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http://www.abc.net.au/lateline/content/2007/s2179957.htm
TONY JONES: David Hale is an acute observer of the international economy. He's written for many leading newspapers, including the "Wall Street Journal" and the "Financial Times", and he's regularly briefed by central banks throughout the world.
Do you agree with Warren Buffet that the US economy is now in recession?
DAVID HALE: There's no doubt the US economy is very week. We've had in the last year a major downturn in housing, home sales are down 50 per cent, house prices are down nine per cent. But our weekly unemployment claims which are the best indicator of the economy are not yet in recessionary territory. They've gone from 300,000 to 370,000 but to be in recession we should be at 450,000. If we go to 450,000 we're in recession. The US corporate sector is remarkably resilient despite this housing recession. Last year corporate profits outside the financial sector increased 10 per cent. Corporate profit margins are at a 50 year high. Corporate liquidity, at a 40 year high. We've had five great years for the corporate sector so you cannot generalise about the US economy based on housing. We've got very distinct sectoral differences and the housing sector is where the recession is, autos have been weak because of the Japanese and the Koreans gaining market share but the rest of the economy's growing by three per cent.
TONY JONES: When we spoke to you last year you actually nailed the impact of the subprime mortgage crisis while talking to us but at that time you didn't think there would be a congressional intervention. There now has been the President and the Congress have got together, massive tax cuts, they're basically printing money to try and buy themselves out of a recession, that's the way it looks, is that going to work or not?
DAVID HALE: We've had over the last several weeks three major policy changes to keep the US out of recession. The Federal Reserve Board since September has cut our core minimum lending rate from 5.25 per cent to three per cent. Ben Bernanke does not wan an election year recession because he fears if we get an election year recession he'll be a one term Fed chairman and be out of a job in January 2010.
Secondly the Congress has enacted $160 billion tax cut package. $100 billion for consumers in June and July, $630 billion for business depreciation allowance. We've also significantly changed in the last two weeks this rules on the Government mortgage lending agencies. They for the first time in three years can buy a lot of new mortgages and expand the balance sheet. They can also extend their loans, not just to middle income home buyers, but to people getting jumbo loanings mortgages that are over several hundred thousand dollars. This is very important to California because it's hard to buy a house in California for under $1 million.
So we've had several actions in the last month to try and revive the economy. Federal Reserve policy, tax cuts, and getting borrowing powers.
The fact is, if we cut interest rate dramatically we will probably by the summer or by the autumn in North America stabilise the housing market. Americans do respond to falling mortgage rates.
TONY JONES: All these things are going in the exactly the opposite direction in Australia, interest rates going up, the dollar is rising, there are many other indicators going in the other direction too including employment. Is Australia now totally decoupled from any effect that a potential US recession could have?
DAVID HALE: Australia's decouple because you only have $8 billion of exports to the United States, you have $10 billion to India, so America's a very minor market for you but what matters is not America, what matters is Asia. Your big markets are China, Japan and Korea and I believe they can decouple. Let's look at China. 40 per cent of GDP is export, 20 per cent of that goes to America. That looks very high risk. But only 20 per cent of the value out of Chinese experts accrues to Chinese companies. 80 per cent goes to countries elsewhere in Asia that supply China with intermediate goods and components to produce finished goods for American and for Europe. The exports in China depend very heavily on imports from Taiwan, Japan, Korea, Singapore and Malaysia. So the reality is only two per cent of China's GDP depends on America. Look at Malaysia. Foreign trade is 180 per cent of GDP. America's half of that, or a quarter of that. Malaysia's the most vulnerable country in the world for American recession after Canada and Mexico. Last year exports to America fell 15 per cent, Malaysian GDP growth was over six per cent. Why? Strong domestic consumption and robust infrastructure spending. East Asia is independent from America now because east Asia has $3.6 trillion of foreign exchange reserves and has massive current account surpluses. If East Asia wants to go for domestic thread growth they can easily do it through infrastructure, through tax cuts through public spending. That's happening in Malaysia, it will happen elsewhere in the region the next 12 months.
TONY JONES: What are the threats coming down the track to the Chinese economy?
DAVID HALE: China right now has three major growth locomotives: export growth which will slow down from 30 per cent to 20 per cent this year but this year China will achieve a great landmark in the economic history of the world, it will become the world's leading export nation. The second locomotive is capital spending. That's booming. It's not just manufacturing, it's urbanisation. Every year 15 million Chinese move from the countryside to the cities, China has to build New York City every six months. Thirdly domestic consumption, Chinese wage growth is 15 per cent, 20 per cent. 30 years ago the Chinese consumer was to buy a bicycle, a television set, or a sewing machine, five years ago it would buy a cellular telephone, now it's an automobile. Automobile sales are seven million. The major threat to the Chinese economy is Kevin Rudd's environmental policies. America is going to embrace Kevin Rudd's policies in 12 months time. All the American presidential candidates we have, John McCain, Hillary Clinton, Barack Obama want to introduce in a year's time carbon trading, which will increase our power costs by 20 per cent, 30 per cent as they will here. If America embraces this we will in two years have the whole of OECD with carbon trading and with Kyoto type policies. Europe will demand and America will demand in two years time that countries that don't comply have big import tariffs because they're generating greenhouse gas emissions and China's emissions this year will exceed Americas because of the scope of China's industrial boom. China will have to embrace the Kyoto protocol and carbon trading by 2012 or face trade war. That will set the stage for China to have an economic contraction because China's economy is 75 per cent based on coal.
