Where are we heading?

Some say the worst is over, some say the worst is yet, to, come, some say we are nowhere and there are some who say the world is going to end 2012. Ok I am not promoting the movie 2012; I am talking of the current scenario of the economy.

Ok I come back to the same question where are we heading? There is a lot of air filled with optimism saying everything is fine. But how can one say everything is fine when nothing is fine? Ok its confusing right.

Over the past two years or so, I have been closely following the world economy, more so, I have been following the bank policies and actions and as a result GDP and its performance. They say history once not learned, is often repeated. But then, no one likes to learn history. We are humans and bound to make mistakes, but does anyone know what is the mistake that is often repeated ?

Murder, Rape, Doping? None of them. But to forget to use basic sense over greed for money something that has kept on continuing centuries after centuries. In Vatican, on the coins it’s written “money is the root cause of all evil” which is very true.

I being an infant to the world in terms of knowledge of economy and GDP and banking products and practices, I remember this very question which struck me in 2006, when I read an article on subprime, which said the way ahead was Subprime loans. But I asked many this question, if a person can’t pay at lower rates of interest or doesn’t qualify how can they pay this? All gave me answers and kept notion that this kid is dumb and simply arguing. But last year, I guess all understood what I was talking about. In one way, the effect was not as huge as I earlier thought it would be, and that is good in a way, but it did reach to where I thought. So what is that people can’t understand that too much of anything good is bad? Human want is unlimited, which is why they want more and more money.

The big mistake lies in the education system, financial regulators and world leaders who run under the corporate magnets, which recently has slightly changed. I blame the education system for allowing unwanted alphabet soup products of finance creep into the system like CDO’s, Asset Backed Securities (ABS) etc... who wants all these? Ask a common man, and he will say he is not interested. But the person, who knows that this is the way to trick the system and get money, will say it has to continue. But I will debate on this some other time.

But Let me start on the great financial regulators. They think they know everything, in reality nothing. In simple words, they don’t even know what 1+1 is, and the best thing, is that they know what is to be portrayed. Good Public Relations Officers they are.

The role of any good regulator is to ensure they can implement the fiscal and monetary policies they have framed. But where does that happen, it always contradicts or falls in confusion, where it selects the wrong practices over the right one.

Amy good governance would have been able to curb this crisis from their respective end by not having allowed speculative trades take place, put a stop to the subprime loans given, selling of the subprime loans as packages between countries and so on. Yes, USA is the financial capital, doesn’t mean that they are always right. They can also make mistakes. We have to understand the grave situation which we are in now.

I talk of all this for the fact that, the large rate of unemployment luring around, and yet false reporting. As in my previous article, I stated, Stats truly do not reflect the exact situation, what exactly reflects is the feeling you get from the street. Someone once said, you got to be in the field to know what it is like. People on the ground know more than who is sitting in the office. Last week, UK reported the economy has not improved and this week, USA has reported consumer spending is still down, so what does this point? We are no far better from where we are. One thing we all learned from the crisis is that we all are linked and interdependent with all the countries. So if two of major economies in the world are still in deep waters, how come others have swam their way out of trouble? Here comes the answer.

Wait for it.

Wait for it.

They are lying. In a little sense, yes they must have improved from where they were last year, but that is a tiny percentage. Because when two of major economies are struggling, how can others perform? If it so, why people are still unemployed? Why consumer spending is still low?

The bailouts purpose was to allow flow of money in the economy, but in reality it was flow of money from govt. to corporations to pay huge bonuses to their directors as the recent Goldman Sachs story is the best example. Goldman says it’s not our business, to interfere in their matter, but I would like to have a reality check, Boss, your bonus is our money. You’re using tax payer’s money to fill your pockets!! Look at the arrogance of such an institution. Lehman Brothers, once the fourth-largest US investment bank, filed for Chapter 11 bankruptcy protections in the early hours of 15 September 2008. Governments around the world subsequently had to pump trillions into their financial systems through bank bail-outs, central bank actions and huge stimulus plans to save their economies from collapse.

Let’s be true to ourselves, as we know or what it should be that, the world economy is still in bad shape. The figures that are reported are false, it’s just being reported to show that their respective economies is improving in order to create false air of optimism and bring more investment to their economies. This is bad, as I said earlier, History once forgotten; it’s often easy to be repeated. We are making matters more grave, worse, and bringing forth a further troublesome crisis on our hand which can be more damaging, that ,social order can be toppled and there would be clash of people with money and with the people who don’t. It’s an ugly scene to think, but all actions are leading towards there.

The stimulus is producing growth but saying that it’s not “genuine” growth because … it was caused by the stimulus. The basic economic logic says that the stimulus should aim to close the output gap. And it’s obviously not remotely large enough to be doing that right now

But there is now concern that as the banks starts to recover; they have not taken the necessary steps to prevent a repeat of the crisis. Alarm bells should be ringing with the early signs of a 'back to business' attitude in the City and little evidence that policymakers are taking measures to ensure the next economic recovery is better balanced than the last one

But today governments have to work out when - and how - to clean up the mess that those emergency measures have left behind. That could be even more challenging than the crisis itself. Trust me the crisis is not over yet, as it is being reported out by various sections because if it was, you can definitely see the unemployment fall, income increase, value of properties increase and so on.

But realities check nothing is yet over. Maybe yes, we can say we are not in the depression stages, but I would like to say that we are not in it now, because for the simple reason that, in depression policy doesn’t work.

But whatever it is or wherever we are, the poorest countries will still suffer. Even though some big international banks are returning to profit earlier than expected, IMF figures on total unrealized losses on bank balance sheets as a result of the crisis suggest that there is room for plenty more bad news.

Unemployment will remain high across the developed economies, and public debt ratios will continue to rise, even several years into economic recovery

So many actions and very little outcome, why is it so? No fundamental change where it is required has not been taken. As they say vanilla doesn’t cut it anymore, it’s all about what chocolate sauce, whipped cream and cherry you can put on top. So if the world wants to avoid another economic disaster, it has a doubly hard task now.

I have something for the leaders which is can be explained by these lines from theory of deadman -not meant to be song

“There's still time to turn this around
Should we be building this up
Instead of tearing it down
But I keep thinking
Maybe it's too late.
It's like one step forward
And two steps back”

I come back to the same question I started with where are we heading? To a double dip or W- shaped recession / recovery? economy may be improving, but with so many people still searching for work, a return to prosperity looks like a distant dream for many.

Bottom line is that we’re not going back to the good old days without fixing our banks and fundamentals.

A year After the Shock, Challenges Remain

The problem is easy to grasp. The solution is anything but

Just six months ago it seemed quite possible that we were going to find that out the hard way. We still might. But by common agreement, the risk of a global slump on a par with the 1930s has fallen substantially since the start of the year.

The extraordinary policy steps taken by governments and central banks since the Great Panic of September 2008 - the bank bail-outs, the record interest rate cuts, the trillions of dollars in budget stimulus - all of that seems to have worked. At least for now.

But today governments have to work out when - and how - to clean up the mess that those emergency measures have left behind. That could be even more challenging than the crisis itself. Trust me the crisis is not over yet, as it is being reported out by various sections because if it was, you can definitely see the unemployment fall, income increase, value of properties increase and so on.

But a realty check nothing is yet over. Maybe yes, we can say we are not in the depression stages, but I would like to say that we are not in it now, because for the  simple reason that, in depression policy doesn’t work.

GROWTH RETURNS

Its a news that has been capitulating most of the people around the world stating growth has been returning. Yes i agree to that, but growth has not returned back in the US or UK, the countries at the centre of the financial maelstrom, but France, Germany and Japan all supposedly grew in the second quarter of 2009.

Also supposedly China also has grown or bounced back to rapid levels of growth, far quicker than anyone expected at the start of the year among the developing economies.

But whatever it is or wherever we are, the poorest countries will still suffer. But, now we are all in Lehman's anniversary mode, considering the events of the past year, things could surely be looking much worse. The US economy may well have started to grow in the last few months and even the UK will surely not be too far behind is all what i can say supposedly based on the figures out there.

Challenges??

Yes challenges remain which keeps the midnight lamp burning for the ministers, economists, reformists etc.. So then, you might say not much is there, right? Well then you are wrong if your thinking that. Because there is a lot. How and when to start unwinding all of that policy stimulus is the one we hear about most often, but there are two other big ones.

The most important one is the current situation or state of the banks.

Even though some big international banks are returning to profit earlier than expected, IMF figures on total unrealized losses on bank balance sheets as a result of the crisis suggest that there is room for plenty more bad news.

There are particular fears about Continental Europe (notably France and Germany). Officials fear that French and German banks have been allowed to remain in denial about a large chunk of their bad assets. Ministers there live in dread of new requests for expensive help.

Even where governments have engaged in extensive stress-testing to ensure that banks have enough capital to survive (as in the US and the UK), the big worry is that they still have too much debt - and too little capital - to want to lend. And we all know, what it means when there is too much of debt and less capital. Very bad combination. An ideal self destruction tool in itself.

Savings?

Very important parameters used by economist in order to find the growth of the economy. A big worry is that not enough is being done to lay the foundations for more balanced global growth. Personal saving in the US is now about 5% of gross domestic product (GDP) - up from roughly zero last year.

