Seoul-based carmaker Hyundai Motor Co. increase U.S. sales 4.9 percent this year, while Toyota Motor Corp. in Tokyo, the world’s biggest auto manufacturer, saw sales drop 36 percent in the same period. The won depreciated 12 percent versus the Japanese yen this year, following a 40 percent drop last year.

So far in 2009, the won is the only Asian currency among the 10 worst performers in emerging markets, according to data compiled by Bloomberg. Hungary’s forint dropped 23 percent versus the dollar and Colombia’s peso lost 13 percent.

Central banks started to support currencies after the credit freeze that followed the collapse of the subprime mortgage market in August 2007, prompting foreign investors to withdraw funds. The defense intensified when Lehman Brothers Holdings Inc. collapsed in September, sending financial assets into a tailspin.

Foreign Reserves

As policy makers propped up exchange rates last year, foreign reserves in South Korea, India, Malaysia and Indonesia decreased to $589 billion on Dec. 31, from $745 billion on June 30.

For now, central banks have stopped fighting the depreciation.

South Korea’s foreign reserves were little changed at $201 billion in February as the won slumped 10 percent against the dollar, its worst month since November. The won also declined 19 percent this year against China’s yuan and 14 percent against Taiwan’s dollar on concern that a possible credit contraction would starve the nation of dollars needed to pay debts.

Weaker currencies alone won’t spur recoveries as the global recession deepens, said Mark Dow, a money manager at Pharo Management LLC, a New York-based hedge fund with $2 billion under management.

The International Monetary Fund sees a “serious risk” of a contraction in the worldwide economy this year and will probably cut its 0.5 percent growth estimate in April, Managing Director Dominique Strauss-Kahn said on March 3.

“If you lose your job and buy a flat-screen TV just because it’s 70 percent off, I bet your wife won’t be happy,” said Dow, who is selling currencies of Malaysia, Philippines, Taiwan and South Korea. “Price doesn’t matter. It’s a mistake for Asia to devalue their currencies. The thinking is wrong, but it’s happening.”
Comment.

uh! they did it again!! wasting billions of tax payers money to defend the currency just to abandon it at later stages..why can't they restored what was put in place by the previous administration which make Malaysia, the only survival in post 1997 financial meltdown without subscribe  to the shark loan from the IMF! Despite the whole lots of the world financial guru and expert spell doom for those unconventional pegging and many cursed the bailouts as an act of mockery to the free market!But they are wrong!Malaysia has proved it all and behold! Those who's bad-mouth the policy strangely doing the same in bailing out even at bigger proportion in the US, the UK and the Ireland and elsewhere.
In strong language, just re-peg you moron! Peg the ringgit to relieve pressure from the global economic crisis. I just wondering what happen to those oldie economists?? Perhaps those great mind and think tank has been sideline by those inept and inadequate professional intall by non other than their new saddos political master.




Currency Defense Drops on Ringgit, Won on Exports
March 9 (Bloomberg) -- Asian central banks are abandoning a six-month campaign of defending their currencies, reversing course to cheapen exports that are falling the most in a decade.

Policy makers from India to Malaysia to Taiwan are letting their currencies depreciate after South Korea gave companies an edge by allowing the won to weaken 19 percent against thebail out dollar this year. Shipments from South Korea, Indonesia, Taiwan and Malaysia fell 17 percent in January to $79 billion, twice the drop of April 1998, when the Asian financial crisis was wiping out a third of the region’s economy, according to data compiled by Bloomberg.

“Export markets have been forced to let their currencies weaken to try and keep up with the competitive depreciation in the won,” said Dwyfor Evans, a strategist in Hong Kong at State Street Global Markets LLC, which has $12 trillion under custody.

The won, India’s rupee and Taiwan’s dollar will decline against the U.S. dollar by 12, 13 and 6 percent, respectively, by the end of June, according to Stephen Jen, a Morgan Stanley currency strategist. Goldman Sachs Group Inc. says Singapore’s dollar will depreciate 3 percent by April. Malaysia’s ringgit will slip 5 percent by Sept. 30, says Calyon, a Credit Agricole SA unit in Paris.