So the environmental policies you're introducing this year and America next year will be the big test for China's economy in four or five years time. It won't depress China, they won't go from 10 per cent growth to one per cent, but it could knock three or four percentage points off their growth rate because it will lead to a huge increase in their costs and to their credit, Hu Jintao are already giving speeches about the need to improve the environment but so far it's vague, it's imprecise. By 2012 it will mean what we will have in America, Australia and Europe in next three year, carbon trading and a big increase in the cost of producing power.
TONY JONES: (re:Barack Obama) He is an extraordinary American phenomenon, the only similar American phenomenon I can think of is Robert Kennedy, also a senator and I'm just wondering because he was assassinated. Is that a fear in the US and what would happen if Obama was assassinated?
DAVID HALE: I think Barack Obama is clearly vulnerable to assassination because he's a very unique figure in American history. He's the first credible black presidential candidate and America has two problems compared to this country. We have a lot of guns and we also have a lot of people who are deeply racist. They killed Martin Luther King 40 years ago. There's no doubt Obama has a unique vulnerability to assassination. When was thinking about running for president 10 years ago, his wife opposed it on the grounds he would also be vulnerable to assassination. So this is a risk and my great hope is it will not come to pass but the FBI, the secret service, our security agencies must now work extremely hard to guarantee this man's security because there's no doubt that his unique role in American history makes him a potential candidate, a potential target for the assassin's bullet.
TONY JONES: What would be the impact on America?
DAVID HALE: I think it would be catastrophic. Barack Obama has generated tremendous excitement in the last few months. I think Barack Obama is many ways like a pop star. He's greatly increased the turn out in the primaries, he's produced great enthusiasm in millions of young people, he's had a profound effect on American politics an if we were to lose him to an assassin's bullet, I think America would be very, very demoralised and it would be a very major crisis for us as we contemplate where we're going. I think it's essential he live, he may lose the election to John McCain, there are no guarantees, there are profound differences between these men on key public policy issues. Barack Obama has staked out a very left wing agenda, large tax increases, protectionist trade policy, a somewhat dovish isolationist foreign policy but there's no doubt he has excited many people, he has generated great enthusiasm and if we lose him to an assassin's bullet I think it'll be a very, very profound crisis, a very profound trauma for the American people.
TONY JONES: David Hale is an acute observer of the international economy. He's written for many leading newspapers, including the "Wall Street Journal" and the "Financial Times", and he's regularly briefed by central banks throughout the world.
Do you agree with Warren Buffet that the US economy is now in recession?
DAVID HALE: There's no doubt the US economy is very week. We've had in the last year a major downturn in housing, home sales are down 50 per cent, house prices are down nine per cent. But our weekly unemployment claims which are the best indicator of the economy are not yet in recessionary territory. They've gone from 300,000 to 370,000 but to be in recession we should be at 450,000. If we go to 450,000 we're in recession. The US corporate sector is remarkably resilient despite this housing recession. Last year corporate profits outside the financial sector increased 10 per cent. Corporate profit margins are at a 50 year high. Corporate liquidity, at a 40 year high. We've had five great years for the corporate sector so you cannot generalise about the US economy based on housing. We've got very distinct sectoral differences and the housing sector is where the recession is, autos have been weak because of the Japanese and the Koreans gaining market share but the rest of the economy's growing by three per cent.
TONY JONES: When we spoke to you last year you actually nailed the impact of the subprime mortgage crisis while talking to us but at that time you didn't think there would be a congressional intervention. There now has been the President and the Congress have got together, massive tax cuts, they're basically printing money to try and buy themselves out of a recession, that's the way it looks, is that going to work or not?
DAVID HALE: We've had over the last several weeks three major policy changes to keep the US out of recession. The Federal Reserve Board since September has cut our core minimum lending rate from 5.25 per cent to three per cent. Ben Bernanke does not wan an election year recession because he fears if we get an election year recession he'll be a one term Fed chairman and be out of a job in January 2010.
Secondly the Congress has enacted $160 billion tax cut package. $100 billion for consumers in June and July, $630 billion for business depreciation allowance. We've also significantly changed in the last two weeks this rules on the Government mortgage lending agencies. They for the first time in three years can buy a lot of new mortgages and expand the balance sheet. They can also extend their loans, not just to middle income home buyers, but to people getting jumbo loanings mortgages that are over several hundred thousand dollars. This is very important to California because it's hard to buy a house in California for under $1 million.
So we've had several actions in the last month to try and revive the economy. Federal Reserve policy, tax cuts, and getting borrowing powers.
The fact is, if we cut interest rate dramatically we will probably by the summer or by the autumn in North America stabilise the housing market. Americans do respond to falling mortgage rates.
