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Wednesday, November 19, 2008

Spread out your tentacles...with money in them!!!

The emerging markets, Russia, China and Saudi-Arabia, in particular, were asked at the end of the G-20 summit, about the huge wads of capital they have on tap; this is more over their counterparts, India and Brazil. Who, really, don't have the capacity to help at this stage, in any event--India and Brazil. They don't have huge export driven economies of scale, to take that sort of risk, largely and unilaterally. India, while emerging, has a domestic development agenda with heavy export restrictions-- this has hurt, on purpose, their export market. Brazil, is not a major exporter, aside from agricultural goods. Which are, primarily, staple industries of both the EU and USofA, both heavy consumers, and both of whom subsidize their farms in any event, to depend on cash coming in. So, as it seems, it comes down to oil, natural gas and the exportation of cheap, ready to use goods. This apparently, was the basis for asking for 'particular' countries to extend lending to 2/3 rd's of the Triad--barring Japan.

Will they do it? Do they have an incentive to do it? Does the political will to balance power between themselves, have it to work with them on all ends? Well, these are all questions with answers, that are simple enough in many regards.

Do we REALLY want to do business with Arabs?

For one reason, why wouldn't Saudi-Arabia and the Gulf States generally, who have been experiencing a heavy rise in built-in inflation, spread some of the wealth around, and, export their inflation at the very least? The economics of it sounds simple enough. However, the politics of it, is a little more tricky-- especially in regards to the USofA. Why would the USofA, with President Obama, work with the Gulf States, with all of their xenophobia in the USofA towards said countries? Remember the Dubai Ports' World debacle? The debacle what gave everyone a good glimpse into the US foreign policy check and balance and good photo-op's of US Ports--as every congressman, took pics in front of the nearest port they could find!?!? The thought that an Arab nation, would control a US port, is, and, was, unfathomable. You would never see it. Unless of course there is money and the need for their money, as it is now! The jury is out and the only person with that answer, is Obama. At least for the USofA. For the EU however, they would willingly take the money of the Gulf States. After all, the EU is more slack with who they borrow money from, in any event. They have dubious business interests in the middle east and Africa, as we speak. So, there is really no issue for them--just up the business relationships.

How's about Russia?

Well, what about Russia? Russia, sort of, shot itself in the foot, in regards to international cooperation on anything US or EU. In fact, Russia is acting totally out of order on many issues. The latest with Georgia, albeit Sakishvili promoted a conflagration in any event, was a bad PR move by Russia. But, it was one in which they had to take, to secure their territory. Can you imagine Russia, being able to put a missile defence system in Latin America or the Caribbean? Think of the possibilities? Why would they allow the US, to put a missile defence system in their backyard, either?

In any event, while Russia does not have built-in inflation as does the Gulf States, it has loads of cash and was somewhat insulated from the global credit squeeze. Their markets, while not perfect, are, OK. They have been making a killing on oil and natural gas and, like the Gulf States, have oil money up to the hilt with vast amounts of oil and gas pockets to explore.

Would the US, want to strengthen Russia and show weakness, all at the same time, when Russia is looking to be a world superpower? Or, does EU, want to play the guessing game on Russia's intention and idle away while they act like nothing is wrong with borrowing money from Russia--a seemingly hyper aggressive country? Will the EU, flip flop, again?

I say they too, as with the Gulf States, take money from Russia. They want it. The US, will most likely, print more money and raise taxes in the short term.

The Red scare...

As for China, this is the best first best option for all parties concerned in the US and the EU. China, while it has strings attached, does not have the interest or the capacity to put off the EU or the USofA. The superpowers practically own the Chinese economy. In fact, I would go as far as to say that they don't, China does not, own enough of their economy, to say a firm no, even if they wanted to. With a low Renminbi and a rising domestic middle class, they would want to control inflation, at the very least.

However, China is on the wrong path to development. They are growing in imports in the most natural resources and not growing in sophistication in the new knowledge based and services economy. In regards to exports, manufacturing little trinkets, won't cut it. If they extend huge amounts of money now, and their exports curb, as they probably are doing right now, they are in for a rude downturn and their economy, will suffer as of a consequence of lending huge amounts of money without securing that for domestic development--inward development. Will they want to lend, with their major consumers having no money to buy little Chinese trinkets? Its a catch-22...do they lend, at the expense of their development, or, lend a hand to their biggest consumers, to have, possibly, that money flow back in to fund future development at a later date? Would the US and EU return the favour so willingly? Hopefully, they would bear this in mind! And, take into consideration, the fact that they are export driven and their markets, depend on US and EU financial vitality as well as guard for future developments in a growing services based economy, in a rapidly changing world---little trinkets, can be made in Brazil and India, much cheaper!

All in all, it is a very tricky lending game going on now. Who lends what to whom and under what circumstance. We will have to wait and see what pans out. But, at least for the EU, Sarkozy, even though France does not need it, will ink a deal for legacy's sake on all fronts. I can guarantee it.

Youri
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