US lunar pull-out leaves China shooting for moon

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February 21, 2010 by Francois Bougon
File photo shows visitors taking photos during an exhibition on "China's First Spacewalk Mission" at the Hong Kong Science Museum. China aims to land its first astronauts on the moon within a decade at the dawn of a new era of manned space exploration -- a race it now leads thanks to the US decision to drop its lunar programme.

China aims to land its first astronauts on the moon within a decade at the dawn of a new era of manned space exploration -- a race it now leads thanks to the US decision to drop its lunar programme.

US President Barack Obama earlier this month said he planned to drop the costly Constellation space programme, a budget move that would kill off future moon exploration if it is approved by Congress.

In contrast, China has a fast-growing human spaceflight project that has notched one success after another, including a spacewalk by astronauts in 2008, with plans for a manned lunar mission by around 2020.

The turnaround is viewed as yet another example of the Asian power's rising profile and technical prowess.

"Overall, China is behind the US in technology and in actual presence in space -- the US operates dozens of satellites, the Chinese only a few," said James Lewis, of the US-based Centre for Strategic and International Studies.

"The real concern is the trend: China's capacities are increasing while the US, despite spending billions of dollars, appears to be stuck in a rut."

The Americans have achieved the only manned lunar missions, making six trips from 1969 to 1972.
But China has been gaining in the space race after launching a manned programme in 1992, and sending its first astronaut into space in 2003.

Only Russia and the United States had previously put a man into space independently.

China aims to launch an unmanned rover on the moon's surface by 2012 ahead of the manned lunar mission a decade from now.

"It is not a very expensive space programme but it is relatively well worked out in terms of autonomy, efficiency and independence," said Isabelle Sourbes-Verger, a France-based specialist on the Chinese space programme.

Some experts have questioned Beijing's timeframe for landing a man on the moon, but Peter Cugley, a China specialist at the non-profit research centre CNA in the United States, says the actual timing is not that relevant.



"Even if a PRC (Chinese) manned lunar landing doesn't happen in the timeframe initially established, the technical expertise gained and boost in national prestige is what the Chinese Communist Party is most interested in," he said.

China sees its space programme as a symbol of its global stature, growing technical expertise, and the Communist Party's success in turning around the fortunes of the formerly poverty-stricken nation.

Experts see its push for the moon, while Washington backs off, as further confirmation of its emergence as a superpower.

"I see it as a confirmation of America's decline," said Lewis.
"Perhaps this decline is temporary, the product of many errors under (former US president George W.) Bush."

China also has pursued its space ambitions efficiently. The Constellation programme had already cost 10 billion dollars, or nearly 10 times more than the entire Chinese space programme, according to official data.

Fu Song, the vice dean of the School of Aerospace at Tsinghua University in Beijing, said Obama's decision was unlikely to spur China to ramp up its space programme, saying its development would remain on a steady course.

But Beijing has other significant Asian competitors to reckon with as it vies to become the second nation to put a man on the moon.

India landed a lunar probe in 2008, and a top official said last month it was targeting a manned space mission in 2016. Japan, meanwhile, launched its first lunar satellite in June last year.

Both developments marked dramatic steps forward for both countries.

But regardless of who gets to the moon next, the sight of Chinese astronauts treading the lunar surface would be a watershed moment for the country, Sourbes-Verger said.

(c) 2010 AFP

Waltzing around exchange rates

 Ultimately, they reflect the underlying strength or weakness of the real economy

AS the textbook says, money is a means of exchange, a unit of account and a store of value. When we discuss foreign exchange rates, we mean the value of the domestic currency against a foreign benchmark.

Since there are many such benchmarks or standards, we use the most common one, which is the US dollar. This is because the US dollar is the most widely used reserve currency, as it accounts for roughly two-thirds of global foreign exchange trading and official foreign exchange reserves.

Most people use the US dollar standard because not only is it the most convenient, it also by and large has been a good store of value, at least relative to other currencies.

If you travel as a tourist in most parts of the world, you will find that you cannot change your own currency easily, but you can easily change against the US dollar. The US dollar is the reserve currency standard because it meets all the conditions of international unit of account, means of payment and store of value.

But with the US running unsustainable current account deficits and a growing net foreign debt position, the US dollar faces structural depreciation, which creates growing uncertainty on a global scale.

The real problem stems from the fact that all foreign exchange rates are relative and not absolute values. Value is relative not only against real goods, but against other paper currencies.

If we use a metal as standard, such as gold, and the quantum of gold remains static as the global demand for liquidity increases, then prices will be deflationary. The gold standard was found to be too strict a disciplinarian, because if all currencies are linked to gold, you cannot run a fiscal or trade deficit without huge outflows of gold.

The advantage of using a paper currency is that the supply can be adjusted to the national or global needs. As monetarists claim, inflation is basically a monetary problem of printing too much money. Money can be printed through growing fiscal debt, growing bank credit or inflow of foreign funds.

You can print domestic money, but you can’t print foreign money. In other words, you can ask domestic people to bear the inflation tax by printing money, but the foreigner (and today locals) can run through capital outflow. They stop investing and lending money and you end up with a fiscal or currency crisis.

The bottom line is that in the long run, you cannot spend more than what you earn. Thus, when conventional economists say that flexible exchange rates help with monetary policy, they think that there is an easy way out of this problem.

Flexible exchange rates may help a little in day-to-day adjustment in prices, but ultimately, there is always the temptation to use the exchange rate to devalue your way out of the fundamental problem of spending more than you earn.