To get its house in order, the US needs saving to remain at least that high, so the US can stop building up mountains of foreign debt.That is only consistent with rapid global growth if other countries step up to the plate, and promote domestic demand in their own countries as an alternative to exporting to the US.

Savings is an integral part for the development of the economy. Earlier it used to be an exclusive feature of the developed economies where they had good saving and income. But now all have come to par with rest of the world.

Most countries really need to focus on generating domestically generated demand, but I guess that is still a difficult task and it is difficult to predict how and when the commitment will bear the fruit.

If there is no rebalancing of growth in favour of domestic demand in "saver" economies such as China and Germany, there will almost certainly not be enough growth. It is as simple as that.

Unemployment will remain high across the developed economies, and public debt ratios will continue to rise, even several years into economic recovery

having said all, one thing is sure in my point of view. You cant expect the domestic demand to grow when unemployment rates keeps on growing,  as a result neither savings will increase, neither there will be any disposable income in the hands of people. So my question is how come all are reporting everything is improving, worst is over? we are at end of recession and all? I think it might be for the company’s who got the bailout money, because so far that has not yet been transformed to the common man.

I am person who don't take statistics into account because a fundamental reason is that it can be manipulated. When you jolt down all the dots saying GDP is growing, I don't get it? Because 1/5th of your GDP is always linked with consumption. So when your unemployment rate increases, people don’t have much money to spend and simultaneously they are not earning. SO then people will reduce spending and spend on essential commodities. When GDP is closely linked with consumption and that pattern is downwards how can one say its over? And moreover if you look the unemployment rate, it’s classically the same as one described in text books for DEPRESSION.  I still feel we are no where better than last year, but a little improvement is there with the false air of information passing around the world. But if you really want to really know if anything has improved, then I suggest go and ask the common man on the street and you will get your answer.

As i said in the beginning , The problem is easy to grasp. The solution is anything but

Overall A Break-Even Budget

It has been a long day of reviewing the budget by several individuals around India and the World. The Union Budget of India 2009-10 is in many ways playing through the traditional in-roads that have been established and taught in our Economics classes. I have been seeing lot of review of the budget and all seem to have given thumbs down for the budget except a few. Moreover, the media anchors who are supposed to be playing role of moderator when the guest comes seems to be fueling the problem by sedimenting a complete negative notion of the budget in the minds of the people.

Well if you ask me, I say the budget is fine balanced and in all sense it is a break even budget where there is no profit no loss in a literal sense. The budget covered several aspects of the economy considering the economic scenario. When I was listening to most of the comments people had to say, it gave me a complete notion that people are thinking only of their own benefit. I saw NDTV and was shocked to see Pranoy Roy who I have huge respect for seemed to be angered in every sense. But I would like to suggest all his guests and Pranoy who were speaking against the budget that most of you are not thinking from a Macro-Economic perspective. It's a complicated topic and area, but has almost a definite answer and 99.99% achievable solution.

First of all, a hue and cry why not disinvesting loss making sector by the government? All of you on TV screens were screaming money should be flowing in the economy so reduce taxes,allow private sector etc… But what about the people employed over there? During this recessionary period it is very important, to not dismiss people especially by the government. Because these people are having their jobs, they earn some income and this would be spent. Only then, expenditure of one becomes the income of another, and if you want government to sell off and give it to private sector who would implement firing of people who exceed the surplus requirement, then I would like an answer from all sitting and saying where would you give these people money? How can they spend when they don't have money? Where flow of money takes place in the economy? A coin has two sides. We have to look both the sides before giving a verdict simply against the government. So I give thumbs up for this move especially when the unemployment is around 6 % and not further aggravating the problem.

Secondly, disinvestment of 10 % is not enough? There is a common say in economics which says human wants are unlimited and always dissatisfied. Also there is another quote which we hear always,we have a problem with whatever is told or given. We have to understand the budget is now for these 9 months before the next one comes. Having said that, what is wrong with 10% disinvestment? In a way government is taking a bigger risk by losing 10% of profit making companies if it goes to private sector because they are losing the profits they can earn and use. I don't need to cite examples of private sectors profit oriented techniques that led to closure or insolvency of many companies and economic downturn round the world. This topic you look anyway can give you any argument. But I think its more than enough 10% disinvestment.

Thirdly, taxes are areas where government earns revenue and the corporate sector can't cry on not reducing the taxes or argue of perquisites being taxed. See for one thing, the corporate sector never pays the correct amount of tax to the government. They manipulate the books and accordingly pay the tax. If the government would get the tax that is lost through book rigging, I guess there would be substantial amount to fund many, many more schemes importantly. And when the government can't receive their revenue properly, why should they reduce the tax? Because whatever may come, the corporate sector has made sure they will continue to manipulate their books. So my suggestions are that corporate pay correct amount of taxes to the government and then only start blaming government. Until then, please maintain silence

Nextly, government expenditure on infrastructure is very important and a very good one. Because this again improves the standards in India on one hand and on the other ensures flow of money in the economy. When a country has good infrastructure there is chance of attracting others into the economy . There was a huge cry saying private sector has not got any chance of growth or they have been put aside. For a simple fact, the government is not going to be doing the infrastructure projects by themselves. They would call for tenders where all parties would be welcomed to participate and the best one would be selected. So please to all ignorant out there, remember not to forget the private sector has huge opportunity out there and if they do quality work, they would be rewarded.

And indirectly most of the people have problem of the governments stand on rural programs undertaken. People wearing suits on TV screens speak a lot of rural development, but in reality it's a complete lie. They don't care. They are interested in their sector and areas improving than the entire country. Most of the hosts and guests didn't say its bad, but they were using the phrase BUT, OR etc… it doesn't require rocket science to understand their displeasure. For once I see government doing something good for the rural people and I would be the first one to congratulate the government with all my heart if they implement it without any delay. If this becomes successful, we can say atleast the poor are not being poorer or not looked after. And for an award,atleast Congress is keeping upto the promise of the election to take care of the aam admi who elected them .

There are several more things I would like to add, but due to constraints I am not going to prolong it anymore. One thing we should understand that we should not compare the Economic Survey with the budget. That was just a survey giving its suggestions. If you say everything has to be implemented suggested by it, then I would like the corporate sector and the media to implement all the suggestions without any failure given by any of their employees. We have to understand there would be screening and different areas to consider before preparing the budget.

Moreover, budget is just a budget; there would be several other measures and reforms taken by the government in due course of time without just looking into the budget. For once, all out there, please keep confidence in Prime Minister Manmohan Singh for he has sufficient knowledge of what decisions are to be taken when the need comes. The government would keep on implementing several policies in the coming days and months.

Finally to all people who are blindly believing the media, a caution- they speak for their interest and for people who promote their shows. If not, they would have been able to protect your investments because they knew the economic downturn and which stocks are doing bad. Because most of us blindly follow them, they tried to pass on wrong information. This was recently exposed by Jon stewart of The daily show exposing and making Jim Cramer of CNBC come out and tell the truth on his show. Google it , you will find the videos and articles. I feel media should report like Jon Stewart.

TO all out there,if you look at an individual point of you, as an individual nothing much of benefit would be there. But atleast, start to be happy for the fact it is considered at aiming at reducing gap between the rich and poor. We always tell kids, to share and help others and support others to grow. If we are not going to stick to our words, then please don't tell all these lies.

Overall a break-even budeget. Further review in due course of time. So stay connected…

A Quick Glance at the Budget - Proposed tax changes in 2009/10 budget

India's finance minister on Monday proposed increasing the minimum alternate tax on firms, but scrapped a tax on commodity transactions.
Following are some of the proposed tax changes:

DIRECT TAXES

* No changes in corporate taxes
* Raises Minimum Alternate Tax (MAT) to 15 percent from 10 percent. The MAT was earlier introduced to make sure companies do not totally avoid taxation by claiming various deductions that cancelled out their tax liability altogether.
* Extends tax credit carry-over period under MAT to 10 years from seven years.
* Scraps Commodity Transaction Tax
* Scraps Fringe Benefit Tax
* Extends sunset clause on tax holidays for export profits by one year to 2010/11
* Tax holiday for natural gas production
* Increases personal income tax exemption to senior citizens by 15,000 rupees, by 10,000 rupees for others
* Elimiates 10 percent surcharge on personal income tax

INDIRECT TAXES

* Maintains overall structure of customs, excise duties and service tax
* Increases customs duty on gold bars to 200 rupees per 10 grams from 100 rupees per 10 grams
* Increases customs duty on other forms of gold, excluding jewellery, to 500 rupees per 10 grams from 250 rupees per 10 grams
* Restores 8 percent excise duty on manmade fibre and yarn
* Raises excise duty on several items to 8 percent from 4 percent, broadly exempting food items and medicines
* Exempts bio-diesel blended petrol, diesel from excise duty
* Cuts customs duty on bio-diesel to 2.5 percent fron 7.5 percent