TONY JONES: All these things are going in the exactly the opposite direction in Australia, interest rates going up, the dollar is rising, there are many other indicators going in the other direction too including employment. Is Australia now totally decoupled from any effect that a potential US recession could have?
DAVID HALE: Australia's decouple because you only have $8 billion of exports to the United States, you have $10 billion to India, so America's a very minor market for you but what matters is not America, what matters is Asia. Your big markets are China, Japan and Korea and I believe they can decouple. Let's look at China. 40 per cent of GDP is export, 20 per cent of that goes to America. That looks very high risk. But only 20 per cent of the value out of Chinese experts accrues to Chinese companies. 80 per cent goes to countries elsewhere in Asia that supply China with intermediate goods and components to produce finished goods for American and for Europe. The exports in China depend very heavily on imports from Taiwan, Japan, Korea, Singapore and Malaysia. So the reality is only two per cent of China's GDP depends on America. Look at Malaysia. Foreign trade is 180 per cent of GDP. America's half of that, or a quarter of that. Malaysia's the most vulnerable country in the world for American recession after Canada and Mexico. Last year exports to America fell 15 per cent, Malaysian GDP growth was over six per cent. Why? Strong domestic consumption and robust infrastructure spending. East Asia is independent from America now because east Asia has $3.6 trillion of foreign exchange reserves and has massive current account surpluses. If East Asia wants to go for domestic thread growth they can easily do it through infrastructure, through tax cuts through public spending. That's happening in Malaysia, it will happen elsewhere in the region the next 12 months.
TONY JONES: What are the threats coming down the track to the Chinese economy?
DAVID HALE: China right now has three major growth locomotives: export growth which will slow down from 30 per cent to 20 per cent this year but this year China will achieve a great landmark in the economic history of the world, it will become the world's leading export nation. The second locomotive is capital spending. That's booming. It's not just manufacturing, it's urbanisation. Every year 15 million Chinese move from the countryside to the cities, China has to build New York City every six months. Thirdly domestic consumption, Chinese wage growth is 15 per cent, 20 per cent. 30 years ago the Chinese consumer was to buy a bicycle, a television set, or a sewing machine, five years ago it would buy a cellular telephone, now it's an automobile. Automobile sales are seven million. The major threat to the Chinese economy is Kevin Rudd's environmental policies. America is going to embrace Kevin Rudd's policies in 12 months time. All the American presidential candidates we have, John McCain, Hillary Clinton, Barack Obama want to introduce in a year's time carbon trading, which will increase our power costs by 20 per cent, 30 per cent as they will here. If America embraces this we will in two years have the whole of OECD with carbon trading and with Kyoto type policies. Europe will demand and America will demand in two years time that countries that don't comply have big import tariffs because they're generating greenhouse gas emissions and China's emissions this year will exceed Americas because of the scope of China's industrial boom. China will have to embrace the Kyoto protocol and carbon trading by 2012 or face trade war. That will set the stage for China to have an economic contraction because China's economy is 75 per cent based on coal.
So the environmental policies you're introducing this year and America next year will be the big test for China's economy in four or five years time. It won't depress China, they won't go from 10 per cent growth to one per cent, but it could knock three or four percentage points off their growth rate because it will lead to a huge increase in their costs and to their credit, Hu Jintao are already giving speeches about the need to improve the environment but so far it's vague, it's imprecise. By 2012 it will mean what we will have in America, Australia and Europe in next three year, carbon trading and a big increase in the cost of producing power.
TONY JONES: (re:Barack Obama) He is an extraordinary American phenomenon, the only similar American phenomenon I can think of is Robert Kennedy, also a senator and I'm just wondering because he was assassinated. Is that a fear in the US and what would happen if Obama was assassinated?
DAVID HALE: I think Barack Obama is clearly vulnerable to assassination because he's a very unique figure in American history. He's the first credible black presidential candidate and America has two problems compared to this country. We have a lot of guns and we also have a lot of people who are deeply racist. They killed Martin Luther King 40 years ago. There's no doubt Obama has a unique vulnerability to assassination. When was thinking about running for president 10 years ago, his wife opposed it on the grounds he would also be vulnerable to assassination. So this is a risk and my great hope is it will not come to pass but the FBI, the secret service, our security agencies must now work extremely hard to guarantee this man's security because there's no doubt that his unique role in American history makes him a potential candidate, a potential target for the assassin's bullet.
TONY JONES: What would be the impact on America?
DAVID HALE: I think it would be catastrophic. Barack Obama has generated tremendous excitement in the last few months. I think Barack Obama is many ways like a pop star. He's greatly increased the turn out in the primaries, he's produced great enthusiasm in millions of young people, he's had a profound effect on American politics an if we were to lose him to an assassin's bullet, I think America would be very, very demoralised and it would be a very major crisis for us as we contemplate where we're going. I think it's essential he live, he may lose the election to John McCain, there are no guarantees, there are profound differences between these men on key public policy issues. Barack Obama has staked out a very left wing agenda, large tax increases, protectionist trade policy, a somewhat dovish isolationist foreign policy but there's no doubt he has excited many people, he has generated great enthusiasm and if we lose him to an assassin's bullet I think it'll be a very, very profound crisis, a very profound trauma for the American people.
