Taoyuan Nights

Hello everyone! Xin Nian Kuai Le!

I saw a great deal of optimism at new year with people suggesting that maybe things would be OK. Well, I say optimism. What I mean is, ‘insane denial’. Allow me to be blunt: Taiwan is in deep, deep, deep trouble. Read these links, for starters:

January exports down 57% from last year

76% of science park workers forced to take unpaid days off.

Taiwan’s exports declines by record 44.1% on global demand drop

CLSA slashes South Korea and Taiwan outlooks – 11% GDP shrinkage

11% reduction in GDP in 1 year! And yet this is barely making it into the business pages, when it should be screamed on the front pages of any worthwhile newspaper.

What’s more alarming to my mind is that some local people are shrugging off this suggestion – for Taiwan. Sure, Singapore 10% GDP drop, no problem! Sure, South Korea 5% drop, no problem! But Taiwan??? No way, Taiwan is just… uh…. special. Taiwan has magical fairy powers that will protect it from economic harm.

Think again people. An 11% drop in Taiwan’s GDP is in fact optimistic, very far from the worst case. However, even an 11% drop would be a long way from anything Taiwan has faced in the last 60-70 years, it would be the worst crash in local living history.

Yet Taiwan’s people are debt-laden and in a very bad situation to cope with even this kind of drop in GDP. Consider that -11% GDP is the kind of drop we saw during the US great depression, the worst economic crash in American history.

But wait, in fact things are much worse than this. Take a closer look at these links:

EDITORIAL: Facing the cruel economic truth

Taiwan’s exports declines by record 44.1% on global demand drop

The first link refers to Taiwan’s GDP being 65% based upon exports. The second link suggests Taiwan’s GDP is 70% based upon exports.

And, these links say Taiwan’s exports dropped by 41% last month (relative to Dec 2007) and 57% this month (relative to Jan 2008), that is, exports are dropping with amazingly accelerating speed as we leave the Christmas season – and have basically halved already.

Let’s do a little maths. Assume that domestic GDP (local spending) remains the same – a very optimistic assumption indeed. Let’s take the 70% exports, and cut it in half to 35% as per the numbers above.

Add that 35% back to the constant 30% local GDP, and we get a total of 65%.

That would represent an almost *35%* drop in GDP this year if the drop in exports doesn’t change. Now, 35% doesn’t seem that bad as a number. But as a GDP number, it is literally out of this world. We are talking about an economic crash at a speed that would make the US great depression look like peanuts. We are talking about potentially one of the biggest economic crashes in all of history, if it occurs, and it will happen right here in Taiwan.

GDP during US great depression

And if local demand drops too, then by god, there will be no words to describe what happens next.

Quite frankly, Taiwan is not going to be a good place to be if a crash takes place that is three times worse than the worst crash in American history. In the US great depression, you stopped seeing stray dogs and cats because people were eating them to stay alive. Can you imagine American people cooking and eating a stray dog? Well, it happened, and it will happen in Taiwan too, and more, at this rate.

There is almost nothing Taiwan can do to stimulate exports. Wages are already at rock bottom; material costs are out of Taiwan’s control; external economies are unwilling to spend; and Taiwan has no room left with monetary policy to weaken its currency, as domestic interest rates are almost at zero, and are already lower than all of their competitors except Japan.

So here’s what I imagine may happen next over the next 2-3 years.

Taiwan will print money like crazy, as it did back in the 1940s. I don’t think they will borrow money for long, because if they borrow money, the interest rate will have to rise, the currency may appreciate and Taiwan will become even less competitive for exports. Furthermore, domestic homeowners are in no position to deal with higher interest rates on their debt. In contrast, printing money will ensure that the currency devalues fast, making exports cheaper. The big problem is that it will absolutely destroy Taiwan’s economy with hyperinflation and Taiwan will swiftly end up with the New-New Taiwan Dollar. Instead of the Great Depression, they will bring the hyperinflation of the Weimar Republic upon themselves (or Zimbabwe-nomics, to draw a more recent parallel). Taiwan’s government have done it before, after all.

I don’t think Taiwan is going to be a fun place to be, within the next 2 years. Just now, we are only at the start of all of this. In my view, things are going to get much worse. I suggest you prepare for it.

Finishing up, I see there’s another insane scheme started:

Government to subsidize newly set up franchisees

That’s right. Taiwan doesn’t need social welfare improvement, or engineering and science breakthroughs, or better transport links, or things like that to stimulate the local economy. No, what we need is *2* Seven/Eleven stores on every corner instead of *1*. We need to drive every last dollar of profitability out of the streets of Taiwan, and reward people for brainlessly copying one another with imagination-less copycat street stores.

(sigh)

I expect a second ‘voter bribe voucher scheme’ to start any minute now.

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p.s. You can read more about this topic at Michael Turton’s blog.