NON-TAX REVENUES, REFORMS

* Intends to move to a system of direct subsidy transfer to farmers
* To set up panel to advise on a viable and sustainable fuel price policy
* To retain 51 percent government holding in state-run firms
* To encourage people's participation in stake sales in state-run firms
* State-run banks, insurance firms to remain with government, will be funded to grow
* Expects 497.50 billion rupees ($10.26 billion) from dividends, profits of state-run firms in 2009/10
* Targets 11.2 billion rupees from stake sales in 2009/10
* Expects 3G wireless spectrum auction to net 350 billion rupees in 2009/10

FeDeReR Breaks Hearts of 2 Americans- Pete & Roddick

This post was published to faris at 11:55:21 PM 7/5/2009


On and on they held serve as the fifth set of the Wimbledon men’s final endured beyond all precedent. On and on, with shadows encroaching on the grass, Andy Roddick kept pace with Roger Federer on Centre Court as Federer attempted to close in on a record 15th Grand Slam singles title.
But as cruel as the concept began to seem as both players continued to invest in the outcome, Wimbledon’s latest epic had to finish. And as poignant as it should seem to those who know how long Roddick has been chasing sunlight in Federer’s shadow, Federer was the one who again ended up holding the trophy.
Roddick, in the midst of a resurgent season, had hoped to postpone Federer’s record-making, but despite playing what looked very much like the match of his life, Roddick could succeed only in turning Sunday’s final into Wimbledon’s latest classic as Federer won by the remarkable score of 5-7, 7-6 (6), 7-6 (5), 3-6, 16-14.
Roddick held his serve 37 times in a row before being broken in the last game. When Roddick’s last shot, a forehand, missed its target, Federer roared and walked to the net all alone in the record books after breaking his tie with Pete Sampras, who is now second on the career men’s list with 14 major singles titles.
“Sorry, Pete; I tried to hold him off,” Roddick said to Sampras, his American compatriot, who was sitting in the front row of the royal box after flying in from Los Angeles on Sunday morning.

Federer, who claimed a first French Open title last month, has now won Wimbledon six times, the US Open five times, the Australian Open three times and Roland Garros once.
Sampras was the last man to set a new mark in Grand Slams when he beat Pat Rafter in an emotional final at Wimbledon in 2000, and the American chose to return to the All England Club to witness Federer's achievement
The 37-year-old arrived to applause during the changeover after the third game and, with his wife, took his seat alongside Manuel Santana, Rod Laver, Bjorn Borg and Ilie Nastase.
With so many tennis greats on hand, Roddick appeared to be very much the support act as Federer attempted to make history, but the American has been a rejuvenated force this year and played one of his best ever matches in beating British hope Andy Murray in the semi-finals.
He went into the final having won just two of his previous 18 matches against Federer, but with the confidence of having arguably the world's best serve and a new variety to his game brought out by coach Larry Stefanki.
Both men started strongly on serve but it was the Swiss who put the pressure on first, forcing four break points in a tense game at 5-5.
GRAND SLAM TITLES
15 - Roger Federer
14 - Pete Sampras
12 - Roy Emerson
11 - Rod Laver
11 - Bjorn Borg
10 - Bill Tilden
8 - Ken Rosewall
8 - Ivan Lendl
8 - Andre Agassi
8 - Jimmy Connors
8 - Fred Perry


Federer was twice denied by Hawkeye, while Roddick saved two break points with trademark heavy serves, and the five-time champion was quickly made to regret the missed chances.
Moments later he was under pressure as he leaked a forehand into the tramlines to give Roddick a set point from seemingly nowhere, and when the Swiss made the same mistake in the following rally the American's supporters were on their feet applauding as their man took a shock lead.
The second set followed the same pattern, with neither player able to fashion a break point and Roddick now making 80% of his first serves.
It came down to a tie-break and, knowing his title hopes were under serious threat, Federer made a nervous forehand error to hand over the mini-break before the Roddick serve took over, sweeping the American to 6-2 and four set points.
An imperious Federer backhand and two service winners cut the deficit before Roddick had a chance on his own serve, but he put a high backhand volley well wide.
Federer fired a cross-court backhand pass to win a fifth straight point and earn a set point for himself, and Roddick pushed a backhand well over the baseline to bring Federer level at one-set all.
It was a body blow for the American and he headed straight to the locker room on the changeover before marching to the wrong end on his return to Centre Court.
Roddick's head cleared sufficiently for him to get a foothold in the third set and he saved a break point in game five with a serve.
The 26-year-old could win only two points on the Federer serve throughout the set but he forced another tie-break, and a chance to amend for the disaster of the second set.
A backhand approach into the net gave Federer the mini-break though and, although Roddick did well to close the gap to 6-5, the Swiss converted his third set point with a thumping forehand
If anyone thought that the smooth coronation of Federer was now back on track, Roddick had other ideas, playing a magnificent volley at 2-1 to earn two break points and taking the second with a backhand pass that Federer could not handle.
Roddick served out valiantly from 0-30 in game nine, thrilling the Centre Court crowd who were about to enjoy a fifth set that few had expected to see.
Federer had the first chance at a break in the decider but again Roddick served his way out of trouble, and the Swiss had still not broken his opponent after nearly three hours.
Both men appeared to be getting stronger and stronger and they were well and truly in the groove on serve, with Federer ahead in the ace count as the fifth set rolled on.
Roddick made his move at 8-8, firing a spectacular backhand winner down the line for 15-40, but five-time champion Federer responded magnificently with a service winner and a nerveless drive-volley.

The fifth set Sunday was by far the longest in a Grand Slam singles final in terms of games played, which is quite a statistic considering that Wimbledon began in 1877. The previous longest was in 1927, when René Lacoste of France beat Bill Tilden of the United States, 11-9, in the fifth set at the French championships.
But this year’s final certainly deserves a place on the shortlist of great Wimbledon matches.
The set became the longest in a men's singles final when Federer fired three aces in a row to move ahead 13-12, and Roddick began to look the more tired - but he refused to yield until the 30th game of the set.
The American looped a forehand long at deuce, and when he did the same on championship point Federer had his first service break of the day - and a historic victory after four hours and 17 minutes that takes him to the top of the Grand Slam list.
But there was some small consolation. The Centre Court crowd, accustomed to seeing Federer with the trophy, was in no mood to forget the man who finished second. The chants of “Ro-ger” were followed by chants of “Rodd-ick.”
Legends are legends, and performance is performance and from what we have witnessed here today was the highlight of how great the game has reached and yet I think we will have to hold on to our judegement regarding which is the best final we have seen recently because at the end of last year, it was last years final at Wimbledon, but after seeing today’s match, it will be this year for many. But, for me, I reserve my judgement after I see next years final. SO congratulations Roger Federer and commensurations Andy Roddick. I think we got to see the best tennis of the year and if Andy continues to play like this, he is surely in a league of champions who would have a say where the title would go at this years US Open.

All Saying Different Things, All of Them Correct

This is going to be one of those rare blog posts where I agree with everyone. There has been a lot of great economics related content on the web the past few days.

In the New York Times Allan Meltzer  worries that we will soon have a great deal of inflation:

Milton Friedman often said that “inflation was always and everywhere a monetary phenomenon.” The members of the Federal Reserve seem to dismiss this theory because they concentrate excessively on the near term and almost never discuss the medium- and long-term consequences of their actions. That’s a big error. They need to think past current political pressures and unemployment rates. For the next few years, they cannot neglect rising inflation.

Whereas Paul Krugman believes we need to fear deflation:

Things get even worse if businesses and consumers expect wages to fall further in the future. John Maynard Keynes put it clearly, more than 70 years ago: “The effect of an expectation that wages are going to sag by, say, 2 percent in the coming year will be roughly equivalent to the effect of a rise of 2 percent in the amount of interest payable for the same period.” And a rise in the effective interest rate is the last thing this economy needs.
Concern about falling wages isn’t just theory. Japan — where private-sector wages fell an average of more than 1 percent a year from 1997 to 2003 — is an object lesson in how wage deflation can contribute to economic stagnation.

Who is right? They both are - here is how it is possible:
Right now the economy is walking a tightrope act, and the statistics do not lie( i don’t accept it always, but people do,so can put the argument from that perspective) - we are not in a 'balanced' state and we risk falling off the rope onto the deflation side. At least in theory monetary policy and fiscal policy can be used to push us towards being balanced again by increasing the rate of inflation. I say in theory, because I believe fiscal stimulus is unlikely to work well in the real world. Monetary policy, of both the conventional and unconventional sorts can certainly increase the money supply leading to increased rates of inflation. But it is easy to push to far, risking falling off the other side of the tightrope in the long run - for the reasons Meltzer gives. We need to fear falling off of either side of the tightrope.
And why is deflation harmful in a recession? Krugman gives one reason, though I also agree with an argument made by Arnold Kling:

Workers view wage rates as signals of their employer's long-term commitment to their welfare. Thus, a wage cut is a particularly negative signal, and it is difficult to cut wages in a downturn without causing major problems.

More specifically, it is difficult to cut nominal wages in a downturn. We can however, a cut real wages is possible (which is what in reality needs to happen) by leaving nominal wages unchanged and having a positive rate of inflation.
Of course, there is also the issue of the unemployed, who no longer have wages to cut and require jobs. I agree with Mark Thoma's take:

Artificially restraining wages from falling is not the correct response, the key is to drive the unemployment rate down so that the labor market tightens and wages rise in response. That is why it's essential that stimulus programs provide a boost to employment, and I've wondered from the start if the stimulus programs we enacted have focused enough on providing employment opportunities.

