About a month ago, I gave a talk to students from China on the topic: the current financial crisis. It was during the preparation for this talk, that I took a comprehensive look into the crisis and the world financial, trade and foreign exchange system. Meanwhile, I formed my own model and understanding about the situation, believing that 2009 is gonna be worse.

 

Today, there came the news that many leading countries have formally forecast either severe slowdown or even contraction of its economy. It seems, after all, we could not restore the confidence, either in the financial system or in the overall economy. So for sure, it's gonna be bad. But for how much?

 

I have a personal experience that makes me realize it could be worse than we had expected. Here it is: almost all major economies are facing the pressure of depreciation in their currency value - US wants to do that; Singapore has been doing that; and China is doing that. In two or three months, my poor little saving in S$ shrinked by 10% in terms of US$ or CNY. Not to mention that I already estimated a lost during the scaring inflation in the middle of the year.

 

I believe this is happening to every saing account, and for most the investment accounts. So what happened?

 

What I see now, is that for decades the financial expansion has enabled one part of us excessively consuming too much (I am afraid this part means the developed part in the West, but not in Asia), perhaps as much as they can't payback in their life time; the other part of us are expanding our production capacity too much (in recent ten years China contributed to this chiefly) - they export and they accumulate wealth in the form of foreign debt.

 

But hold on, this ever-growing accumulated wealth, although is in foreign debt, has been largely dumped into the property market - land price soars up all the way. In other words, we have been piling our wealth in a illusionary form - property. Then coming to a day like today, when foreign asset depreciates as foreign currencies depreciate, the foreing debts that we hold lose their value heavily. Next, as the property market soon looses power as wealth accumulation weakens, our illusionary wealth - land titles - becomes trash papers.

 

This is an enlarged picture for the 1989 Japan. The saving part of us is going to loose a lot of their (including mine) wealth accumulated for decades.

 

This property market crackdown is not happening so fast in the Asian side (although there is every sign of this), because we are depreciating our currencies as well, so as to stimulate export a bit. But this can't hold for long, a competition of depreciating currency globally does not help revolving the economy, but for depriving the saving part of us the accumulated wealth away.

 

When all currencies depreciate a lot, a man-made global inflation that is purely nominal can not be avoided. In the end, this compepition of depreciation washes the debt of the west away. Leaving the savers in the east poorer. In this way, the crisis is not a one year or two year thing.

 

From this point of view, it is really a time that governments in the west strive to stablize their currency value, so that Asian countries do not follow. Westerners should take the courage to manifest that "we are going to pay back our debts"; and the easterners should say "Our industries compete in every means but depreciation in our currencies."