The Daniel Lian article below is only one of the many listed at the Morgan Stanley site about debating the dollar. I recommend everyone check out the December 10 archive for the full story. It should be scary, but I don't know when it will be.
What Are the Key Structural Issues Facing Asia?
by Daniel Lian
In my view, the global macro imbalance and a resulting significant transfer of wealth are the key structural challenges that Asia needs to address. In this respect, a review of history is helpful to provide context.
The chance of attaining economic sovereignty first presented itself to developing Asia in the 1950s after the end of the Second World War. This period also marked the beginning of the (rapid) end to western imperialism and colonization. The end of colonization meant that Asia had a wide-open platform to pursue economic development. After a brief flirtation with import substitution in the 1950s and 1960s by some Asian countries, most north-east and south-east Asian economies joined the band-wagon of export-orientation. China started to embrace some aspects of market economics in the late 1970s, and India started to experiment with economic liberalization and outward orientation a decade ago. So what is wrong with this seemingly ‘progressive’ path for Asia? The trouble is that it has been an extremely imbalanced development model.
Macro imbalance. The global economy has suffered massive global imbalance for the last several decades. This global imbalance has centered on saving – i.e., Asia’s excessive saving, compared with inadequate saving in the US and parts of the west. From another macro perspective, the imbalance is characterized by Asia’s massive export machine and appetite for Asian goods in the US and parts of the west. In a sense, Asia’s export machine has ensured that its current account surpluses have been finely balanced against the global imbalance in savings.
Unlike Andy, my chief concern is not so much about Asia losing export competitiveness and its sole growth engine, as the dollar structurally weakens, and more about the tremendous welfare costs that will hit the region if it retains its imbalanced model.
Welfare transfer. In my view, the world is experiencing the greatest welfare transfer ever seen across geographical regions and across generations. Such transfers are embodied in the macro imbalance characterized by Asia’s aggressive exports but passive savings in US Treasuries and other foreign (chiefly dollar) assets. Asia’s obsession with exports and savings has enabled present generations of the US and some parts of the developed world to sustain an unusually high rate of consumption, at the expense of current generations in Asia. This is because Asian exchange rates are artificially low and exports and wages are artificially cheap, and Asia has suppressed its present consumption to subsidize buyers of its exports. It also comes at the expense of future generations of the US economy and some parts of the developed world. At some point, present consumption in these countries will have to give way to savings to restore macro imbalances. Future generations will have to bear the economic burden of an aging population, as well as the devaluation of their currencies and the retirement of their public and private debt.
One would think future generations in Asia are the obvious winners as they inherit vast savings accumulated by their hardworking parents. However, their world is extremely uncertain and they face three major risks. First, wealth distribution has been heavily skewed and benefits relatively few. Poor governance means there is a good chance that their wealth will be squandered by the collective bad deeds of rent-seekers through systemic risk in Asia’s financial systems and asset markets. Second, it is hard to believe the unfortunate future generations of the US and other parts of the developed world will work doubly hard in their lifetimes to retire debt accumulated by their parents. It is more likely that they will simply raise inflation to reduce their debt burden at the expense of the future generations in Asia who inherit those excess savings. Third, with the likelihood of deteriorating demography (Asia will be growing older then), lack of intellectual property and economic ownership, and without the excessive consumption behavior of the west, Asia has insufficient economic means to accumulate wealth... Continued in archive of Dec. 10.