One policy that would help accomplish this, is to cut the payroll taxes paid by firms, as to reduce the costs of employing workers.

Dim and distant, but a glimmer nonetheless!

My views on the economy, the stock market, the problems with the banks, the Geithner plan and whether there's light at the end of the tunnel.

The rate of economic contraction will slow from the -6% of the first quarter to a figure closer to -2%. And next year the economic recovery will be so weak--growth below 1% and the unemployment rate peaking at 10%--that it will still feel like a recession even if we may be technically out of it. So, compared with the bullish consensus that sees positive growth at 2% by the third and fourth quarters of this year and a return to potential growth by 2010, my views are consistently more bearish.

Still, compared with the sharp contraction in U.S. and global growth in the first quarter of this year, the rate of economic contraction will slow down for the U.S. and other advanced economies by year-end. That is only a mild improvement in what is still a severe U-shaped recession, with a very weak and tentative recovery by 2010.

The stock market has predicted six out of the last zero economic recoveries. For the last 18 months, we've had six bear market rallies, and at the beginning of each one of these suckers' rallies the delusional perma-bulls repeated that this was the beginning of a bull market rally. And for six times these perma-bulls were totally wrong as the rally fizzled and new lows were reached. And for six times I correctly pointed out that these were bear market rallies.

But such perma-bulls have no shame in showing up over and over again on CNBC and talking up their books and being proved wrong over and over again. As I have never been a "perma-bear," in spite of the "Dr. Doom" nickname, I will be the first one to call the bottom of this severe recession and the bottom of the bear market when I see sustained evidence of robust and consistent economic recovery.

I see the latest rally as another bear market rally, as over the next few months, the news--macro news, earnings news, financial news, corporate default news, financial firms insolvency news and so on--will be worse than expected by the consensus. Look how wobbly the stock market was on Monday when the expected news that the Big Three are in Big Trouble led to a 3% to 4% market fall. Do you listen to Tim Geithner, who says that some banks need "large amounts of assistance," and who is now pushing--like Bernanke--for fast-track Congressional approval of a law that will allow the takeover of systemically important financial institutions and bank holding companies? This market recovery has still very shaky legs, and it will continue to lurch until the U.S. and global economic recovery does occur and is more robust and sustained.

The global economic contraction is still very severe: In the Eurozone and Japan there is no evidence of "green shoots" or positive second derivatives; and in the U.S. and China such evidence is still very, very weak. So investors and markets are way ahead of actual improvements in economic data. And the idea that stock prices are forward-looking and bottom out six to nine months before the end of a recession is incorrect.

First, we've already had six bear market rallies and, despite the "prediction" of stock prices, not a single economic recovery. Second, in 2001 a short and shallow eight-month recession was over by November, but stock prices kept falling for another 16 months until March 2003. This time around, the recession will be of at least 24 months duration--three times as long and five times as deep, in terms of GDP contraction, as the one in 2001. This time the deflationary forces are global, not just in the U.S. and Japan. This time we have the worst financial and banking crisis since the Great Depression, while in 2001 there was no banking crisis. This time we've got the worst housing recession since the Great Depression, with home prices still bound to fall another 15% to 20% for a cumulative fall of 40% to 45%. This time corporate default rates on junk bonds are predicted by Moody's to peak at 20%, not the 13% of the previous recession.

Thus, the idea that a weak U.S. and global recovery with massive deflationary pressures and a severe financial crisis and massive corporate defaults will lead to a robust recovery of earnings and a sharp persistent bull-market rally in equities is totally far-fetched.

As I have argued before, the risk of an L-shaped near-depression will be significantly reduced if aggressive policy actions were undertaken. That risk of near-depression is now lower than it was three months ago--but not gone altogether--as policy makers in the U.S. and globally have finally gotten religion and taken out all their policy bazookas, missiles, rockets and artillery and started to use them.

These more aggressive and front-loaded policies include massive monetary easing and zero policy rates; quantitative easing; unconventional monetary and credit actions to reduce the spread between market rates and government bond yields; significant--if in some cases still insufficient--fiscal policy stimulus; policies to restore credit growth and reduce the credit crunch; policies to clean up toxic assets of banks; policies to recapitalize banks and take over the insolvent ones; policies to reduce the tsunami of foreclosures and reduce the debt servicing and debt burden of distressed households; policies to support emerging market economies under stress; and policies of appropriate regulatory forbearance to restore credit and liquidity in financial market.

These policies will not restore positive growth in advanced economies until next year, but will reduce the rate of economic contraction to a more moderate pace by the end of 2009. Thus, as I noted earlier, the rate of the advanced economies' economic contraction will slow down from the peak contraction of this year's first quarter (-6%) to a more modest contraction in the fourth quarter (-2%) and a very weak positive growth (0% to 1% in U.S., Europe and Japan) in 2010 with still sharply rising unemployment rates peaking at 10% in these advanced economies. This will be an improvement compared with the fourth quarter of 2008 and first quarter of the 2009 collapse of global economic activity, but still a much more bearish scenario than the bullish case of positive and high (2%) growth by the third and fourth quarters and return to potential growth by 2010.

So the road ahead is still very, very bumpy. The worst for the degree of economic contraction may be behind us by the second or third quarter of this year, but there will not be any robust and sustained recovery as the damage of the financial and real excesses of the last few years will have lasting effects on actual and potential growth for the U.S. and global economies. And the burden of trillions of dollars of additional fiscal deficits and debts in advanced and emerging economies will be a drag on actual and potential growth for years to come.

But if aggressive policy actions are accelerated after the G-20 meeting in London, one can expect a slow and painful process of mending the U.S. and global economy that will still take a long time. That will, however, allow us to see the light at the end of the tunnel some time next year, first for the real economies, next for financial markets and finally for the financial system and its wounded institutions

Slowdown in Economic Growth in GDP Growth in 2009

In Q4 2008, economy expanded 5.3%, slowest pace since Q4 2003, (Q3 2008: 7.6%, Q2 2008: 7.9%) due to contracting manufacturing (-0.2%), agriculture (-2.2%) and exports

Growth forecasts revised down: 2008: 7.8% (IMF), 7.4% (ADB), RBI: 7.5%; Govt: 7.1%, i-banks: 5.6-8%, RGE Monitor: 6%. Forecast for 2009: 7.1% (govt); 5.1% (IMF); 7% (ADB); I-banks: 4.3-6.3%, RGE Monitor: 5%

Since December 2008 Govt and central bank have been giving fiscal stimulus package aimed at non-bank financial corporations, infrastructure, housing, SMEs, exporters; reducing taxes, easing credit access. Since September 2008: Central bank continues inject liquidity, ease capital inflows and cut policy rates. Further rate cuts and credit easing, and fiscal stimulus expected in 2009 though close to 10% of GDP of fiscal deficit will limit the latter

Growth, capital expenditure and consumer spending in 2007/08 was fueled by global growth and liquidity boom, capital inflows and asset bubbles. But global credit crunch, risk aversion and Foreign Institutional Investor (FII) sell-off have severely affected domestic liquidity for banks, stock market and real estate correction, bank lending to finance consumer spending and investment. Domestic slowdown will aggravate asset market correction during 2009 and put bank performance at risk

Consumers hit by high inflation, tight lending standards, job losses, slower income growth, negative wealth effect from correction in stock and home prices

Recent boom in capital expenditure (37% of GDP) is being hit as manufacturing and industrial production are declining since December 2008; several investment projects are being canceled/postponed due to capital crunch; corporate earnings have also taken a hit since Q4 2008 on slowing domestic demand, tighter credit, volatile stock market and drying Initial Public Offerings (IPOs), global liquidity crunch that is limiting access to external finance (major source of capital); corporate savings will run down domestic savings while government runs a deficit

External Sector: Exports have been contracting since late-2008 since major export markets (US and EU) are in recession and high growth markets (Asia, Middle-East) are slowing. Financial sector woes in the West are affecting IT service exports. Vulnerability to trade and current account deficits (expected to exceed 10% and 3% of GDP respectively) on high oil import bill of 2008, contracting exports, slowing remittances from the West and Gulf. These factors pose risk to the current account while slowdown in capital inflows (FII outflow, easing FDI on risk aversion, global liquidity crunch) poses risk of financing external deficit. These factors have pushed rupee to a 5-yr low

Food and oil subsidies, pre-election and fiscal stimulus spending are expected to push fiscal deficit to 10% of GDP in FY ending Mar 2009 and over 9% in FY ending Mar 2010; S&P and Fitch have cut ratings to 'negative'. This may raise govt debt issues to over US$70 billion in 2009 raise interest rate and depress bond prices,putting risk of financing twin deficits at a time when capital inflows are already drying up

What others are saying

JP Morgan: Targeted 7.1% GDP growth in 2009 by government would not achievable, since fiscal packages in December 2008 and January 2009 and monetary easing in late-December 2008 need 6 or 9 months to show up in the growth rate

