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Do as I say, not as I do…

January 27, 2012
Manila, Philippines

[Editor’s note: Tim Staermose is filling in today while Simon is at the farm in Chile.]

There is a delicious irony in the world of economic policy at the moment.
Back in 1997 and 1998 I had a ringside seat to the Asian financial crisis from my trading desk in Seoul. When everything collapsed, the policy prescriptions from the World Bank and IMF for Asia’s sick economies was to:

1. HIKE interest rates,
2. CUT government spending,
3. Further deregulate, liberalize, and open their economies to foreign investment to attract capital;
4.  And let their zombie banks FAIL.

Though, they experienced brutal recessions after swallowing this tough medicine, the two countries which carried out these policies to the fullest extent:  South Korea, and Indonesia, are today among the most successful and dynamic economies in Asia, and the WORLD.

Since emerging from recession in 2000, Indonesia has enjoyed more than a decade of fast, uninterrupted economic growth. In fact, one emerging markets funds manager told me this week that Jakarta today is “far too modern” to interest him now.  It has already “emerged.”

South Korea also emerged bigger, better, and stronger from the crisis 14 years ago.  On my last trip there in late 2010 ahead of the G20 meeting in Seoul, I was astounded how far it had come since I’d last been there in 2003.

I remember having a chat with my cab driver and telling him it really looked to me as though Korea had  reached “developed country status.”  Becoming a “seon-jin-guk” as they call it in Korean was always one of the burning desires of Korean politicians, bureaucrats, business people, and ordinary citizens alike.

My cabbie was far too modest and said, “No. We still have a long way to go,” as he waved my visa card in front of a payment gadget mounted on his dashboard that instantly deducted the fare and had me on my way in about 5 seconds flat, without having to fumble around for change or sign anything.

South Korea today is the most wired country on the planet.  So good are their technology companies, spearheaded by Samsung Electronics, they even have Apple running scared.

I recently retired my Blackberry.  The replacement won’t be an iPhone.  It’ll be Samsung’s Galaxy S2.  All my friends who have them say they’re, “Way better.”
Bottom line — Indonesia and South Korea “reset” their systems back in the late 1990s and have emerged stronger and more dynamic than ever.

The Asian crisis, back then was brought on by the same things that led to the current crisis in Europe and the US (and the one I believe is coming to China):  Too much cheap money.  Too much borrowing by people who couldn’t afford it, to buy non-productive assets.  And an insanely leveraged banking system run amuck.

Today, the same Western policymakers whose advice got Indonesia and South Korea quickly back on the rails are giving the EXACT OPPOSITE prescriptions for their own economies.

They’ve CUT interest rates to near ZERO.  Governments have SPENT trillions of borrowed money that they have no hope of ever repaying on ill-advised “stimulus.”

They’ve BAILED OUT nearly all the brain-dead banks, keeping them on life support in a coma.  Protectionist rhetoric is building up, and more onerous regulations are being ushered in.

This is what Japan did after its 1980s bubble.  And look at them now.  They’re stuck in a time warp, and the Japanese economy remains in a funk.

It doesn’t take a genius to see that if they persist with their current approach, Europe and America are going to end up exactly like Japan. And places such as South Korea, and even Indonesia, are eventually going to leave them in the dust.

Until next time,

Tim Staermose,
Chief Investment Strategist
Sovereign Man

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About the author: Born to a Danish father and British mother, in Dar Es Salaam, Tanzania, Tim Staermose has led an international life since the day he was born. Growing up, he also lived in Egypt, Denmark, and Singapore, before eventually settling in Australia, where he completed his education and took out citizenship. Since then he has also lived and worked in Hong Kong, and Manila, Philippines, in the field of equity research — both for a bulge-bracket Wall Street investment bank, and for an independent investment research firm. Today, when not traveling the globe looking for investment and business opportunities for the Sovereign Man community and catching up with his diverse, multinational group of friends, he divides his time between Hong Kong, and the Philippines.

Comments on this entry are closed.

  • John Lloyd

    Tim, there’s no doubt that South Korea has attained remarkable success but I’m curious as to why you use it as an example. It’s one of the most protectionist countries in the world. Everything from foreign cars to Jack Daniels is slapped with a huge tariff, essentially forcing people to buy the domestic equivalent. Shrewd policy but it is hardly compatible with the libertarian/free trade ethos of this site.

    • Mamillow

      The iphone doesn’t have a market in South Korea because the charge $1,000 for it. I wanted to buy one there. They consider it very high class.. since it’s slapped with this tariff.

  • nfordham3rd

    It’s very cool that you worked in Korea. I lived through the IMF and yes, I agree, Korea has emerged. And to be honest, I hate Korea now. It’s becoming as Western as the US.

    And I don’t really see the relevance in needing to bring up how your credit card was used through RFID in the taxi cab. Doesn’t Sovereign Man talk about how RFID and the digitization of all things financial what’s gotten us f****d and will kill us at the end?

    Good point how the Western world is not taking their own advice to heart. I can’t take that away from you.

  • StuckInUK4Now

    I think it was Doug Casey who forecast about ten years ago that Europe’s main industry through the 21st century would be supplying domestic servants to the Chinese and other Asia-Pacific region countries.

    That, of course, assumes that the young scions of Europe know how to conduct themselves in a domestic-service environment and make it worth their employer’s while to employ them.

    The current noisy controversy in the UK over a proposal to cap total welfare benefits at around GBP 26,000 per household, so that non-working households cannot claim more money than the national average income earned by working households, does not bode well even for this depressing future scenario.

    Meanwhile the bankers who wrecked the financial system safe in the knowledge that they were “too big to fail” continue to soak up taxpayer’s money and pay themselves million-pound bonuses for achieving nothing discernable. The bonuses are usually justified on the grounds of “retaining talent” despite the obvious fact that these real-life ‘Eugene Lawson’ types have displayed all the talent of a potted plant.

    (How on earth does the concept of “too big to fail” manage to exist in allegedly capitalist economies anyway, and why is it capitalism – rather than state interference in the economy – getting the blame for all the chaos? Presumably because of the same cognitive dissonance that allows workshy Brits to claim it’s their right to receive more in welfare payments than the average British employee earns.)

    An endgame of some sort can’t be far off, surely?


  • VA_Voter

    Excellent piece.  If that was all there was to it everyone would be doing it but I bet you a dollar to a doughnut that the politicians that created the mess got booted out of office and were totally discredited. 

    Since politicians only care about themselves and not about the people this must be the sole reason other countries don’t bite the bullet.

  • http://www.facebook.com/nick.migliaccio Nick Migliaccio

    Precisely BECAUSE Neither the Euro’s, the UK or the USA will do that, I issued a STRONG SELL, tonite on all NON-PM stocks,and a Hi-Level Alert for PM stocks.


  • Hiday_happy

    there had war at thailand,im afraid to go

  • Louande

    The chances of Europe and the USA doing what South Korea and Indonesia did are as good as zero.  In the land where people run around naked, crap on cars in public, burn their flags, occupy cities, and harass the 1%ers how in hell do you expect the government to control them?  This is the land of the free, remember?  The people, the banks, the businesses–they all want their freebies!  How dare you suggest austerity should be imposed on them!

  • Mamillow

    Wow… I lived in South Korea for a year, and spent a week in Japan. I thought Japan was much more efficient and well kept. That is the measure of good economy, not this boom/bust cycle.

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