Business

Monday October 6, 2008

Huge repercussions if bailout fails


ECONOMISTS are concerned that if the massive US bailout failed, the repercussions to the US economy and the rest of the world would be disastrous and far-reaching.

A local economist said a major concern was that the US economy might go into a tailspin, dragging along other countries that have financial dealings, past and present, if the financial credit crunch was not resolved quickly.

He said there was also a fear of the US dollar falling and its impact worldwide especially if the US economy also collapsed.

The economist said the US had been on a federal trade deficit for many years and this deficit had hit a record of US$311bil for the first half of fiscal year 2008, up from USS162bil the year before.

“As a nation, the US has been spending above its productivity, but still has the liberty to print more US currency so long as other nations are prepared to accept the dollar,” he said. However, the situation may be different if the US economy and dollar collapse.

Pong Teng Siew

RAM Holdings Bhd group chief economist Dr Yeah Kim Leng said the US had enjoyed international currency status that was accepted and traded worldwide and it had banked on other nations supporting the US currency for years.

“But if the US economy collapses, what will the dollar be worth?” he asked.

Jupiter Securities research head Pong Teng Siew concurred that the bailout was crucial to stop the US economy from collapsing and impacting the dollar negatively.

Pong said there was a need to at least save the current financial system in the interim period and look for ways to build a new financial system or business model that was commercially viable and sustainable, while not disrupting economies and trade worldwide.

He said other nations such as Japan and China and many European countries had invested in US treasury bonds and bills held in US dollars, so they have to support the US economy.

Japan and China currently hold US$590bil and US$510bil in US treasury instruments (bonds and bills) respectively.

“They can’t let the US economy collapse because it will adversely affect them as well,” Pong said.

His advice to corporations globally is to rely less on the US economy for growth and to trade less in the US dollar. “Unfortunately, until something else perceived to be more secure comes along, the US dollar will still be the preferred currency for trade for most countries,” he said.


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