IMF: Significant downside risks to GDP growth in 2008 (6.3%) and 2009 (5.3%) but government measures could be an upside though constrained by the fiscal deficit and large public debt, thereby increasing dependence on monetary policy

Citi: While trend in auto, cement, steel and retail sales in February 2008 expected to be positive, real estate, freight and port traffic as well as march data are still worrisome; hard to achieve 7.1% growth in 2009 

EIU: 7.1% growth in 2009 targeted by government is overly optimistic; Global deleveraging and risk aversion will limit the availability of financing for investment and consumption, which will increase the pain on industrial and services sectors; Despite of struggling by govt. to create enough jobs for labor force, number of unemployed workers would increase (500,000 jobs were lost in Oct-Dec-08); It will play the important role for election in April-09  

Deloitte: India economy has been impacted by four different ways; weak manufacturing, falling exports, revenues of software companies and closing credit tap in banking sector

Morgan Stanley: Recent growth trend above sustainable levels was driven by capital inflows. Stimulus measures won't prevent a deeper slowdown in domestic demand, cost of capital, industrial production and exports

Kotak: India in a two-year cyclical slowdown with slowing saving and investment, but this phase may be short and shallow unless the global economy deteriorates more than expected. But new capacities in mining coming on-stream, large consumption stimulus, high domestic saving base will help sustain reasonable growth. The sharp deterioration in activity Q4 2008 may have got arrested in Jan 2009; fiscal package too small to sustain the current investment and growth cycle and is constrained by fiscal deficit; monetary stimulus will help reduce interest rates but pace of rate cuts will ease

Goldman Sachs :growth will reach a trough in Apr-Jun-09  before recovering by end-FY10; Stimulus would support specific sectors amid the downturn but not enough to reduce impact of slowdown on aggregate demand

WEF: Dependence on capital flows to finance current a/c deficit is a risk; global crisis could cause sharp capital outflows, fall in share and asset prices, reduction in availability of finance

 

Please do leave your comments. Would like to hear from your perspective also.

India's Stock Market in a Bear Market Rally?

 

On March 26 2009 Sensex rose to a 2 month high crossing the 10,000 mark on easing inflation and U.S. market rally.

In spite of some stabilization from 2008 trends, Sensex had fallen 12.65% in 2009 as of mid-March as risk aversion and FII outflows continue. Top10 firms lost over $4 bn from their market capitalization in Feb 2009. Stock market fell over 56% in 2008 from the Jan-08 peak making it one of the worst performing markets among Asia, BRICs and EMs

Stock market will face further risks in 2009 as investor sentiment will continue to trend down amid significant slowdown in GDP growth, domestic demand, lower corporate earnings, political uncertainty, increasing terrorist activities, sharp depreciation of Indian rupee and expected future weakness against USD, and lower dividends forecast for 2009 (on global liquidity crunch, contracting industrial activity though easing commodity prices related cost of production is a plus). Slowing IPOs, capital raising activity by firms is affecting their expansion plans. This will weigh down on investment in 2009 and further flight out of foreign capital from Indian markets

FIIs have sold over $1.8 bn in 2009 as of mid-March and $13 bn in 2008 (after buying $17 bn investment in 2007) and their share in BSE-500 Companies (which a/c for a large share in market cap) has also declined; this is causing rupee depreciation, depletion of forex reserves

Valuations have shown significant correction as P/E ratios are down from a high of 28 in early 2008 to ~9 in early Feb 2009, and are also cheap in terms of  bond/equity yield gap, market cap/GDP relative. But given that corporate earnings will ease further and risks to the corporate sector are to the downside in 2009 on demand slowdown and credit crunch, valuations might fall further making an attractive buying opportunity by end-2009 or early-2010

Q4 2008: Profits for top line of 595 companies grew 17% from 35% in Q3 2008. The bottom line saw net profit fall 21.1% on lower realization for commodities, marked-to-market losses on derivatives exposures and high finance charge

Energy stocks (losses of oil companies), real estate (slowing capital inflows, housing correction), auto (slowing demand), banking (defaults), tech (slowing IT exports), cement, metals, finance along with retail investors have taken a hit

Again, what others are saying have also been quoted. They are as follows:

Stock market regulator: FIIs are lending and borrowing overseas by using offshore derivatives (P-notes) to short sell in the market

UBS : India's benchmark stock index would rise though FY2009/10 due to relative cheap price in March 2009 compare to other markets; Index will increases  as extending a bull market in anticipation of of a recovery in earnings

HSBC :Cheaper valuation, government stimulus plans as well as government pumps about US$ 100billion would rebound stock market; rupee's depreciation again U.S. dollar in 2008 would make overseas investors to attract India's stock market in 2009

Kotak (via bloomberg): Market was already expected the rate cut, the fear now is that govt are running out of measures that they can use to stimulate economy

Fundsupermart: still cautious on India as earnings might slow down further and market is still expensive compared to other Asian markets

Goldman Sachs : Further fall in markets, FII holdings expected as less favorable macro outlook and corporate earnings don't support the high equity valuations

Indian Economy in a Deflationary Mode. Will the Central Bank Continue to Cut rates?

The world is running in circles with this financial crisis that has got all tangled into it without leaving anyone. I know for many this is still a recession stage, but many of the facts point to us that all are in early stage of depression or last stage of recession. But as far as any economy is concerned, all are pointing towards downward growth and India is no exception. Indian economy is in a deflationary mode, but the question is whether central bank will continue to cut rates?

• Easing Inflation: Wholesale Price Index (WPI) slowed to 0.27% (lowest in 33 years) in the week ending March 14 2009 from 0.44% in the week ending March 7 2009 (lowest level in two decades). 2008's base effects, slowing food and fuel prices (fuel price cut in December 2008), commodities, power due to global recession and domestic demand slowdown led the fall in the WPI. But Consumer Price Index (CPI) hasn't eased much compared to WPI (8-11% in mid-March 2009).
• Inflation outlook: While WPI might turn negative by March-end/April on easing supply-side factors, CPI might remain high until late-2009 and might slow only as demand eases. This might constrain rate cuts by RBI. Further cut in fuel prices expected which along with recent cuts in excise and service taxes will drive down inflation further. Credit growth has slowed to 19.6% y/y by mid-Jan 2009. Good agriculture harvest also a positive. Deflationary pressures might continue until the end of 2009
• Mar 4: RBI cut interest rate to 5% from 5.5% (5th time since Oct 2008); reduced reverse repurchase rate to 3.5% from 4% as growth slowed to 5.3% in Q4 2008 along with contracting exports, slowing investment and bank lending. Rate cuts are aimed to provide domestic and FX liquidity, improve credit growth
• Jan 2009: Cash Reserve Ratio(CRR) (5%) unchanged after cutting rates aggressively since late-2008. But RBI extended the special refinance facility and short-term repo facility for banks to meet the funding requirements of MFs, NBFCs and HFCs up to Sep 2009
• Central Bank: "While financial markets continue to function in an orderly manner, India’s growth trajectory has been impacted both by global financial crisis and downturn much deeper and wider than anticipated with declining WPI. Banks should monitor loan portfolio to prevent asset impairment, price risk appropriately but continue to lend to creditworthy enterprises"
• Room to cut rates further since growth forecasts will be revised down amid contracting exports and industrial production (real estate, construction, auto, consumer durables) and slowing capital expenditure and consumer spending, cooling labor market and wage pressures. Aggressive monetary stimulus needs to complement the fiscal stimulus (whose size is constrained by fiscal deficit). Inflation is also trending down sharply giving room for more rate cuts to prevent negative real rates. In spite of liquidity injections, global credit crunch, capital outflows and central bank's foreign exchange interventions are keeping liquidity tight. This is affecting private sector's access to credit as bank lending rates haven't eased much and lending standards to firms and consumers have become stringent. Household and firms' bank Non Performing Assets (NPAs) are rising
• Risks of easing rates: Will exacerbate capital outflows and rupee decline. interbank rates have eased since Q4-08; Will not be sufficient to offset the pull back in private domestic demand in 2009. Banks are also reluctant to cut rates too low, and lend to risky sectors like auto, real estate and are instead preferring to park funds in govt bonds. Aggressive rate cuts, liquidity injection and currency depreciation poses inflation risk during recovery in an economy with structurally strong domestic demand
• Since Oct 2008's liquidity squeeze, spike in overnight call and inter-bank rates and slowing domestic demand, RBI has aggressively cut rates (first time in over 4 years), reducing the amount banks are required to invest in govt bonds to 24% from 25%, easing credit cost and conditions for restructuring loans directed towards small and medium enterprises (SMEs), corporate sector and housing sector, injecting liquidity into banking system, buying back govt bonds, improving credit access to banks, investors, Mutual Funds, easing capital inflows, FX intervention by RBI to contain rupee slide

What others say

• Citi: further interest rate cut or reductions in CRR in April 2009 is expected due to given high fiscal deficits, limited fiscal space, weak macro data, and lowering inflation rate 
• EIU: deflationary impact of global recession and easing commodity prices will persist till 2009-end; central bank is expected to cut interest rate further in Q1 2009
• Kotak: Near-zero WPI may not lead RBI to cut rates since CPI is still high. But quantitative easing by the Fed may lead RBI to step up its open market purchases against large fiscal borrowings but it will still resist private placement of government debt on its balance sheet
• Goldman Sachs: WPI to enter a period of deflation from April until end-2009 due continuing demand destruction and large base effects from 2008. Central bank could cut cash reserve ratio for banks by mid-2009 to provide liquidity but might not cut interest rate further until end of general election in
• Nomura (not Online): Central Bank would cut interest rates in April and June due to soft transmission of stimulus to economy
• DBS: Deterioration in growth is main reason of rate cut; further rate cut expected by April 2009 
• Morgan Stanley: RBI's easing will reduce systemic risks in banking system but won't renew business and consumer sentiment in near-term

CNBC you have to report TRUTH… FIX CNBC!!

