KARACHI Aug 16: “Too much money” is the world’s biggest problem. Investors are putting money in stocks and bonds and creating “endless bubbles” often making it difficult to tell a boom from a bubble or false economic recoveries.
This is how two economists at Morgan Stanley, Andy Xie and Stephen Roach, have tried to depict the global situation that has moved over the last decade from a money crunch to a glut. Their observations have been reinforced by Karen Lowry Miller, writing in Newsweek.
Like elsewhere in the world, surplus funds in Pakistan are going into stocks, government papers, gold and real estate. In the Karachi Stock Exchange, the prices of stocks have shot up reportedly by 60 per cent since January. The outcome is inflated prices of securities and plummeting of price earning ratio. There is currently some room for a better return on stocks because of falling interest rates and squeeze on sales of National Saving Certificates.
The investment at high priced financial assets would also be a bit compensated by improved corporate profitability and dividends. Oil marketing companies, auto manufacturers, fertilizer textile, and cement firms have improved their financial performance. The commercial banks are doing well because of returns from earlier investment in stocks and Pakistan Investment Bonds. The core banking business of deposit and lending is not as lucrative.
Surplus funds flowing into property would boost output in industries whose products are used in construction. Yet with eroding purchasing power of the middle classes and the problem of acquisition of land, the scope for housing construction is limited. The Defence Housing Authority came out with a housing project, because it was in possession of valuable land and supported by liberal funding by Askari Bank. Without incomes rising as a result of economic growth, the housing boom, if it occurs, could end up in fiasco like it happened in Thailand. As in East Asia on the eve of 1997 crisis, the housing-building is now funded by local commercial banks.
For quite some time, surplus money has been flowing into speculative investments in global currency and stock markets and is not being used, as needed, to boost economic growth. The volume of daily transactions in foreign exchange markets is of $2 trillion, bulk of it speculative. In industrial economies, there is excess production capacity and stagnant demand because of falling purchasing power of the consumers.
Europe, the US and Japan which supported each other through trade and investments now suffer from prolonged economic slump. The lack of avenues for investment in areas that could spark growth has created surplus money that is also priced cheap. Coupled with 9/11, the economic slump is inducing capital flows from the centre to the periphery, from developed to developing countries.
And George Soros says that “instead of moving towards equilibrium, financial markets left to their devices, are able to go to their extremes and eventually breakdown. They must be supervised and to some extent managed.”
Since the global financial flows are deeply influenced by Washington’s policies, Mr Soros cautions the US government in his capacity as a US citizen: “It does not make sense to devote all our energies in improving our relative position in a social system, when the social system is drifting towards a disaster.” He advocates for a new humanitarian vision to strengthen the system.
Economists reckon that some of the excess money will go up in smoke if it is tied to speculative business and not employed in productive pursuits. There are $5-6 trillion of mobile capital in global financial markets, some of it is surely destined to be burned.
In developing countries like Pakistan, there is surplus money on the one hand, and the state of under-development and massive poverty, on the other. The situation is anomalous and needs to be remedied by a radical change in economic policies.