Devalued currencies may throw a lifeline to exporters getting clobbered by South Korean competitors. Oppenheimer & Co. predicts Taiwan-based AU Optronics’s share of the global market for liquid-crystal displays in television sets and computers will drop to 15 percent this year, from 16.8 percent in 2008. The company posted a record loss of NT$26.6 billion ($764 million) for the fourth quarter.

Outperforming Taiwan

Its South Korean rivals, Samsung Electronics Co. and LG Display Co. will boost their combined LCD share to 44.9 percent, from 41.9 percent, Oppenheimer said in a research report to clients last month. Shares of those two companies have outperformed their Taiwan competitor by at least 21 percentage points since Sept. 30.

“There will no longer be meaningful interventions to prevent Asia-outside-Japan currencies from falling,” Jen said in a March 2 report from London. “There’s a genuine change in the currency policies of many Asian economies. A severe contraction in the trade surpluses clearly affects the relative supply and demand for dollars in these countries.”

Central banks intervene when they buy or sell currencies to influence exchange rates.

‘Stable’ and ‘Functioning’

Malaysia’s Bank Negara bought ringgit four months ago, helping it strengthen 4.5 percent Malaysian Ringgitagainst the dollar in December. The central bank said March 5 that the currency is now “stable” and “functioning on its own.” The ringgit fell 6.8 percent this year to 3.7203 today as it slipped toward the 3.80-per-dollar peg abandoned in 2005.

The Philippines won’t intervene to shore up the peso, Deputy Governor Diwa Guinigundo said March 4 as it approached the lowest level since Dec. 5. The peso ended a three-month slide in November after the central bank drew down its reserves by 2 percent the previous month, the biggest drop since 2005. The currency declined 2.5 percent to 48.620 per dollar this year.

Foreign reserves in India barely changed in February at $239 billion, indicating the central bank didn’t sell dollars to prop up the currency as the rupee shed 4.7 percent in its worst monthly performance since October.

Adnan Akant, foreign exchange chief in New York at Fischer Francis Trees & Watts, which oversaw $22 billion as of December, predicts Singapore’s central bank will widen its trading band to let the currency fall when policy makers hold their biannual meeting in April. He’s selling the city-state’s dollar, which depreciated 6.5 percent this year to S$1.5442 per greenback.

‘Engine’ for Growth

South Korea was the catalyst for the shift away from defensive intervention. After spending 22 percent of foreign reserves from August to November to stem won losses, South Korean Finance Minister Yoon Jeung Hyun said Feb. 25 that its weakness may be an “engine for export growth.”

The won’s 17 percent slide this year versus Asian counterparts is its steepest annual start since 1995, when Westpac Banking Corp. started to track the value of the currency on a traded weighted basis.

China’s $585 billion stimulus plan may halt or reverse Asian currency losses by spurring growth across the continent. Christy Tan, a currency strategist at Bank of America Corp. in Singapore, said the region’s economies and currencies are ready for a recovery.

‘Positive Implications’

“Asia as a whole continues to enjoy rather healthy trade surpluses,” Tan said. “We have an above-consensus forecast for China growth at 8 percent. That’ll probably have positive implications for the Asian currencies going forward.”

Malaysia, Southeast Asia’s second-largest oil and gas producer, has had trade surpluses every month since 1997. Singapore’s current account surplus will fall to 15 percent of its economy this year from 24 percent in 2007, according to forecasts of economists surveyed by Bloomberg News.

Akant said China’s stimulus will have limited impact because that country “can only help itself, but not enough to help all non-Japan Asia.”

The region is twice as dependent on exports as other parts of the world. Excluding imported components, international sales account for two-thirds of Singapore’s $161 billion gross domestic product, almost half of Malaysia’s $181 billion and Thailand’s $246 billion and a third of Taiwan’s $356 billion and South Korea’s $970 billion, according to Credit Suisse Group AG.

Malaysia’s exports fell the most in 15 years in January, down 27.8 percent from a year earlier after slipping 14.9 percent in December, the trade ministry said March 6.

Falling Exports

A Taiwan government report today showed exports fell 28.6 percent last month from a year earlier, following January’s record 44 percent drop, according to economists surveyed by Bloomberg News.

