The thief and the scorpion

By Chan Akya, Jan. 13, 2007, Asia Times:

2 excerpts: … The decline of US credibility is complete after the humiliating death of Saddam Hussein and the sharp escalation of violence in Iraq that followed it. News editors of US television channels describing the situation as “the United States is losing the war in Iraq” clearly failed English grammar at school, by mixing up their gerund-participle in place of the appropriate past participle, ie, “the United States has lost in Iraq”.

The fact that America’s moral obligations have not kept pace with its technological capabilities has been brought to the fore once again, by the country’s attack on Somalia’s apparent sanctuaries for al-Qaeda this week, even as the US forsakes any responsibility toward the innocent victims of Sudan’s genocidal leaders. It is a matter of some wonder to observers that a US administration can practice non-intervention in the same breath as active bombardment.

The malaise is not only American, as other countries such as Britain appear equally culpable, albeit of other offenses. The suspension of an investigation into alleged bribing of members of the Saudi royal family by a British defense contractor was explained as a measure to safeguard English jobs. That economic interest has been at the forefront of all societies’ cultural, religious and moral evolution has already been covered in a previous post; [1] I only bring this story up to highlight the more generic disease prevalent across the Western Hemisphere …

… Market reaction: Financial markets are already signaling this eventuality, as the rising prices of Chinese financial companies now show. The country’s largest bank and its largest life-insurance company are, respectively, the third- and second-largest by market capitalization in the world. Behind this creditable achievement lies the expectation of foreign investors to benefit from significant currency appreciation, rather than any overt trust in the fundamentals of such companies.

Chinese banks continue to face huge challenges, ranging from their excessive deposits to their large and growing book of problem loans. Meanwhile, Chinese insurance companies face the threat of a staggeringly quick demographic decline, which, when measured against the poor returns on less risky assets in the country, implies that growth in overall income is likely overstated.

Thus the primary reason for investors to partake of such assets, at inflated prices, is the expectation that they can profit from the rise before any downturn. Investors in US or European assets can hardly complain on this front, seeing as the assets they are holding appear equally subject to overoptimistic valuations. At one stage during the emerging markets crisis of the late 1990s, the value of one US company exceeded the combined market capitalization of all emerging markets. It is the natural order of things that the boot is now on the other foot.

In summary: If the sting of a scorpion surprises a burglar, he is caught between the need to scream, risking capture, or silently bearing the pain before gingerly withdrawing into the night. Much the same logic rules the financial markets these days, where the poor returns to be had in the US markets have driven many investors to search for alternatives, even if these appear overvalued themselves.

This global epidemic of pseudo-logic will end in tears for many investors, but at least the people with the real savings have the ability to recover, which the US economy appears to lack. (Read the rest on this page of Asia Times).

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