Tuesday, September 14, 2010

Lets Start Calling the Spade As SPADE



No body have clue whether we are in the middle or at the end of crises But the most optimistic people says we are in the beginning of new growth cycle . I am not here to determine you all what kind of recovery we are going to face V type , U type or W shape of recovery of global economy . But definitely explain you all the process. Last decade was quite unusual decade in the last 200 years history of the world , the key reason is there was a global synchronised growth around the world , if you travel to any corner of the world there was growth , its a decade of prosperity & excellency , INDIAN incomes are multiplied more number of times , so every one went on shopping....! the caveat is weather the same kind of economic growth will sustain or not is the million rupees question. ..... Iam not using $ because by the end of this decade Dollar position as global imperial currency will be questionable ??. In the beginning of the decade most of the folks were not aware of Google , SMS , credit cards and EMIs now they have became a part of their life , present decade will not be a easy going , we need to be very cautious about every thing in life , things will change at very fast pace , Investment avenues what looks good today will be turned as bad and bad will be darlings. Countries not heard like Vietnam , Cambodia,Srilanka etc., will be the dream destinations to earn money.
After the burst of TMT bubble ( Technology -Media- Telecom) and 1980 economic crises to maintain the growth momentum , policy makers in United states identified a new formula that was pumping money into the economy from the Federal Reserve by ultra expansionary monetary policies , Federal Reserve reduced its Fed Rate in baby steps from 23 % in 1983 to today at 0.25% which maintained growth momentum in the past 2 decades . Federal Reserve 's interest rate known as Fed Rate is considered to be a bench mark rate to European Central bank and creates major impact on the monetary policy decision making of Central Banks around the globe. If Interest rates are low! what will happen? we can't save money in banks!! ,one thing We will do is spend which in turn increase the corporate profits . So Invest in stock markets and Real estate , But the terrible problem is since interest rates are low if we borrow money and leverage our finances and spend and buy homes that creates systemic collapse thats what happened in USA and major parts of Europe . With excess liquidity in the system financial institutions innovated frenzy products like subprime bonds and policy makers relised lately total America was subprimed ,With availability of Cheap capital in global markets Indian Corporation went for shopping Tatas Bought Corus for $ 13 billion and Hindalco bought Novelis for $ 8 billion , like this most of the corporations increased their debt on the balance sheets . By pursuing Ultra expansionary monetary policies , Politicians & policy advisors created consumer demand and increased the gap between income and savings , as a result finally corporate profits are up by many folds . During this period policy makers focused on only Technology , service sectors and Military expansion and American corporates with WTO implications expanded their foot prints around the globe outsourced their business operations & manufacturing units to low cost destinations like China for manufacturing and India and Philippines etc for services . If your carrying APPLE I PHONE just turn it back you can understand this story better ! Designed in USA and manufactured in China!! . When Economy witness a unprecedented growth the first sector to expand is financial sector , The largest 5 broking companies in the world in 2007 Goldman Sachs ,Lehman , Morgan Stanley ,Merill lynch and Bear sterns paid 36 billion dollars as bonuses to their key employees, this was more than GDPs of some developing and middle east nations. From these numbers you can understand the heightened activities of these brokers which created the Economic imbalances around the World . But the Administrators and policy makers in USA and across globe least bothered about these imbalances. Their main focus was on "catching the Monarch of Iraq only"?. With excess liquidity in the banking and financial system people started investing in Real estate and banks leveraged its books by lending to the same sector . During 2007 in so called emerging markets Foreign investment has grown $ 200 billion to $ 900 billion , commercial bank lending up from $ 12 billion to $ 269 billion with this excess flood of liquidity stock market capitalisation in low and middle income economies in increased eight fold from $ 2 trillion in 2000 to $ 15 Trillion in 2007 or from 35 % of GDP to 144%. Stock Markets in BRIC Countries accounted for $ 11 Trillion . If the consumption led by excess credit goes up the key beneficiaries were the resource producing nations China and Canada in turn create demand for raw material like Oil , Iron ore, copper , Nickel , aluminum etc . With this commodities demand countries like Australia , Middle east , OPEC and African nations got benefited .
Noble laureate Mr PaulKrugman recently said “To be honest a new bubble now would help us out a lot even if we paid for it latter , This is a really good time for bubble” . Over a period of time Wall Street started influencing the Capitol Hill White House and American policy making decisions and the same thing will happen in India the Dalal Street will dominate Indian policy making over a period of time in the days to come. Every one boasting we achieved a lot in last ten years in India , Yes We did , but policy makers should relise this wouldn't had happened without taking the advantage of this credit bubble but not by our own capabilities!, If We again rely on next bubble the Growth story of India will be dampened. This is time for Indian policy makers and corporates to start and plan for sustained domestic growth models to maintain the growth momentum in INDIA.

2 comments:

  1. rightly said sir as economic senario of the world is changing, our policy makers have to be proactive so that vision 2020 should be on track as well as we will be able to compete with emerging economies like china.
    Thank you Mr. Kranthi for writing such blogs we expect many more from you.

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