It's Time to Turn Around...thinking about 8.5% Growth?

Sweet memories don't fade faster than the bitter ones.

The question is, whether to default or not to default?
And the answer is, nep.

Can’t blame the Obama administration either can we? They almost inherited a battered, shattered economy with burning issues left for fiscal fantasies. But it seems that they have forgotten J.M. Keynes! Attempting conspicuously to raise the debt ceiling is neither is a good option nor the only fair policy choice. The fiscal fissures left behind by the Republicans bore fruit as their business of corporate bailouts turned out to be lender of last resort’s (Fed Reserve’s) nightmare. Now left with but few policy choices, their primary objective is to deal anyhow and in anyway to avert a default on sovereign debt. Any sweeping budget agreement to reduce deficits by overhauling tax base seems improbable, given that Republicans are up in arms against such initiatives.

But it’s not the Republicans who are to be blamed. They are as patriotic as the Democrats. They all work for a better future, for a better tommorrow. They did what was required, only did they ever undermine the overstimulation of the economy that led to over-borrowing.

However again, Keynes may have some answer. Even if a tax re-write to generate new revenues and channelize those into productive economic growth would in certain, expand the tax-base and create new jobs, raising new money in the old economy seems to be the real problem for the Democrats. What America needs is quality spending since; spending must have some utility or social value.

Although Bush era tax breaks to affluent is to end by 2012, it would be too late altogether for the Democrats. And, how long do you think holding down interest rates to allow cheap borrowing may pursue such goals? Any default on debt will invariably raise borrowing costs (that’s the cost of a default) and that would require to be cushioned through quantitative easing policies.

But this time, the Fed should try a new aspect-qualitative easing against quantitative easing.
Fed Chairman, Dr. Bernanke would be in much more demand in those times again. Can’t blame him either can we? Like Obama, he inherited the Chairmanship of the Fed Reserve following the legacy of Greenspan. And it all started with him soon after. Suppose that the US defaults on domestic and sovereign debts that would invariably cast shadow on the attractiveness of the long-term US Treasury debt papers. For a few years, the 33 Liberty street near the Fed Bank would be deserted almost.

Well, that would cut Mr. Bernanke’s frustration and he can rather buy some quality time. But that’s not a good way out. Macroeconomic structural imbalances should be solved and vigorous stimulation of the domestic economy would be required. In those atmosphere, it may turn out that, to surprise, USA may be growing at a rate of 8.5% again!! That happened during the 1980’s. That can happen now. Americans have a fair history of turnarounds similar to Japan, and this is their last chance perhaps.

Suppose that, if growth returns with full vigor in the USA, bad days for China and their heap of cheap stuffs. But before that happens, and by default, Beijing-Washington debt standoff may be the real factor of gunship diplomacy.

And in those days, it may well sound like the tale of two economies with two currencies- a rising dollar, and a falling renminbi. And that wouldn’t matter much! Even a wildly depreciating renminbi wouldn’t be enough to attract Chinese goods into the US shore.

A contrarian view isn’t it? Well so, what options do really remain for the Democrats?

1. First, extending maturities on bonds set to expire (seems unlikely, but probable)
2. To avoid being marked as a defaulter and lose credit status, privatization as a long-term remedy for the economy (few takers)
3. Package for austerity measures similar to Greece (people would be on the streets)
4. Involve the private sector through large scale private-public partnerships for growth oriented policies and large-scale investments in railways, highways etc. (to create jobs)- (not seemingly a better idea for the Republicans)
5. Selling and issuing more debt (raising debt ceiling-not just only one option)
6. Let China buy more Treasury bonds (not a bad choice-but may lose some fiscal sovereignty this time)
7. New tax levies on banks and investment houses
8. Re-in sourcing jobs by reinsuring new employment
9. Filling tax-loopholes would invariably fill-up fiscal fissures
10. Reorganize defense spending, enough has been done, and off certain, quite important for the long run,
11. Don’t mess-up with the Medicaid.
12. Renegotiate international trade treaties and let the closed economies open up a bit further
13. Don’t just hope for the best; rather toil firm for the best!
14. And don’t let Fed buy up all the treasury debts again
15. Invest in R&D, education, reignite American Dreams*
*(Most important)

These measures would in time, invariably alleviate the long-term deficit problem of the US. Mamas will sing and dance with Billy Joel’s River of Dreams, not to wake up at night and fear about tomorrow. And here again, Keynes is the king, as those were so fair times!


