Believing that the JSX could continue its gains<\/p>\n
Kelly K. Knight, Austindo Group, Jakarta<\/p>\n
There is a widespread belief that a bubble is forming in the
\nrupiah bond market, and in the rupiah currency itself, but this
\nmight not be true.<\/p>\n
Rupiah bonds are going up, along with bonds denominated in
\nother currencies throughout the world, because virtually all
\nshort-term interest rates are going down in every currency. The
\nreason is because all governments try to peg the exchange rate of
\ntheir currencies to the U.S. dollar (either transparently or
\nthrough intervention, with a fixed rate or a band); and this
\nlinkage means that, when U.S. dollar short-term interest rates go
\ndown, the short-term interest rates of the pegged currencies must
\ngo down too, and their bonds must go up.<\/p>\n
The declining dollar interest rates are also causing the
\ndollar to weaken. This is causing strengthening in first, all the
\nother currencies, including euro, and rupiah, and all the
\ncommodities.<\/p>\n
Thus the strengthening of the rupiah currency and bonds has
\nmuch to do with America's dollar policy, and little to do with
\nIndonesia itself.<\/p>\n
Thus, why doesn't the U.S. government raise short-term
\ninterest rates to protect the value of the dollar? Or, why is the
\nU.S. government keeping U.S. currency short-term interest rates
\nlow, even when this is now obviously weakening the dollar?<\/p>\n
The answer is that low the green back interest rates help to
\nfinance its "war on terrorism." Because, if US$ interest rates
\nare low, the U.S. government can borrow cheaply to finance the
\nWar.<\/p>\n
This is what the U.S. government always does during times of
\nwar. The government knows that in times of war, Americans don't
\ncare so much about their economy or currency or inflation --
\nexcept winning the war. Americans will understand that they must
\nincur pain in war-time; and they will be prepared to incur pain
\nwith no political complaints.<\/p>\n
The pain of war is not new for Americans because America is
\nalmost always "at war" with somebody or other (French and Indian
\nWar, Revolutionary War, Civil War, Spanish-American War, World
\nWar I and II, Korean War, Vietnam War, Cold War, Iraq I,
\nAfghanistan, Iraq II, etc.). War is not unusual in the U.S.,
\npeace is unusual.<\/p>\n
As to whether Sept. 11 will be interpreted as an "act of war"
\nby Americans, we have to remember that the last time America was
\nattacked on its own shores was by the Japanese at Pearl Harbor.
\nWe should expect a similar U.S. response to Sept. 11. Afghanistan
\nand Iraq are only the beginning.<\/p>\n
The end could look more like Nagasaki and Hiroshima -- "real-
\nworld" measurements of America's capacity for "payback." The
\n"war on terrorism" means the "war on everyone who hates the U.S."
\n-- and is not a small isolated group of people.<\/p>\n
This war has already been declared to include North Korea and
\nIran, but it might not be limited to them. Hence this war will
\nlast a long time, which means that low US$ interest rates (and a
\nweak US$ currency) will also last a long time.<\/p>\n
Under normal war scenarios, the U.S. would keep interest rates
\nlow for the reason stated above, which would weaken the currency.
\nThe pain for Americans would occur in the form of domestic
\ninflation because all imports would become more expensive in U.S.
\ndollar terms.<\/p>\n
And the Americans would happily accept this inflation as a
\nnormal cost of war. As the Cold War ramped up to a furious pace
\nin the late 1960s, 1970s, and early 1980s, inflation was raging
\nin America and Americans accepted it for more than a decade -- no
\nproblem. Gold went to $800\/ounce.<\/p>\n
Yet the "war on terrorism" will be different from normal war
\nscenarios. U.S. inflation will be cushioned by a deluge of excess
\nsupply from China, India, the former Soviet Union, Eastern
\nEurope, and other countries that previously generated no exports
\nbecause they were not even able to feed themselves.<\/p>\n
Their participation in the global economy is not only
\nsomething new, significant, and growing; it is almost entirely in
\nthe form of production, not consumption. Oil was previously a
\nweak spot, not only for U.S. inflation but also for U.S.
\nstrategic military purposes, but that problem has been solved.<\/p>\n
The U.S. now controls the second largest oil reserve in the
\nworld after Saudi. Oil prices are determined "at the margin" and
\nthe U.S. now has absolute control of supply "at the margin."<\/p>\n
But control of oil is only the first piece of the big puzzle,
\nwhich is the long-term "war on everyone who hates the U.S."<\/p>\n
The pain of domestic inflation is now well-cushioned, so
\nAmerica can play a long term game in financing the war with low
\ninterest rates, which implies a continuing weak dollar, and
\nstrength in commodities, foreign currencies, and bonds.<\/p>\n
Some will incorrectly argue that low US$ interest rates and a
\nweak US$ are unsustainable because they will inhibit the
\nborrowing power of the U.S. government. This argument does not
\napply in a world dominated by one "empire-building hyper-power",
\nwhich is what the U.S. is today.<\/p>\n
The most recent historical example of such a single empire-
\nbuilding hyper-power was the British Empire, the government debt
\nof which equaled 30 percent to 50 percent of its gross domestic
\nproduct (GDP) for more than 100 years.<\/p>\n
U.S. government debt-to-GDP is only a fraction of that
\npercentage, which shows that the U.S. still has enormous
\nborrowing capacity to finance the extension of its empire.<\/p>\n
This leads to a viscious circle (or "virtuous circle",
\ndepending on one's perspective): The more the empire borrows, the
\nmore it can extend its power. The more it extends its power, the
\nmore people want to buy its debt securities.<\/p>\n
Low US$ interest rates and a weak US$ dollar are highly
\nsustainable and can last for decades because they will not impede
\nU.S. borrowing power, which means that commodities, foreign
\ncurrencies, and bonds will be strong for a long time.<\/p>\n
How will all this affect Indonesia? First, rupiah interest
\nrates will continue to look fantastic relative to US$ interest
\nrates, which will keep the rupiah currency strong as well as the
\nrupiah bond.<\/p>\n
Second, Indonesia's credit rating will improve dramatically
\nbecause Indonesia will make a "killing" (in US$ terms) from
\nstrong commodity prices caused by the weak US$, which will enable
\nIndonesia to repay its debt (US$ denominated). Of course, an
\nimproved country credit rating is very supportive for both its
\ncurrency and bonds.<\/p>\n
Third, as the world's most populous Muslim country in the
\ncontext of the "war on terrorism", Indonesia should be able to
\nfind many ways to negotiate "big-bucks" of foreign aid and even
\ndebt forgiveness.<\/p>\n
As is normal in war-time, the U.S. and its allies are now
\ntossing hundreds of billions of dollars around the world to
\nextend their power. So why shouldn't Indonesia get a mere $20
\nbillion or $30 billion -- peanuts maybe, for the U.S., but
\nsignificant in terms of strengthening the rupiah and rupiah
\nbonds.<\/p>\n
Sometimes the market seems to believe that the rupiah and its
\nbonds are destined to collapse and, to attract capital back into
\nthe Indonesia, interest rates are destined to be high. The ideas
\nabove will then seem like heresy.<\/p>\n
But these ideas lead to an even more heretical thought:
\nCorporate earnings are going to increase because rupiah interest
\nrates will continue to decline, which means that the stock market
\nin Indonesia is going to go up.<\/p>\n
These thoughts are those of the author and not necessarily of
\nthe Austindo Group.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/believing-that-the-jsx-could-continue-its-gains-1447893297",
"image": ""
},
"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
}