|
Watching CNN over the weekend my eight- year- old daughter asked me if Freddie Mac and Indy Mac were new burgers from McDonalds. I pretended that I did not hear her. Since she didn't persist, and it looks like I needn't worry much about these Macs for the time being, at least in those terms.
But I do notice that the US seems to be in for big trouble, and the multiplying woes are multiplying by the day which could impact our lives eventually.
Few in the UAE, or for that matter in the entire Middle East, might have heard of the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) until two weeks ago.
But as subprime became very much a part of our lingua franca during the past one year, Fannie and Freddie could become as familiar as Big Mac or Coca Cola to all of us very soon.
These two government- backed institutions, that have guaranteed almost half of the $12 trillion worth US mortgage debt, have been rated in the league of sovereign debts by credit agencies in their ratings until recently.
The revelations last week that their guaranteed liabilities were almost 65 times their regulatory capital have virtually extinguished their market values, amidst fears of insolvency.
The Federal Reserve and the US Treasury have put together a rescue package to support these institutions.
While the package adds an additional $5 trillion debt to the government already overburdened with more than $9 trillion debt, the news from the financial sector is of frightening proportions: as much of the US banking system appears rickety.
As a result, in his Senate Banking Committee testimony last week, Fed chairman Ben Bernanke told US lawmakers the central bank is grappling with 'significant' risks that the economy could slow more than expected.
Sitting amidst unprecedented financial surplus from the oil boom, the Gulf is relatively decoupled from the US woes.
Merrill Lynch said last week that with oil prices above $135 a barrel, the six Gulf countries together are estimated to accumulate their current account surplus by $1 billion a day in 2008. The boom indeed cushions the storms in global markets and paints a bright medium-term picture.
However, in the medium to long term, the liquidity surge in itself has the built-in flaw that it could drive up inflation further.
Large current account surpluses and/or rising terms of trade imply that the real exchange rate has appreciated.
If the nominal exchange rate is not permitted to appreciate (as is the case in the Gulf), real appreciation can occur only through an increase in inflation.
The world's leading emerging markets are already showing signs that they will be forced into stagflation if the US slips deeper into recession.
As the US contraction slows, export- led growth and, in many of the emerging economies such as India, China and Brazil, rising inflation, are forcing monetary authorities to tighten monetary and credit policies, forcing further slowdown.
If a global slowdown results in a decline in oil prices, the region could be soon on its way to the proverbial recoupling with the rest of the world, in slower growth and high inflation.
|
