24 November 2008

The outcome of the Economic Crisis Summit of the group of 20 leading industrial and emerging countries in Washington on 15 November 2008 did not offer anything concrete nor substantial that will draw down the resistance of the required response from corporate investment and bank lending towards the stimulus packages that are being churn out by the various governments around the globe.

The stock markets were virtually oblivious to the Summit as they continue recording losses. A situation made worse by the three major US auto manufacturers' requests for bailouts still in limbo. The confidence crisis does still prevail.

Other than the agreement not to impose any new trade barriers for the next 12 months and the support to continue with the greenback as the world's currency and to beef up the world's leading financial institution, namely the World Bank and the IMF, the Summit concluded to meet again in April 2009, by which time the common set of principles for reforms of the regulatory and institutional regime for the world's financial sectors would have been trashed out for some sort of conclusion. It is the beginning of a long and constructive process for revising the global system.

In the new system the US will still be the largest economy but no longer the sole determinant of global economic health. The new winners will be those with cash and those without cash will be in a precarious position. This goes for individuals, corporations as well as governments.

The global economy for the past five years has been driven by credit, with cash as currency pushed to the sidelines. With cheap credit, deals get pricier and valuations higher. Now credit is cheap but not readily available.

Every crisis creates opportunities, this time is no exception.

There is more cash lying around the world than most people think, sitting around hardly used. Those who have it are hoarding it, unclear about the short term. As the dust settles, however, that cash will be king.

Some of these cash will be used for purely private gains like buying up real estates at fire-sale prices, which will do little to enhance the public good. But other uses of cash will. There will be picking of deals amid the market wreckage, which decision will be made more cautiously. This reliance on cash will temper excessive greed and speculation.

There are then the cash rich governments of China, Japan and the Middle East oil kingdoms and the many individuals within them. They need a vibrant US and European economies. The actions of these countries and their cash-rich individuals can also have direct and positive effects on the economies of the US and Europe, thus helping to turn around the global economy. They can prevent a collapse by purchasing US and European treasuries and bonds, and investing by buying up parts of ailing but potential companies.

Governments' actions alone cannot fuel the economy. They can jump-start the system and thereafter corporate investment and bank lending has to drive the system.