Sources: IHT.

Our Version of a "Good, Bad and Ugly Economy"!

The question is, whether to default or not to?

How would a layman rate the present American economy? Well, it may be the job for the rating agencies-Moody, Fitch and Standard and Poor, as they are marinating for a busy schedule for the judgment day- August 2^nd. For us, it is between “Good, Bad and the Ugly”. A good economy supports lending. A bad economy does not, while the ugliest of all- defaults.

The doomsday clock is ticking faster than it seems. Prioritizing a compromising solution as a last ditch to avert a default seems to be the utmost bread and butter job for the US policy makers these days. Like the ratings’ agencies, they have a busy schedule till 2^nd of August. The next day would belong to rating agencies. What started out as fiscal hedonism has turned out to be a pauper’s austerity? Let’s see.

Financing bailout programs now have almost become 'vogue and vanity' since, behind the wax-lyrical tunes of recovery following every major recession, belies the debilitating melody of writedowns and bailout packages regenerating acute market anxieties. Following the Subprime crisis, the Fed Reserve bailed out the private sector. Now, who would bailout the US government? So, one may hang around one’s own mind and ask, what is making the economies so vulnerable to default? Are these the consequences of policy-breakdowns or outcomes of modern fashionable hedonistic fiscal practices that predisposed those same economies to adopt austerity measures at present?

For the creditors, it’s a matter of “faith”-China and particularly Japan. A default would cost at most about $4.5 trillion of creditors wealth, substantially those of China, Japan and the UK. The days of gunboat diplomacy would invariably end for China, who often mounted threatening calls for a sell-out of their enormous fed treasury holdings-but yet, that’s nevertheless hard earned currency from cheap manufacturing exports. Japan, perhaps, may have the worst pie, had run through one of the worst stagflation for decades, has been through a devastating Tsunami, and well, may loose after everything else, their proud investments in Fed-treasury. That amounts to $900bn, or about 1/5^th of Japan’s yearly output.

So, the question hovers, can Obama administration afford to default? And if they do, what would be the market reactions? Who will win or loose the largest part? This P&L accounting now seems to be both annoyance and anxiety among the investor community globally, since; the attractiveness of the US treasury bills fascinated many a countries to shelve their surplus forex reserves, as a safe haven. The US Treasury bonds are considered most liquid product in the world after hard currency, and they could have never imagined that there would be such a version of liquidity crisis in the US that would dent their faith in it. But it happened.

Again, it’s a matter of confidence and trust-the other import of faith. These countries, not only exported their goods and liquidity (as trade and current account surpluses), but together, their faith through their investments. For the US, suppose that even if they default, the equation won’t change much. It is neither Greece nor Portugal. Being an Ivy-league economy, at most, it may loose credit status temporarily and that too, people will forget after a decade or so. But the Obama administration cannot alienate the vote bank by rolling back Medicaid. Or neither the note bank-the corporate sector-by increasing tax rates.

And if they doesn’t estrange these two, the only option is to alienate the international creditors-ahoy, China! Think like killing two mocking birds with a single stone. Well, not a bad option is it? At least, they don’t have to worry about repaying Chinese debt.

So, the reason, it may become an Ugly economy-By Default.

And suppose that if there was any political motive behind buying U.S. T-debt by China, that would, again ahoy-will be nullified. But that might invoke “gunboat diplomacy”. But first in place, why did China buy so much of US Treasury debt? They found no other better place to invest and channelize their surpluses. And then, perhaps for a better U.S.-Chinese debt symbiosis that may have shaped artificially low interest rate scenario which first led to housing price bubble, and then let it burst. Now, the whole episode turned out to be some borrower’s paradise, and lender’s nightmare. So suppose that the P&L accounting goes wrong for China, what’s their option?

Think before you invest. Think again. And this usually follows every nation that goes bust. And for every creditor who lose by lending.

China can however recuperate and absolve some of the losses by heavily boosting domestic consumption, while, the US, may have indeed very little option but to stimulate and opt for more savings in future, and enforce fiscal prudence in managing deficits and debts. Well, the most lasting and hidden acumen is perhaps, after a short debt-overhang, US may be back in old business, but who knows what lingers for China? Where will they start investing their new sovereign wealth? India may be a good bet next time. And for Japan, perhaps, they won’t be able to afford to lose so much next time!

Well, this is the layman version of a Good, Bad and Ugly economy.

Ref: IHT, Bloomberg.

