Why the Asian Growth Model is Circular

Original Article by GlobalMacroForex

Some consider the Asian Growth Model to be an amazing unexplainable miracle.  These people argue it’s a path out of poverty for many southeastern Asian nations.  Others consider it be currency manipulation and corrupt Keynesian slavery.  Maybe it’s a combination of all these things…

What is the Asian Growth Model?

The Asian Growth Model is a socio-political-economic culture focused on:

1)  Strong competitive exports in labor-intense industries

2)  Currency depreciation to maintain price competitiveness

3)  High household savings rate

4)  High Current Account Surplus

5)  Low external government debt

6)  Government support/manipulation for certain strategic businesses

7)  Collectivist culture and work ethic

The Process

Here’s how it works.  First, the government artificially directs resources to certain industries allowing them to produce exports dirt cheap with local labor,

Depending on the nation, time period, and level of state control, they may convert their earnings back to the local currency or leave them in USD.  If it’s a private non-state run exporter, then they are more likely to convert it back to the local currency.

 The government then prints money for a process referred to as financial repression,

There are few reasons they do this, first to extract wealth to give it to certain strategic sectors.  This wealth extraction is so effective because of the high household savings rate.  The high savings rate comes from cultural national traditions towards working for a better life for your family.  This strategy robs the workers of the ability to climb out of poverty and directs it towards large banks that influence the politicians in power.  In Japan, these are called “Main Banks” at the top of conglomerates called keiretsu.  In South Korea, they are referred to as chaebol.  In China, they are State-Run Enterprises.  These banks get artificially cheap credit to lend to exporters at the expense of the worker’s savings and income.

This depreciated currency makes the exports cheaper to foreigners.  If the central bank did not do this, the currency would rise as people climb out of poverty.  The workers would then use this wealth to invest in their own business ideas.  But these entrepreneurs don’t sound like obedient voters so they dash their hopes by printing money and buying US Dollars or Euros.  Then with this currency buy Treasuries or other government bonds.  These assets are labeled ‘reserves’.

Here’s the wild part.  The US government pays welfare, social security, and other programs with this Treasury debt money.  49.2% of US citizens receive some form of government benefit.  This money is then used by Welfare recipients to buy cheap Asian products from the same countries that loaned the money to US government.

This completes the cycle and we’re back where we started.

Monetary Circle of Life

As you can see young Simba, we are all connected in the circle of life.  The wealth flows from the sweat of the local Asian workers to the governments in Asian economies, who loan it to the US Treasury.  The US Treasury pays dependents who buy more Asian goods.

This system is unstable and insane as the American debt piles up and Asian state-run companies further misallocate resources.

In Japan, the bubble popped in 1990,

In Thailand, South Korea, Malaysia, Indonesia, and the Philippines in 1997.

In 2014, the Chinese housing bubble let some air out, but it’s still ongoing

The current Chinese-US Debt bubble has to end.  It could be in 20 years from now or it could be tomorrow.