This is exactly the Greek tragedy. Greece is part of the eurozone, which uses the Maastricht Treaty rules to stop member countries from printing too much money to ensure that the euro will have stable value. The Maastricht rules draw the line of the annual fiscal deficit at not more than 3% of GDP (or gross domestic product) and total fiscal debt at 60% of GDP.

The Greeks ran a fiscal deficit of more than 12.7% deficit in 2009 and total fiscal debt is now at 120% of GDP. They hid the deficits for more than 10 years by various tricks, including using investment bankers to do swaps to hide the deficits.

In the 1990s, leading investment banks were fined in Japan for helping Japanese companies and banks hide their losses. Now they are bold enough to help governments hide their deficits.

To put it bluntly, neither fixed nor flexible exchange rates can hide the fact that if a borrower spends more than it earns, be it a company or a government, the day of reckoning will come soon.

Fixed exchange rates are a discipline – the profligacy will show up very fast. Flexible exchange rates use a weaker currency to try and earn more exports. But if the source of overspending is the government aided by loose monetary policy, then sooner or later the foreigner will stop lending or investing. You cannot jazz your way out of over-spending. Sooner or later the music must stop.

The Greeks thought that being part of the eurozone, the other Europeans would bail out Greece, so non-Greeks will help pay for their over-spending. Since Greece cannot devalue the euro by itself, then the pain of adjustment must be done on the fiscal or employment side. In other words, a fixed exchange rate ultimately forces the structural adjustment. The Europeans are asking Greece to make that adjustment as a condition for help.

We cannot think about exchange rates as only bilateral, that is, between currency A and currency B. We saw that before the Asian crisis, when East Asian currencies were mostly benchmarked against the US dollar, with some fixed and others floating. Nevertheless, each currency had some kind of parity against each other.

For example, before the crisis in 1997, the ringgit was roughly 2.5 to one US dollar, the Thai baht 25, the Filipino peso 25 and the Taiwan dollar also 25. In other words, they adjusted at roughly one or 10 to each other. This made it very convenient to do business across East Asian borders, mainly because of trade competitiveness.

Each central bank knew that if the rates moved out of line, not only against the US dollar but against the neighbours, there would be trade competitive issues.

This regional pattern of currencies “waltzing against each other” in a stable pattern unless disrupted by crisis was formed by the underlying Asian Global Supply Chain. After the Asian crisis, when most currencies floated, the same pattern emerged, because the underlying needs of the Asian Global Supply Chain forced some competitive stability between the linked exchange rates.

In sum, exchange rates ultimately reflect the underlying strength or weakness of the real economy. You can jazz up all you want through flexible rates, but ultimately if you overspend, you pay.

● Andrew Sheng is author of the book, From Asian to Global Financial Crisis.

A welcome increase in the Fed discount rate

The short-term impact is negative, but a start has to be made towards making money more expensive

IT’S strange how markets react sometimes. The short-term, knee-jerk, downward reaction is often difficult to understand even when the long-term benefits are obvious, and events signal the start of normalisation of very unusual and adverse circumstances.

But it is likely that the stock market’s adverse reaction to the increase by the US Federal Reserve of its key discount rate by a quarter of a percentage point to 0.75% will be short-lived.

At the same time, it is also clear that stock markets may not see the kind of gains seen in 2009 when prices went up by about a half after the collapse of share prices in late 2008 following the world’s most serious financial crisis since the Great Depression of the 1930s.

Two things happened to the markets – stock prices headed south while the US dollar headed north. That is the right way to go purely from a short-term point of view and it likely reflects that although the Fed’s move was expected, it came a bit sooner than the market expected.

Higher interest rates – and this move by the Fed without a doubt presages that – mean that investors will demand a higher rate of return from their holdings. That implies that stocks and bonds will have to fall accordingly.

On the currency side, it implies that holdings of US dollar assets will soon enough get higher interest rates. Accordingly, the US dollar rose to a nine-month high against the euro.

But these are short-term effects. The trillions of US dollars that have been injected into the US and other economies and the loose monetary policies followed all imply that at some time, inflation will become a serious concern.

Easy, cheap money helps to turn an ailing economy around and boosts confidence but prolonging it can be dangerous. That the Fed sees it fit to change its stance now is positive because it must feel that the threats to the system have been largely diffused.

Even so, it is too early to pop the champagne and bring out the glasses. It’s a long walk out of the woods and the way is fraught with unseen hurdles and obstacles. The weather can change in a thrice and the path can get slippery. It calls for a lot of good, careful footwork.

For us in Malaysia, one must reasonably expect that interest rates will begin a slow climb upwards as well. The economy is recovering, the fiscal stimulus measures have bitten and growth is on the cards again.

Our economic problems were not anywhere near as serious as those in developed countries affected by the world financial crisis but we have our own set of problems and we need to work our own solutions to these – and fast.

The world does not stand still and once it sorts out its problems – and it is well on the way to doing it – it will continue its inexorable march onwards. We simply cannot afford to be left behind.

Eyes are focused on what new trick we can conjure up to bring forth a flourish of growth and opportunities to push incomes up for all of us. It will be interesting to see how much structural change will be made to the broad economy.

The march towards normalisation of the world economy, which has started, puts more pressure on us to put our house in order. Nothing less than radical change is required to make the necessary impact.

● Managing editor P. Gunasegaram believes in the old, paradoxical saying that change is the only constant or is it the only constant is change? Never mind, they mean the same.