If the Jon Stewart vs. Jim Cramer fiasco wasn’t enough to convince you that some content changes are due at CNBC, I’m not sure what will.

As I’ve said a few times here at SF and around the blogosphere, the CNBC we have today isn’t the CNBC that I knew 10 years ago as people say it to me.  There is a larger focus on sensationalism and talking heads debating themselves rather than reporting business news.

I’m not a believer that over the top debates and guest speakers arguing with seasoned reporters is proper etiquette for a business network.

I have been telling people that over the past 2-3 years, that what is being reported in the television are not the truth and its just a window dressing to fool or exploit all of us as we think they know everything and we don’t know anything. Well, I think now atleast people will start giving a year to my thoughts with JON STEWART bringing out the truth through humor and his comedy to the public.

If you feel the same way, or just want to put a warning shot across their bow, please consider signing the FixCNBC.com petition.

If getting called out for their lack of ethics by a channel who’s most notable show contains 4 foul-mouthed 4th graders (aka - Southpark), then maybe a petition of a few hundred thousand disgrunted viewers can shake things up a bit.

Treasury Officials Who Missed $8 Trillion Housing Bubble Still Haven't Noticed It

If the NYT description of the Treasury Department's bank rescue plan is accurate, then this should have been the headline to the article. The article reports that the Treasury Department is confident that it will not lose money by buying mortgage backed securities at far above their market price because: "the government can hold those mortgages as long as it wants, officials are betting the government will be repaid and that taxpayers may even earn a profit if the market value of the loans climbs in the years to come."

House prices are currently falling at more than a 20 percent annual rate. If they fall another 20 percent in real terms, they will be back at their trend level. A further 20 percent decline will hugely increase the percentage of mortgages that are underwater, reducing the value of mortgage backed securities from their current level. There is no obvious reason that house prices should then again rise above their trend level.

The failure of people like Ben Bernanke and Timothy Geithner to recognize the $8 trillion housing bubble led to this crisis. It appears as though they somehow still don't understand it. This fact should have been the headline of the news article since their continued failure to undersatnd the housing market could cost taxpayers trillions of dollars and further damage the economy.

NYTimes ignores protectionism for banks

If the U.S. government were to hand checks for tens of billions of dollars to the domestic auto industry or the steel industry to help them survive, presumably it would be viewed as a form of protectionism. However, when the checks to the banking industry, for some reason the question of protectionism never arises.

The NYT had a front page story warning of the rise of protectionism. Remarkably, it makes no mention of the hundreds of billions of dollars that the U.S. government is paying to keep the financial industry afloat. All the claims about the inefficiencies of protectionism apply as much to banking as they do to the auto and steel sector (we can use the same graph for all three), however protectionism for the banks never seems to raise any concerns in the media.

Is the U.S. Government Insolvent?

 

Given the economic situation at hand, the word "insolvent" might be nominated as Word of the Year (2008, 2007). However, given all the attention to that word -- which basically means one is unable to cover financial obligations -- I'm not sure why more people aren't a little more concerned about the idea that our government itself may be, in effect, insolvent, and becoming more so every day.

Consider the trillions committed for economic stimulus and bailout purposes. We already owe trillions (including $1 trillion to China). Recall that private enterprise, real estate, and consumer spending all bring in the tax revenues that the government requires to fund its initiatives if it had a balanced budget. Needless to say, tax income is dwindling as the economy stumbles and teeters on the brink of even more serious damage.

And yet the government is committed to spending even more, which means borrowing more and/or firing up the printing presses, making some decisions that could cripple many businesses and drive some overseas -- not to mention hurt already beleaguered consumers. Anybody who realizes money doesn't grow on trees or get delivered by storks (in the case of trillions, flocks of storks I guess, or maybe Monsanto's (NYSE: MON) working on genetically modified super storks) should be very concerned.

Same economic story, different administration

For what it's worth, expanding government, spending taxpayer money, and digging us into a huge debt hole for defense spending is most certainly not "better" than expanding government, spending taxpayer money, and digging us into a huge debt hole for social programs that likely won't result in real, long-term economic growth. I find war spending far more odious, but neither should come to pass, especially with the kind of fiscal black hole U.S government has been digging with a Keynesian shovel -- although admittedly, even John Maynard Keynes didn't condone governments indulging in deficit spending in supposedly good times like the Bush administration did.

Last year's documentary I.O.U.S.A., which featured well-known people in government and business like Alan Greenspan, Paul Volcker, Ron Paul, and Berkshire Hathaway's  Warren Buffett, pointed to an overburdened and unsustainable situation even before all the bailout madness really picked up steam. The National Debt Clockran out of numbers, folks. That was meant to be a wakeup call: We were already over our heads!

Of course, people can argue all they want about "this guy versus that guy," and why "we shouldn't question this new guy's economic policies because he's so much better than the last guy," or "this political party's my political party so they're OK no matter what," and "gee, do we ever hate those other guys!" Maybe some people find all that team mentality as comforting as six-packs and Monday Night Football, but I think it's all a silly distraction that distracts people from thinking about the real issues. And as far as I can tell, what the real issue is: Where's the money, and where's more of it going to come from?

Beyond the banks
Many people are already well aware of the fears that huge banks like Citigroup Bank of America, and Wells Fargo up to their eyeballs in risky loans that are rapidly defaulting are basically insolvent. Meanwhile, the consumer climate makes dying dinosaurs like General Motors even sicker, and of course its own debt load's nothing to sneeze at.

But all that's child's play when you ponder our government's cash burn and burgeoning obligations.

The $3.6 trillion budget President Obama recently spearheaded includes a near-term deficit of a mind-blowing $1.75 trillion. While he vows that the deficit will be halved later, that seems built upon some rather rosy economic recovery projections coming to pass, and if industries become increasingly beleaguered (and businesses provide jobs and tax revenues, folks), then I think you can see why this might present a problem down the road.

Meanwhile, the National Debt is currently just under $11 trillion and growing. You can't just keep adding debt while GDP declines, and raising taxes will strangle already beleaguered businesses and citizens. The Federal Reserve is firing up the printing presses, but that brings to mind the very real risk of hyperinflation.

Last but not least, I hope nobody missed the fact that last week China expressed concerns about the U.S. being good for its debt to that country. If that doesn't scare you -- and support the thesis that there is major reason for concern -- I don't know what will. Meanwhile, France and Germany balked at spending for their own stimulus plans. Um, hello?

Fasten your seatbelts
Unfortunately, the government's overheated spending, relying on future revenues and of course, that of future generations, reminds me a little too much of the Ponzi scheme mentality. And if entrepreneurship and business suffers, then our economy will be awfully close to a Ponzi scheme, where money is simply handed around without any real productive enterprise going on. Only this time it's going to include ugly side effects like worthless greenbacks resulting from out-of-control inflation. (And the Fed's $1 trillion move yesterday certainly stirs up still more concerns about runaway inflation even if the stock market did rise on the news.)

And of course, things could most certainly get far worse from there.

I know this sounds harsh, but I'm a proponent of trying to recognize the truth instead of fighting to stay in a state of overly optimistic delusion. I'm not stuffing cash in my mattress or giving up on the idea of investing; I try to remind myself that panic is destructive, not constructive, and won't help our current situation.

Yet I do believe there are grave issues at hand that we should contemplate, which could most certainly change the way we invest, not to mention the way we live.

And one of them is, is the U.S. Government insolvent? Feel free to comment in the comment boxes below, but I fear the road to real economic recovery is looking awfully rocky -- fasten your seatbelts, it's going to be a bumpy ride.

Why successful bank rescue is far away?

I am becoming ever more worried. I never expected much from the Europeans or the Japanese. But I did expect the US, under a popular new president, to be more decisive than it has been. Instead, the Congress is indulging in a populist frenzy; and the administration is hoping for the best.

If anybody doubts the dangers, they need only read the latest analysis from the International Monetary Fund.* It expects world output to shrink by between 0.5 per cent and 1 per cent this year and the economies of the advanced countries to shrink by between 3 and 3.5 per cent. This is unquestionably the worst global economic crisis since the 1930s.

One must judge plans for stimulating demand and rescuing banking systems against this grim background. Inevitably, the focus is on the US, epicentre of the crisis and the world’s largest economy. But here explosive hostility to the financial sector has emerged. Congress is discussing penal retrospective taxation of bonuses not just for the sinking insurance giant, AIG, but for all recipients of government money under the troubled assets relief programme (Tarp) and Andrew Cuomo, New York State attorney-general, seeks to name recipients of bonuses at assisted companies. This, of course, is an invitation to a lynching.