Liquidity Trap

The U.S. dollar's continuous southward sliding due to rock-bottom interest rates and a Himalaya like budget deficit has become a boon for U.S. exporters,particularly for those technological giants.The Federal Reserve's rate-setting committee will keep the interest rate at where it is, at least for a 4-5 months.So,the Short-term rates will remain near zero till 18th September,which would drive up the prices of oil and gasoline.

Meanwhile,the situation in Japan looks gloomy as the country is devastated by 9.0 magnitude quake and tsunami followed by a nuclear power crisis,The Monetary Authority in Japan was in hibernation for the past twenty years as they didn't do anything to end the deflation.Recently,they had taken the correct measure and by August-September 2011,they will go for another round of easing,that is moving the long-term interest rate to downwards through additional purchase of Japanese government bonds,bypassing the bank note rule.

So,from a liquidity point of view,the additional asset purchase program by the Monetary Authority in U.S. and Japan looks workable to me.

Usual Disclaimer apply

Fiscal mismanagement

Standard and Poor's(S&P's) decision on the long-term credit outlook for the United States from stable to negative is a clear indication that the U.S. administration is in mid of a chaotic fiscal mismanagement,which could spark another financial crisis,if left unchecked.

In the coming months,the rising interest rates combined with a Himalaya like fiscal burden could jeoparadize the economic recovery and subsequently could drive the economy right back into the recession !

The immediate task for the over-confident Obama administration is to reduce the mammoth debt ,which is 99 per cent of G.D.P. to a safe level,or else the Investor will dump the U.S. debt and in some extent,the dollar for a safe heaven like Gold and German bonds.

NYSE and the hostile bid by Nasdaq

Chances are high that 219 years old NYSE, a symbol of American capitalism may reject the increased offer of $47.98 a share bid by Nasdaq OMX/ICE.Of course,borrowing the additional amount could be a herculean task for Nasdaq,but in 2005,the company somehow managed to overcome the borrowing process when the management in Nasdaq was successful on their bid to the Inet electronics system.Yes,its very risky but at the same time,Robert Greifeld looks very confident and calm right from the beginning.

So,how much would Nasdaq OXM/ICE owe if the company managed to succeed with the bid? Well,it could be around $6.48 billion with an additional refinancing cost which would be very difficult to payback.Things are now quite different from 2005, So Mr.Greifeld should be careful.

In my view,NYSE should reject the pauper bid by Deutsche Boerse's as well as of Nasdaq OMX/ICE offer.That would be good for the general investor and shareholders in the long run. Deutsche Boerse's offer comes with a nationalistic concern while the hostile bid by Nasdaq OMX/ICE,though very attractive, would be a catastrophe for the shareholder in the long term.Splitting the company dose not makes sense to me.With piles of debt and a massive job cut on the card,the Nasdaq bid would be too povre for NYSE as well as for the economy.

Debt trap-part 2

The continuous arm-twisting by Germany over those indebted countries like Greece,Ireland, Portugal and Spain could spark a revolt within Southern European countries. Yes,I agree that Greece,Ireland,Spain and Portugal would be much better off without the common currency,but unfortunately there is no provision for allowing a member country to leave the Euro-zone.We can say that this is a political debt trap which would destabilize the region in the coming months.

The Southern European countries have to leave the common currency so they can devalue their own currency as soon as possible.The five year Greek credit default swaps climbs to as high as of 1,070 basis points while Portugal 10 -year bond yields hit euro with skyrocketing 9.16 percent ! Its so chaotic all over the Mediterranean due to the austerity measure taken by these countries.

Time has come for the Mediterranean countries to think more sensibly about staying together in the Euro-zone and to be controlled by Germany to follow the austerity measure blindly.

Insider trading: Rajaratnam episode-2

As the insider trading trial of Galleon Group captivated much of the wall street with suspense,it becomes clear that Raj Rajaratnam will face the jail term in the coming days.The taped conversation that can spoil all the hard work done by Mr.Rajaratnam's lawyer going to be a decisive factor.


Mr.John Dowd,a lawyer for Mr.Rajaratnam would find it difficult in his bid to keep his billionaire client out of prison.This case is different from the trials of John Rigas or David .L.Sokol,who the prosecutor says that he brought nearly 100,000 shares of Lubrizol on illegal tips.


In those trial,there were no recorded call tapes as well as those documents presented by the two sides didn't match correctly ! But things are quite different in Rajaratnam's trial.He will face the jail sentence,at least for a ten to twenty years.