If one were to look at the basic reason for all the problems caused by USA’s sub-prime crisis, one will find the people’s spending habits as the fundamental flaw in the system. The habit of using credit cards in the American system is encourages spending.
If a person has no credit card in America (or is not in good credit standing), he is like an outcast. There, people who pay in cash look funny. Even for a dollar worth of purchase, people use credit cards. I witnessed this practice when I was in America. In the convenience stores, I was surprised to see people use credit cards even with small purchases. Stores would hardly have any change if you use a 100 dollar bill to pay.
Since America works on a credit system, the Fico Score, which measures your credit standing, would also serve as a measure of paying habits. A lot of Americans respect this, but the temptation to overspend is there. Buying a car on lease was so easy. Anyone with a good Fico Score could easily walk out of a car dealership with a new car. I walked out of an Audi dealership paying two thousand dollars as down payment for an Audi Q7, which I use when I visit the US.
America, over the years, has grown because people were taught how to leverage or borrow money. They have one of the lowest rates of personal savings in the world. Even America as a country, after the Paulson bailout, will have 10 trillion dollars in debt. On the other hand, countries like China will have 1.5 to two trillion dollars in reserve, Russia with 500 billion dollars and today, Asia has over three trillion dollars in reserve. Actually, the top five countries with the highest foreign exchange reserves are all Asian countries – China (+1,809 billion USD), Japan (+1,004), Russia (+597), India (+307), and Taiwan (+291).
Basic Asian culture is to live within our means. Asians have higher savings rates. For instance, People’s Republic of China’s gross domestic saving is 48.6% of Gross Domestic Product. Hong Kong has 32%, Korea has 30%, Malaysia has 42%, Singapore has 51%, and Thailand has 34%.
Now that a credit crisis has struck, not only America will be affected, but the rest of the world. What the Paulson plan achieves, if passed, is to force banks to get rid of the illiquid assets and to be housed by the US government.
During the Asian crisis, Special Purpose Asset Vehicles (SPAVS) were created for banks to unload their bad assets. In the end, most investors in these SPAVS made a very good return. But, the Asian crisis is nothing compared to what is unfolding today in America. If handled poorly, this could lead to a depression.
Even if the worst is to happen, I believe the bright side for Asia and most countries with emerging markets will be able to withstand this crisis better, as we live a more frugal lifestyle. However, there is no doubt that all of us will still be affected.
The only way for America to correct their problem is to make way for change in their attitude of spending and borrowing. But, this will come as credit crunch hits. Americans will be forced to cut back on borrowing, and as a result, the US economy will weaken. We hope it will be a short recession in America, but the chance of a longer recession at this time is much higher. Americans will be forced to cut back on borrowing. The process of de-leveraging the economy will take some time.
Opportunities for countries like the Philippines will be the outsourcing of businesses from the US, as the labor rates are so much lower in Asia. Americans have relatively high labor rates, as the cost of living is so much higher now in their country. Just imagine how much the American tax payer is burdened with a 10 trillion debt. You can imagine the budget deficit that they would have coupled with a huge trade deficit. With a recession, if the dollar is not the world currency, I would say America would be bankrupt.
We hope and pray that America will find a solution to its problem. It is still one of the biggest consuming-economies in the world. Both Paulson and Bernanke have proven to be the best choice of President Bush for the job. Nobody in their wildest dreams saw this coming, except for Paulson – founder of the Paulson Hedge Fund who made billions shorting the sub prime credit. Now, it is all in the hands of the American congress to pass this 700 billion dollar financial plan. A rejection would be catastrophic. It would have serous repercussions on the whole credit system in the world. All we can do is hope and pray for the best. In the end, this would be a lesson. It is always prudent to live within your means and avoid leveraging.
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I had a talk in Finex about a week ago and was asked to speak about the new Magna Carta. The new Magna Carta has expanded its scope to include the micro entrepreneurs such that the mandatory allocation of banks’ loan portfolio would now include lending (directly or indirectly) to micro-entrepreneurs, aside from small and medium entrepreneurs. The allocation mandated has been increased from eight to ten percent. But as what we have observed, very key to enabling micro entrepreneurs to graduate to the next level and grow is for them to have a basic change in mindset. They must also have a change in attitude that is positive and entrepreneurial, and one that endeavors to build on their savings that will be the foundation of their future wealth, as well as source of funds for future growth. And as they strive to grow, institutions like Go Negosyo and other like-minded associations will be there to mentor and guide them.