Yet it is clear why this is happening: the crisis has broken the American social contract: people were free to succeed and to fail, unassisted. Now, in the name of systemic risk, bail-outs have poured staggering sums into the failed institutions that brought the economy down. The congressional response is a disaster. If enacted these ideas would lead to an exodus of qualified employees from US banks, undermine willingness to expand credit, destroy confidence in deals struck with the government and threaten the rule of law. I presume legislators expect the president to save them from their folly. That such ideas can even be entertained is a clear sign of the rage that exists.

This is also the background for the “public/private partnership investment programme” announced on Monday by the US Treasury secretary, Tim Geithner. In the Treasury’s words, “using $75bn to $100bn in Tarp capital and capital from private investors, the public/private investment programme will generate $500bn in purchasing power to buy legacy assets – with the potential to expand to $1 trillion over time”. Under the scheme, the government provides virtually all the finance and bears almost all the risk, but it uses the private sector to price the assets. In return, private investors obtain rewards – perhaps generous rewards – based on their performance, via equity participation, alongside the Treasury.

I think of this as the “vulture fund relief scheme”. But will it work? That depends on what one means by “work”. This is not a true market mechanism, because the government is subsidising the risk-bearing. Prices may not prove low enough to entice buyers or high enough to satisfy sellers. Yet the scheme may improve the dire state of banks’ trading books. This cannot be a bad thing, can it? Well, yes, it can, if it gets in the way of more fundamental solutions, because almost nobody – certainly not the Treasury – thinks this scheme will end the chronic under-capitalisation of US finance. Indeed, it might make clearer how much further the assets held on longer-term banking books need to be written down.

Why might this scheme get in the way of the necessary recapitalisation? There are two reasons: first, Congress may decide this scheme makes recapitalisation less important; second and more important, this scheme is likely to make recapitalisation by government even more unpopular.

If this scheme works, a number of the fund managers are going to make vast returns. I fear this is going to convince ordinary Americans that their government is a racket run for the benefit of Wall Street. Now imagine what happens if, after “stress tests” of the country’s biggest banks are completed, the government concludes – surprise, surprise! – that it needs to provide more capital. How will it persuade Congress to pay up?

The danger is that this scheme will, at best, achieve something not particularly important – making past loans more liquid – at the cost of making harder something that is essential – recapitalising banks.

This matters because the government has ruled out the only way of restructuring the banks’ finances that would not cost any extra government money: debt for equity swaps, or a true bankruptcy. Economists I respect – Willem Buiter, for example – condemn this reluctance out of hand. There is no doubt that the decision to make whole the creditors of all systemically significant financial institutions creates concerns for the future: something will have to be done about the “too important to fail” problem this creates. Against this, the Treasury insists that a wave of bankruptcies now would undermine trust in past government promises and generate huge new uncertainties. Alas, this view is not crazy.

I fear, however, that the alternative – adequate public sector recapitalisation – is also going to prove impossible. Provision of public money to banks is unacceptable to an increasingly enraged public, while government ownership of recapitalised banks is unacceptable to the still influential bankers. This seems to be an impasse. The one way out, on which the success of Monday’s plan might be judged, is if the greater transparency offered by the new funds allowed the big banks to raise enough capital from private markets. If that were achieved on the requisite scale – and we are talking many hundreds of billions of dollars, if not trillions – the new scheme would be a huge success. But I do not believe that pricing legacy assets and loans, even if achieved, is going to be enough to secure this aim. In the context of a global slump, will investors be willing to put up the vast sums required by huge and complex financial institutions, with a proven record of mismanagement? Trust, once destroyed, cannot so swiftly return.

The conclusion, alas, is depressing. Nobody can be confident that the US yet has a workable solution to its banking disaster. On the contrary, with the public enraged, Congress on the war-path, the president timid and a policy that depends on the government’s ability to pour public money into undercapitalised institutions, the US is at an impasse.

It is up to Barack Obama to find a way through. When he meets his group of 20 counterparts in London next week, he will be unable to state he has already done so. If this is not frightening, I do not know what is.

The root cause of the financial crisis: a demand-side view- Photis Lysandrou

The financial sector is widely blamed for the financial crisis, with banks and their investment vehicles considered responsible for the products at its epicentre.

By contrast, investors who bought these products are seen as having played a largely passive role. In fact, demand-side pressures were the main driving force behind the growth of these products. As a result, governments will be unable to prevent crises if they restrict themselves to changing the global financial architecture.

The scale of demand for securities (see appendix, table1) helps to explain the fall in treasury yields and the tightening of yield spreads after 2001. Psychological factors are typically invoked to account for these developments: infected by the atmosphere of optimism and confidence in the real economy, investors also became over-confident and hence overly willing to accept lower risk premiums. However, it is more likely that yields fell after 2001 mainly because governments and large corporations were unable to supply securities with a sufficient wealth storage capacity to accommodate the surplus capital pools.

Without any one of the main components of the global demand for securities, yields would not have fallen as far as they did; nor would the ‘search for yield’ phenomenon have become as pronounced as it did.

The question is: which demand component can we subtract? That exercised by the institutional investors? Or by the banks? Or by governments? In each case, there is justification or plausible explanation for the size of the demand for securities that was exercised.

However, this hardly applies to the high net worth individuals, of whom there were 9.5m in 2006. HNWIs may have had little or no direct involvement in the collateralised debt obligations market, but their indirect involvement was substantial in that they were the leading providers of finance to hedge funds (see appendix, figure 1). These hedge funds were in turn the leading buyers of CDOs (see appendix, figure 2).

This last fact is easily explained. The basic task of hedge funds is to generate above average returns for their clients, for which these clients pay above average fees. This task became increasingly difficult in the low-yield environment of the early to mid- 2000s. The problem was that no matter how sophisticated were the investment strategies used to generate yield, there were limits to how much could be squeezed out of the securities and other available asset classes. So the hedge funds found themselves in a dilemma: on the one hand, more and more assets were placed under their management because other investors were finding it difficult to generate yield; on the other hand, the hedge funds were themselves finding it difficult to generate yield.

It was hedge funds’ need to resolve this dilemma that led them to the search for alternative financial products that could give higher yields, and, when finding that the CDOs fitted this description, led the demand for them. Hedge funds pressured suppliers into providing these products at an ever-increasing rate. As Gerald Corrigan, a managing director of Goldman Sachs, told British MPs recently: “To a significant degree it has been the reach for yield on the part of institutional investors in particular that goes a considerable distance in explaining this very rapid growth of structured credit products”.

Financial crises will not be avoided merely by reforming the financial system. Regulators can make the system as transparent and accountable as they like, but as long as there remain external pressures on it to create products or to indulge in harmful practices, such products and practices will continue to be introduced and financial crises will continue.

Only a significant re-distribution of wealth will remove these external pressures. This requires globally coordinated action in three areas of tax policy:

(1) Tax havens: these need to be closed to prevent trillions of dollars from disappearing off governments’ radar screens;

(2) Tax structures: these need to be harmonised to prevent mobile sections of global capital from encouraging a tax competition ‘race to the bottom’ with the result that domestic tax burdens fall on those who cannot operate across borders;

(3) Tax rates: these need to be re-aligned so that the tax burden is again distributed on a progressive rather than regressive basis.

A globalised version of Keynesianism is needed to help to prevent future crises and to help finance the resolution to the present one. As governments pile more claims on their future revenues through bond issuance, the lower will be their credit ratings and the higher will be the risk-adjusted returns that investors will demand.

From where will these returns come? Since there are limits to how much can be raised from average income households, small businesses and other immobile taxable units, there will have to be, in the absence of serious tax reforms, deep cuts in many areas of government expenditure.

It will be difficult for governments to institute the necessary tax reforms, and thus prevent them from making those cuts, given the pressure exercised by the very wealthy.

However, it can be done providing strong countervailing pressure is brought to bear on governments. If ever there was occasion and opportunity to exercise that countervailing pressure, it is now.

Photis Lysandrou is professor of global political economy, London Metropolitan Business School, London Metropolitan University

Appendix: Table 1

Major Holders of Securities, 2006 (US $Trillions)	Total Assets	Securities	Alternative Investments (inc. Hedge funds)	Other Assets (cash, real estate, etc.)
1. Institutional Investors
(a) PFs	21.6	17.3	1.3	3
(b) MFsÂ	19.3	17.4	0.8	1.1
(c) IC's	18.5	14.8	1.1	2.6
2. Banks	74.4	37.2
3. Governments
(a) Reserves	5.4	4.9	0	0.5
(b) SWFs	1.9	1.5	0.2	0.2
4. HNWIs	37.2	19.3	3.7	14.1

References

Bank of England (2008), Financial Stability Report, October
Capgemini (2007), 11th World Wealth Report, June
Conference Board (2008), Institutional Investment Report, September
House of Commons (2008), Treasury Committee, Report on Financial Stability and Transparency, 26th February, 2008,
International Monetary Fund (2008), Global Financial Stability Report, April
McKinsey Global Institute (2008), Mapping Global Capital Markets: Fourth Annual Report, January
Sovereign Wealth Fund Institute (2008), Asset Comparison -Investor Classes and Asset Classifications, August

What is LIBOR?