Taiwan, Singapore, Hong Kong and South Korea, once called the Asian Tigers, have entered recessions as Westerners cut spending on cars, TVs and semiconductors.

Singapore’s Chartered Semiconductor Manufacturing Ltd., the world’s third-largest maker of customized chips, said in January it may report record losses of between $142 million and $152 million in the first quarter and will cut 600 employees, 8 percent of its workforce.

The export-fueled “boom is going bust,” said Henrik Pedersen, the London-based chief investment officer at Pareto Investment Management Ltd., which oversees $46 billion. “The countries will survive, but not without a big adjustment in their currencies. They don’t mind seeing their currencies weaker.”

Leveraged to Growth

Singapore’s economy contracted at an annualized 16.4 percent rate in the fourth quarter, Singapore Dollarthe most in at least 33 years. It will shrink another 3.5 percent in the first quarter, according to the median prediction in a Bloomberg survey of four economists. Taiwan’s gross domestic product is forecast to slow 2.7 percent this year, following a record 8.4 percent decline in the final three months of 2008.

“There’s a realization that the region is leveraged to global growth,” said Paresh Upadhyaya, who helps manage $50 billion in currency assets as a senior vice president at Putnam Investments in Boston. “Exports and industrial contraction are worse than the Asian crisis in 1997, 1998. They may have to debase their currencies.” He said he has “underweighed” the Taiwan dollar, the won and other Asian currencies since January.

After the bust of the housing bubbles in the region and the devaluation of Thailand’s baht prompted investors to flee the markets in 1997, industrial production in South Korea declined 13.5 percent in July 1998, from a year earlier. This past January, output dropped 25.6 percent, the statistics office said March 2.

Lower Interest Rates

Central banks from Indonesia to the Philippines are also weakening currencies by lowering interest rates. Though intended to boost growth, rate cuts also dim the appeal of their assets. The Reserve Bank of India reduced its benchmark repurchase rate to a record low of 5 percent from 5.5 percent on March 4, and from a seven-year high of 9 percent in September.

Investors are shunning emerging markets amid concern that the global recession will hurt these countries more than bigger economies. A combined $643 million evaporated in the South Korea, Taiwan and Thailand stock markets on March 2 alone, the most in three months, according to Calyon. The MSCI World Index fell 24 percent this year, compared with 14 percent for the MSCI World Index of developed nations.

“The same-old demand won’t come for the next five, 10 years,” said Scott Ainsbury, a money manager at FX Concepts, the world’s largest currency fund at $12 billion. “People may underestimate how far these currencies can fall.” Ainsbury said he’s selling the Taiwan and Singapore dollars and the won.

Worst Performers

The weaker won helped Seoul-based carmaker Hyundai Motor Co. increase U.S. sales 4.9 percent this year, while Toyota Motor Corp. in Tokyo, the world’s biggest auto manufacturer, saw sales drop 36 percent in the same period. The won depreciated 12 percent versus the Japanese yen this year, following a 40 percent drop last year.

So far in 2009, the won is the only Asian currency among the 10 worst performers in emerging markets, according to data compiled by Bloomberg. Hungary’s forint dropped 23 percent versus the dollar and Colombia’s peso lost 13 percent.

Central banks started to support currencies after the credit freeze that followed the collapse of the subprime mortgage market in August 2007, prompting foreign investors to withdraw funds. The defense intensified when Lehman Brothers Holdings Inc. collapsed in September, sending financial assets into a tailspin.

Foreign Reserves

As policy makers propped up exchange rates last year, foreign reserves in South Korea, India, Malaysia and Indonesia decreased to $589 billion on Dec. 31, from $745 billion on June 30.

For now, central banks have stopped fighting the depreciation.

South Korea’s foreign reserves were little changed at $201 billion in February as the won slumped 10 percent against the dollar, its worst month since November. The won also declined 19 percent this year against China’s yuan and 14 percent against Taiwan’s dollar on concern that a possible credit contraction would starve the nation of dollars needed to pay debts.

Weaker currencies alone won’t spur recoveries as the global recession deepens, said Mark Dow, a money manager at Pharo Management LLC, a New York-based hedge fund with $2 billion under management.

