STOCK CARNAGE AROUND THE WORLD, MORE PAIN AHEAD

The last few days, trillions of dollars were wiped off the stock market around the world. After Friday S&P downgraded US crediting rating one notch, stock market fall exacerbated. By Tuesday morning, almost all of the stock market in developed economy has sunk into bear territory. Fear, panic and uncertainty undermined financial markets and send gold into dizzy heights. It triggered monetary authorities and central banks around the world into emergency sessions to take measure to limit the financial carnage.

Many actually felt this market crash was belated. It should have crash long ago if not being propped up by mere optimism and constant short term measures from central banks. Simply put in, no one leave the party when the music is still playing.

Symptoms of financial woes have been brewing for months, beginning with Euro zone debt crisis. The spiralling US budget deficit is well known and new loan is needed to prevent this government from defaulting since the beginning of the year. In China, the inflation was reaching undesirable level. The same problem beset most of the developing countries. Basic food necessities have almost double over the past years. And commodities prices have spiral up of control. The wealth disparity between the rich and poor has reach obscene proportion. Optimism that acceptable resolution can be work out to avoid government default kept the market in hope and in check.

The S&P downgrade was the last straw that broke the camel back. It is therefore not surprise that stock market took a big tumble. The hard truth is that the financial woes are worst than people want to believe. And politicians want to inject the sense of confidence that the economic situation is manageable. But when the truth sank in, waves of panic selling went unabated.

When investors finally acknowledged that US debt level is undesirable and unsustainable under the current economic condition, they panicked and scampered for safety. The only way to prevent a default was to borrow more or continues to print money (quantitative easing}. By doing that, it is now understood that these measure only postpones the problem. The European problem is fundamentally similar, spending more than the revenue it can collect. Without new loans, Greece, Iceland and even Portugal and Spain are heading for sovereign default.

The only way out of this problem is a complete overhaul of the government spending. This means most of social welfare and benefits have to be revamped and scaled down. Government bureaucracies need to be downsized or even shut down. Defence is one area the US and the European need to cut drastically and stop thinking of maintaining overwhelming military power in this world.

This painful belt tightening required partisan politics and very strong political will. Such measure means drastic reduction of welfare and benefits as well as loss of jobs. Which politicians in the democratic world risk losing his election chances to do the right things? It’s never easy to take away benefits.

The American continues to blame the Asian countries of trade imbalance, currency undervaluation and trade protectionism for the current woes. This may be true to some degree, but the politicians are fully aware of overspending is the main culprit. In the globalised world, the American economy has become uncompetitive due to its high cost. In the past, it could sell to the rest of the world anything, but not now. What the US can produce, the Asian can produced at a fraction of the cost. But globalisation and free trade also enabled the US consumers to enjoy the benefits of cheaper products.

In the years to come, as Asian become more affluent, more middle class will be created like the west. Salary and purchasing power will increase in tandem. Currently, the financial disparity between the developed and the developing world is just too far apart. A bus driver may perform the same functions, but why should an Indian bus driver be paid a fraction of the pay compared to a British bus driver.

Educational level with labour mobility will provide workers in this globalised world a level playing field. Free trades will speed up this process. We can now see this happen at the top echelon of management. Many of the brightest are paid according to the skill rather than the colour of the skin. Many westerners work in developing world like locals. Gone are the days, every white man is an expatriate in a foreign land. So the catching up will accelerates. But it also means the workers of the west will suffer stagnation until the rest of the world catch up. It means more misery ahead for the citizen of developed world.

And if the pain is too hard to bear, the US should take a lesson from then Great Britain, where at one time it boasted the sun never set. But after WW2 and in the 50’s it admitted it could no longer maintain the British Empire. It allows many old colonies to go independent. It culminated in the withdrawal of its military east of Suez by 1971.

In Singapore, the Royal Navy in Sembawang Naval Base and RAF in Tengah became history. The US should seriously consider this option.