I recently thought that i had an in-depth idea of LIBOR. But then, all of a sudden i was put into the fray and I learnt that it was only 0.1% of the entire concept I knew. For this, I thank my faculty of International Finance of my college( Mr. Chandrashekhar – amazingly brilliant ) who gave me a better perspective of the topic and now after going through various documents, articles, books and sites I have compiled it to a simple article.

In this article I'll explain a little understood yet extremely relevant financial tool used across the globe: the London Interbank Offered Rate(LIBOR).

Then what Is LIBOR?
LIBOR is equivalent to the federal funds rate, or the interest rate one bank charges another for a loan. The advent of LIBOR can be traced to 1984, when the British Bankers Association (BBA) sought to add proper trading terms to actively traded markets, such as foreign currency,forward rate agreements and interest rate swaps. LIBOR rates were first used in financial markets in 1986 after test runs were conducted in the previous two years. Today, LIBOR has reached such stature that the rate is published daily by the BBA at about 11:45am GMT.
LIBOR's reach is felt thousands of miles away from the Thames; it is used as the key point of reference for financial instruments, such as futures contracts, the U.S. dollar, interest rate swaps and variable rate mortgages. LIBOR takes on added significance in times of tight credit as foreign banks yearn for U.S. dollars. This scenario usually sends LIBOR for dollars soaring, which is generally a sign of imminent economic peril.

The Reach of LIBOR
LIBOR is set by 16 international member banks and, by some estimates, places rates on a staggering $360 trillion of financial products across the globe. Included in those products are adjustable rate mortgages (ARMs). In periods of stable interest rates, LIBOR ARMs can be attractive options for homebuyers. These mortgages have no negative amortization and, in many cases, offer fair rates for prepayment. The typical ARM is indexed to the six-month LIBOR rate plus 2-3%.

LIBOR's reach doesn't end with the homeowner. The rate is also used to calculate rates for small business loans, student loans and credit cards. More often than not, LIBOR's heavy hand isn't felt directly by homeowners or others in need of a loan. When the U.S. interest rate environment is stable and the economy flourishes, all is usually well with LIBOR. Unfortunately, there is another side to that coin. During times of economic uncertainty, especially in developed countries, LIBOR rates show signs of excessive volatility, making it harder for banks to make and receive loans among each other. That problem is passed down to people seeking loans from the bank. If cash is scarce or at a premium for your local bank, the bank simply charges you, the borrower, a higher interest rate, or worse, doesn't loan you the money at all.

If Times Are Bad, Watch LIBOR
Another prominent trait of LIBOR is that it can dilute the effects of Fed rate cuts. Most investors think it's great when the Fed cuts rates, or at least they welcome the news. If LIBOR rates are high, the Fed cuts look a lot like taking a vacation to Hawaii and getting rain every day. High LIBOR rates restrict people from getting loans, making a lower Fed discount rate a nonevent for the average person. If you have a subprime mortgage, you need to watch LIBOR rates with a close eye as almost $1 trillion in subprime ARMs are indexed to LIBOR.

While LIBOR action in relation to the foreign exchange markets pertains more to currencies, such as the euro, the British pound, the Japanese yen, and others, its daily impact on the value of the dollars spent in the United States is negligible, though it is worth noting that LIBOR is very relevant to rates on the euro, or U.S. dollars held by foreign banks. The euro accounts for roughly 20% of total dollar reserves.

Bottom Line
LIBOR isn't sexy, and it's doubtful anyone is looking forward to the next release of LIBOR data with the same anticipation of seeing the next James Bond movie. That said, anyone with a credit card or a desire to own a home needs to be of aware of LIBOR. LIBOR is the true British monarchy, at least for the global financial markets - and your personal bottom line.

Spanish doldrums – Paul Krugman

This is an article written by Paul Krugman which i felt is necessary to share. So read through this and leave your comments.

“I’m in Yurp for a week, spending some time on other peoples’ problems (although in a way it’s all part of the same problem.) And one has to say that Europe has gotten itself into one heck of a mess, worse even than ours — because they have intractable adjustment problems on top of the general crisis.

The poster child for these adjustment problems is Spain, where I’m currently sitting.

For much of the past decade, Spain had a huge construction boom, financed by vast inflows of capital:

Now that boom is over. But it left as its legacy a sharp rise in Spanish costs and prices relative to the rest of the euro zone (the chart below is Spanish unit labor costs in manufacturing relative to the EZ average, but it doesn’t much matter which measure you use):

How does Spain get out of this? No devaluation is possible — and no, I don’t think exiting the euro is feasible. So it has to do it with relative deflation, hard enough in normal times, when at least costs and prices elsewhere are rising a few percent a year. In the face of a depressed and possibly deflationary European economy … this is going to be ugly.”

Why i say we are in the Depression Zone? And Thanks to the Bank it's a crisis; in the eurozone it's a total catastrophe

The Bank of England may have averted a catastrophe. If ever there was a time when England needed its own monetary authorities – acting with wartime urgency – this is the moment.

Those nations with fossilised or timid central banks clinging to outdated ideologies are not so lucky. Even less lucky are those such as Spain and Ireland that have surrendered policy to a body that is deaf to their pleas and constitutionally obliged to ignore the welfare of their particular societies. They face crucifixion.

Spain's agony is already well advanced. Industrial output has fallen 24pc. Some 352,000 people have lost their jobs in two months. BBVA expects unemployment to reach 20pc next year, touching 4.5m. Premier Jose Luis Zapatero can do nothing as long as Spain remains in monetary union.

He cannot devalue to claw back 30pc in lost labour competitiveness against EMU's German bloc, or take emergency steps to slow the property crash. In an odd lapse last week – perhaps a slip – he advised Spaniards that the best thing to do in these dark times was to ****.

Yes, it is dangerous for the Bank of England to buy up a third of all long-dated gilts. But it would be even more dangerous to allow deflation to run its course in an economy where debt levels have reached such extremes. Debt and deflation are a deadly mix.

The errors that led to our current predicament are well-known. A small army of economists – Austrians, Monetarists, and Keynesians – warned that central banks were playing with fire by fixing the price of credit too low and ignoring asset bubbles. The $6.7 trillion in reserve accumulation by China, Japan, and the petro-powers drove bond yields too low for safety.

Credit signals were gravely distorted. In Britain, Gordon Brown poured petrol on the fire by pushing the fiscal deficit to 3pc of GDP at the top of the cycle. Wretched man. However much we rage at Sir Fred or Citi-wrecker Chuck Prince, let us not forget that this crisis was confected by governments. To blame the free market is to miss the bigger point.

But I digress. We are now faced with the post-debt wreckage. The task at hand is to hold our societies together as best we can. One dreads to think what would have happened if the Hoover-Brüning nostalgics had succeeded in blocking every remedy.

As it is we have seen industrial production collapse in every region. The drops in January were: Japan (-31pc), Korea (-26pc), Russia (-16pc), Brazil (-15pc), Italy (-14pc), Germany (-12pc). Falls that took two years from late 1929 have been compressed into five months.

Those who say this is nothing like the Great Depression are complacent. Household debt is higher today, and UK banks are in worse shape. (No bank of size failed in the British Empire during the slump). Britain's economy contracted by 5.6pc from peak to trough in the early 1930s (Eichengreen). Some put the figure at nearer 8pc. We may surpass that this time.

America suffered worse. Real GDP fell 28pc. But the worst occurred in the second leg, after the heinous policy blunders of late 1931. Reading contemporary accounts, it is clear that hardly anybody – not even Keynes or Fisher – realised that the world was slipping into a depression during the first 18 months.

Nobel laureate Paul Krugman says the Fed has been as far behind the curve today as it was then, given the faster pace of collapse. It is bizarre that Ben Bernanke has not started to buy US Treasuries a full three months after he floated the idea, despite a yield rise of 80 basis points.

He has been stymied by the hawks. Kansas chief Thomas Hoenig said last week that the top priority is to drain liquidity before recovery later this year sets off inflation. Well, Mr Hoenig said last May that inflation psychology was gaining a hold "not seen since the 1970s and early 1980s" with a risk that inflation would become "embedded in the economy." The price spike broke within weeks. If his model was wrong then, why is it right now?

As for the ECB, it has not reached the starting line. Jean-Claude Trichet insists that there is no danger of deflation in Europe. What is the weather like on his planet, asked Mr Krugman.

The ECB has cut rates to 1.5pc, but since they need to be minus 1pc on the Taylor Rule, this leaves the breach as wide as ever. The Bundesbank is blocking any serious move towards quantitative easing.

Given that Germany's economy is imploding (Deutsche Bank sees 5pc contraction this year) one wonders if the Bundesbank would be less hawkish if the D-mark still existed. Even their hard-money brothers at Switzerland's SNB are cash printers these days.

So has monetary policy in euroland been paralysed by squabbles at a calamitous moment, blighting every member state? Almost certainly.

I'll take the Old Lady of Threadneedle Street any day, warts and all

 

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