There have been a lot of going on in the financial markets lately. And certainly a lot of catching up with the latest on the news for me. I managed to get internet connectivity after a series of periodic failures here in India [ will be here for a good few months working on the software project with a big team of programmers]. I read a couple of the financial news today and it seems the talk of the town is still on the monetary policy of US [FED] and its 'repercussions' and of course the gold and now, Silver is in the lining. [ I don't think silver will ever match gold as predicted by some observers. Silver price being relatively cheap from its all time high is NOT a good reason: The liquidity focus is still on gold and that's all that matter in any price rally.]
I thought maybe I should wrap up my November blogging with my views in generality with regard to the global financial situation. They are just my views, there is no right or wrong. They represent my thoughts as I received part and partial information and form my picture of the situation. There are assumptions and ignorance; take as another coffee-shop gossip with no offence.
Now, the question about US's monetary [expansionary] policy. Honestly, I would prefer that we never had this topic at all. But the fact that it has become a topic, there is an apparent concern.
Does the recent quantum easing through another round of money printing really deserve the headlines? 600 billion to buy back its own issued debts? What does 600 billions means to the world economy? But what I see is a different message that is causing all the jittery.
Africa or any other countries would have done that without gripping much of our attention except that it is just another ludicrous news on a crazy move taken by the government. We are talking about it because the dollar was [is?] a global currency. The subprime crisis rocked the confidence in the dollar. Obama and his regime is trying to save this lost confidence. And his agenda is to drive employment up and get the momentum of growth back in shape...while in debt and now creating more debts.
Theoretically, more supply of USD in the market means weakened USD. And it is getting a double whammy with the perceived/ actual dented underlying fundamentals of its economy that give the dollar its current 'value' in the market place. If what the pundits expect of a devaluing dollar is coming true, it means the Americans have to pay more for their imports and that means more of USD will be 'sucked' out of the United States. That creates more internal [national] demand for the dollar because more of the USD will be used for/to buy the same amount of foreign goods/services and hence more printing will happen. And when more printing happens without fundamental justifications, the world begins to question the 'value' of the dollar that they are holding in their hands. As the picture becomes clearer that the value is diminishing despite trickles of signs that the USA is recovering based on its recent economic releases, the truth is that there are now more USD in the world market place than it used to be.
Here is the question. Can its economy grow [fast enough] to maintain the value of its current float of dollar without weakening? Certainly not for the next 5 years. Why? Just look at its infamous trade and budget deficit records. When was the last they had a surplus? How does a deficit happens? When consumption from the world is more than that of what the world [combined] consumes from them. Consuming means spending and spending means money outflow. So, the joke or irony here is that the world has more USD than the 'printer/creator/owner' itself! Now, here's the fear factor. If I am vested in this currency and it is poised to devalue [as perceived given the rate of printing, contrary to China's Yuan in exact opposite predicament] and there is no consensus on a new currency candidate as an alternative, saved for the fact that the Chinese Yuan [RMB] has its own strategic agendas as well, 'dump the dollar and get the gold' by far is the 'quickest fix', lest its astronomical price, for any financial savvy.
What we are experiencing now is a major shift from our familiar terms with the USD. It is an inevitable shift as a result of cumulative debts arising from the American's way of managing their monetary affairs and how they define the word 'debt' in their dictionary and regard 'debtor' in the societal and obligatory aspects. We have trusted that we were in good hands but the story has changed. As the value of dollar continues to fall, without the change in monetary policies [spending habits], it only becomes harder and further for the American to reinstate the once glorified position of the dollar amongst the international trade community. We can no longer depend on them to drive the global growth, for every attempt at it is more printing of it.
