January 27, 2012

Manila, Philippines

[Editor's note: Tim Staermose is filling in today while Simon is at the farm in Chile.]

There is a delicious irony in the world of economic policy at the moment.

Back in 1997 and 1998 I had a ringside seat to the Asian financial crisis from my trading desk in Seoul. When everything collapsed, the policy prescriptions from the World Bank and IMF for Asia’s sick economies was to:

1. HIKE interest rates,

2. CUT government spending,

3. Further deregulate, liberalize, and open their economies to foreign investment to attract capital;

4. And let their zombie banks FAIL.

Though, they experienced brutal recessions after swallowing this tough medicine, the two countries which carried out these policies to the fullest extent: South Korea, and Indonesia, are today among the most successful and dynamic economies in Asia, and the WORLD.

Since emerging from recession in 2000, Indonesia has enjoyed more than a decade of fast, uninterrupted economic growth. In fact, one emerging markets funds manager told me this week that Jakarta today is “far too modern” to interest him now. It has already “emerged.”

South Korea also emerged bigger, better, and stronger from the crisis 14 years ago. On my last trip there in late 2010 ahead of the G20 meeting in Seoul, I was astounded how far it had come since I’d last been there in 2003.

I remember having a chat with my cab driver and telling him it really looked to me as though Korea had reached “developed country status.” Becoming a “seon-jin-guk” as they call it in Korean was always one of the burning desires of Korean politicians, bureaucrats, business people, and ordinary citizens alike.

My cabbie was far too modest and said, “No. We still have a long way to go,” as he waved my visa card in front of a payment gadget mounted on his dashboard that instantly deducted the fare and had me on my way in about 5 seconds flat, without having to fumble around for change or sign anything.

South Korea today is the most wired country on the planet. So good are their technology companies, spearheaded by Samsung Electronics, they even have Apple running scared.

I recently retired my Blackberry. The replacement won’t be an iPhone. It’ll be Samsung’s Galaxy S2. All my friends who have them say they’re, “Way better.”

Bottom line — Indonesia and South Korea “reset” their systems back in the late 1990s and have emerged stronger and more dynamic than ever.

The Asian crisis, back then was brought on by the same things that led to the current crisis in Europe and the US (and the one I believe is coming to China): Too much cheap money. Too much borrowing by people who couldn’t afford it, to buy non-productive assets. And an insanely leveraged banking system run amuck.

Today, the same Western policymakers whose advice got Indonesia and South Korea quickly back on the rails are giving the EXACT OPPOSITE prescriptions for their own economies.

They’ve CUT interest rates to near ZERO. Governments have SPENT trillions of borrowed money that they have no hope of ever repaying on ill-advised “stimulus.”

They’ve BAILED OUT nearly all the brain-dead banks, keeping them on life support in a coma. Protectionist rhetoric is building up, and more onerous regulations are being ushered in.

This is what Japan did after its 1980s bubble. And look at them now. They’re stuck in a time warp, and the Japanese economy remains in a funk.

It doesn’t take a genius to see that if they persist with their current approach, Europe and America are going to end up exactly like Japan. And places such as South Korea, and even Indonesia, are eventually going to leave them in the dust.

Until next time,

Tim Staermose,

Chief Investment Strategist

Sovereign Man

Read more posts on Sovereign Man »