A serious word about Mr Dung’s dong
By
Bill Bonner Jun 27, 2008
Print this article
Nguyen Tan Dung's Vietnam: hurt by US policies
“I, Franklin D Roosevelt, President of the United States of America, do declare that said national emergency still continues to exist and pursuant to said...” With those mealy words America’s Depression-era president ventured from bad luck into treachery. The Executive Order he issued on April 5 1933 confiscated Americans’ private holdings of gold, then valued at $20.67 per ounce. Then, in January 1934, the US president fixed the price of gold at $35. All of a sudden, Americans’ dollars had been devalued by 69.3%.
Whether this act of nationwide larceny did the economy any good or not, we cannot say. It was not until after World War II that the economy fully recovered the spring in its step. And US stock prices didn’t return to their 1929 highs until 1950. But there is hardly an act of government so foolish or so maladroit that subsequent politicians won’t provide an encore.
This week, the government of Nguyen Tan Dung moved to centre stage. Vietnam had recently become the world’s largest importer of gold bullion. Investors and householders bought the yellow metal for the same reason people always have – to protect themselves from paper. The paper at issue is called the dong, the official currency of the Socialist Republic of Vietnam. Lately, the dong has been losing value against consumer prices at the rate of 25% a year.
A year ago, a Vietnamese investor might have turned to the share market for safety and growth. But Ho Chi Minh’s stock exchange fell every single day in May and is down nearly 60% since January. Or, he might have bought property. Alas, the recent downturn has hit Hanoi property like Richard Nixon’s B-52s. Apartment prices in commercial centres, according to Morgan Stanley, have fallen by half so far this year.
How about the dollar, another refuge from shady money in sunny places? The dong has stayed fairly close to it; but it must have felt as though it was handcuffed to a leper. Since the Roosevelt era, the dollar has sunk from 1/20th of an ounce of gold to 1/1,000th. In dong or in dollars, the average price of gold this year is 250 above the average price in the same period last year – a loss of 37% in the value of paper currencies.
But a year ago, the whole world was a sunnier place. Vietnam was so blessed you needed to wear sunscreen indoors. It was the “next Asian miracle”, with growth rates of more than 7% for the last decade. “Young, prosperous, and confident,” was how The Economist put it. Wages were barely half those in China. And productivity was growing faster. Diem Bien Phu and the tiger cages had been forgotten; foreign investment was rolling in like new Mercedes off a transport ship. Then, the monsoons began. Nowhere have the rains come down harder than in the streets of Ho Chi Minh City. The Vietnam stock exchange is the world’s worst performer this year.
The Vietnamese have always admired Americans. When Ho Chi Minh declared independence for Vietnam in 1945, after the August Revolution, he plagiarised directly from Thomas Jefferson: “All men are created equal,” he began. “They are endowed by their creator with certain inalienable rights; among these are life, liberty and the pursuit of happiness.” No wonder the state bank of the Annamites handled this latest crisis just as FDR and Richard Nixon managed similar ones in the US. FDR reneged on America’s historic obligation to its own citizens; after 1933, they could no longer redeem their paper money for gold. Richard Nixon stiffed the foreigners in 1971; henceforth, if the French wanted to trade their dollars for gold they were out of luck. Now cometh Mr Dung, putting the gold importers out of business. He “temporarily” withdrew licences for further imports, the FT reports.
The problem for Vietnam is no longer that it is so backward, but that it is so forward. Now, all nations must pay, more or less, the global price for rice – and bear the consequences of Mr Nixon’s dollar-based financial system. But some are more vulnerable than others. With imports and exports equal to 160% of GDP, Vietnam has one of the world’s most globalised economies. So, when the Fed tries to stimulate the US economy with loose credit, the extra liquidity drives up prices faster in Hanoi than in Houston. The IMF puts average inflation worldwide at 3.9% for 2007 and 4.7% for 2008. But emerging markets suffer higher rates of inflation – almost 12% says the IMF.
The reason is simple enough: emerging markets are big importers of raw materials, which they turn into finished products. And unlike the US, their economies are still running hot – which puts upward pressure on labour rates. Also, food amounts to nearly a third of family budgets in emerging markets; in the US and Europe, it is only half as much. Since commodity prices and food have soared in dollar terms, so has the cost of living.
In years past, if the US economy sneezed, an Asian exporter like Vietnam would catch a cold. Now, when Mr Bernanke delivers his quack medicine, he practically kills it. “Vietnamese investors have taken a rational decision that this is a hedge against higher inflation and a weak dollar,” said a director of Dragon Capital, based in Ho Chi Minh City, to the Financial Times. They bought so much gold, that imports of the metal into Vietnam more than doubled in the last year. Investors everywhere might want to make a rational decision, too – while they still can.
Published in
Economics
| More
articles
by
Bill Bonner
FREE - MoneyWeek's daily investment email
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.