Governments sell bonds to 'reduce' money supply in the market place. This is how it works, when they sell bonds with a higher return coupon [interest paid], people buy these bonds and the money goes back to the central bank and these people have less to 'spend' and the economy will slow and hence inflation too. And when they want money to go back into its economy, which is the case, they buy back [spend money] these bonds from the market place and hence the money flows back into the economy and so inflation is expected too. Now, the first problem is that the money used for buying back these bonds are not from their reserves [savings] but new money [printed]. But they solve part of the problem, i.e to create jobs and growth. So now, they have the money to keep their banks to continue to lend at low rates and people start to borrow again at low rates to spend recklessly on future income again and that we see they are repeating their mistakes from Subprime. However, the concern here is not the inflation that comes after reckless spending but rather; these printed money will cause bigger trade deficits which is the root cause to the USA financial woes in the past, present and likely the future. They are spending more than they are making at national level. Printing more money will not help them grow their economy 'intrinsically' and it serves only as a 'time-released' remedy that will put them deeper into the problem when the effect is gone. The problem will remain for as long as they deny the simple cashflow principle; 'in' should be faster than 'out'. The ONLY way as I can see, but reckon as an uphill task, is that they start sucking all those money back into their economy as trade surpluses and foreign investments, not the easy way out. It doesn't solve the problem at its root and that is the cause for all bad financial management,when the outs are more than the 'ins', someday you become bankrupted, simple and period. The dilemma here is that they are too dominant, too big and too complex to be bankrupted.
See, truth is, without the 'brilliant' concept of spending future money via lending and borrowing [banking system], we are certainly still in the stone age. It is an important 'invention' of money concept that is paramount to driving and sustaining growth. Credits make the world spins faster. Imagine that banks never lend; they only accept your deposits and pay a small interest. What will happen? One thing for sure, it will kill the big ticket items like automobile and property industries. More than half our population will be out of jobs for that matter. The car makers can't afford to wait for one to take 10 years just to save enough to buy a car from them. Neither can the property developers wait to sell a unit every 30-40 years when one saves enough to pay in full. With the interdependence of sub-economic sectors, the entire economy will doom in this scenario. So, thats how credit lines work in fueling the economy. And for the fast witted, it is not difficult to understand that those GDP numbers we are getting is in someway a huge percentage of credit money at work. The growth in GDP comes at the expense of being burdened with more debts, face it! That's why the picture appears the rosiest at the peak of economic performance. That's the point of time when a nation is at its widest debt's spectrum and there ain't sufficient surpluses from its economic trades to help its people service these debts, it just collapses and you will see, as usual, the typical aftermath of financial casualties aplenty due to 'over-spending'.
If a loan is within serviceable, lending and borrowing is a healthy and must-have pillar of any economy. What if the borrower now cannot service his debts and is now resorting to 'restructuring' the old loans, taking more loans to pay back the old loans and print if still not enough ? COOL? That's Money in[ from] the Air!
The world is recognising this very fact now and waking up to it. "Don't keep the dollar for too long!" one thinks. That's right on the deadly spot - confidence. When confidence is lost, faith is lost, it takes a long time to rebuild. And that's the shift I am talking about. We are in the middle of a transition looking for an alternative to the USD, but there is no deputy 'leadership' that the world has appointed in second to the USA. The chinese is the best candidate and obviously, panic and hungry monies are flowing into the land at a much rapid rate reportedly. That however is a solution only to the more complex players. Are we prepared to use the Yuan as the new currency of the world? I doubt it and I doubt this will ever happen because the chinese has always adopted a 'private' policy in managing their affairs and that is too much risk to rely on a watertight partner.
Therefore, we are now in a time of distress where our neighbours are not keeping their household affairs within their own premises. They are creating a scene at the common corridor and we just can't simply close our doors and pretend that nothing is happening. When will the good old peaceful days be back? Only when the trade surpluses for USA come long and much enough to reduce its debts and money supply. Until then, the shift shall be imminently permanent where the new driver for economic stability and growth will have to be the from asians and the readiness to embrace a switch of roles in global food chain from consumer to producer [USA] and from producers to consumers [ the rest of the world] is the new order to the emerging reality of a new set of global financial challenges and equations. And that is why we seem to have endless unrest in this recent period of time.
0 comments:
Post a Comment