The International Monetary Fund sees a “serious risk” of a contraction in the worldwide economy this year and will probably cut its 0.5 percent growth estimate in April, Managing Director Dominique Strauss-Kahn said on March 3.

“If you lose your job and buy a flat-screen TV just because it’s 70 percent off, I bet your wife won’t be happy,” said Dow, who is selling currencies of Malaysia, Philippines, Taiwan and South Korea. “Price doesn’t matter. It’s a mistake for Asia to devalue their currencies. The thinking is wrong, but it’s happening.”
Comment.

uh! they did it again!! wasting billions of tax payers money to defend the currency just to abandon it at later stages..why can't they restored what was put in place by the previous administration which make Malaysia, the only survival in post 1997 financial meltdown without subscribe  to the shark loan from the IMF! Despite the whole lots of the world financial guru and expert spell doom for those unconventional pegging and many cursed the bailouts as an act of mockery to the free market!But they are wrong!Malaysia has proved it all and behold! Those who's bad-mouth the policy strangely doing the same in bailing out even at bigger proportion in the US, the UK and the Ireland and elsewhere.
In strong language, just re-peg you moron! Peg the ringgit to relieve pressure from the global economic crisis. I just wondering what happen to those oldie economists?? Perhaps those great mind and think tank has been sideline by those inept and inadequate professional intall by non other than their new saddos political master.

35.7 trillion' lost by recession  

Posted by ipv6

RECESSION: 35.7 trillion' lost by recession 

The global crisis wiped a staggering $50 trillion (£35.7 trillion) off the value of financial assets last year including $9.6 trillion (£6.8 trillion) of losses in developing Asia alone, the Asian Development Bank has said.

"This is by far the most serious crisis to hit the world economy since the Great Depression," said ADB President Haruhiko Kuroda.

But he predicted Asia would be "one of the first regions to emerge from it".

In a study commissioned by the Manila-based lender on the impact of the financial crisis on emerging economies, it estimated the value of financial assets worldwide - currency, equity and bond markets - to have dropped by $50 trillion (£35.7 trillion) in 2008.

It said developing Asia was hit harder - losing the equivalent of just over one year's worth of gross domestic product - than other emerging economies because the region has expanded much more rapidly. In Latin America, losses were estimated at $2.1 trillion (£1.5 trillion).

According to the study, the figures provide clear proof of the close connections between markets and economies around the world, leaving few, if any, countries immune to financial or economic fallout. A recovery can only now be envisaged for late 2009 or early 2010, it said.

A sprawling region, developing Asia includes 44 economies from the central Asian republics to China to the Pacific islands. The bank had earlier projected the region's growth to slow to 5.8% this year from an estimated 6.9% last year.

The worldwide downturn has hit export-driven economies particularly hard. From South Korea to Taiwan to Singapore, exports have plunged by double digits in recent months as American and European consumers spent less on cars and gadgets.

Kuroda said the impact of the crisis could result in a spike in unemployment, slower growth rates and depressed stock markets.

Tight liquidity and credit could also hit small and medium enterprises, while a drop in remittances from overseas workers, which has been fuelling domestic consumption in countries like the Philippines and Indonesia, could remove important social safety nets, Kuroda said.

The Press Association

Comment.

35.7 trillion?? How did this crisis happen? Why is it so widespread?Well, many already fear/forecasted this especially looking at the US economy back then, but not many subscribe to their teory/prediction as they argue the US is too big to fail and many others jargon which I shouldn't list here for the sake of this article. 

Perhaps the speech from one of financial wizard in the name of Ben Shalom Bernanke(The US Federal Reserve chairman) would gave you some idea into this whole mess. Ben Bernanke succeeded Alan Greenspan in 2006.

here I reproduce:

The depth and sophistication of the country’s financial markets (which, among other things, have allowed households easy access to housing wealth). Mr Bernanke 2005

Which Paul Krugman (yet another heavyweight in financial world) comment early this month;

Depth, yes. But sophistication? Well, you could say that American bankers, empowered by a quarter-century of deregulatory zeal, led the world in finding sophisticated ways to enrich themselves by hiding risk and fooling investors.