Some “Hard Decisions” and “Soft Bargains”...

I don’t fully agree with the author’s view published in an article yesterday in NY Times News Services. The author may be right on some aspects, but I have something more to point out. The US economy suffers from under-savings- that’s what I mean. They might have spent much, but saved too less. Those spending- quite rightly pointed out by the author, may be ascribed to military expenditures or homeland securities which however, can be well justified given the post 9/11 security concerns. But on healthcare, it’s like an odd-even puzzle. Can’t say those were too wasteful either.

Well so, things aren’t going as though they seems to be somewhere between a ‘tough bargain for a simple deal’. That was all mandated, and all which was required to keep ticking the hopes of a turnaround show. But to speak, The Whitehouse now seems to have become the hotbed for some diplomatic DJs. Indeed, perhaps they could go all the Gaga way...for some good music.

The economy continues to weaken. Productivity is slowing down. It’s not that about always having a whole piece of cake.

And not even that of forever having some good luck. It’s about morality which even a moron knows well.

• Indeed, President Obama still occupies important place in the hearts of the millions, not only in America, but in the entire world. And so is the reason he is trying hard to bring in some change-both in policies and practices. These days, he has but very few options except for a dip in the pink, well, you need to go into debt first. That’s the norm these days, yet unavoidable.
What is avoidable and can be averted is-a ‘hard luck’ for America from ever hanging in an innovation and productivity shortfall, as also, to avert a potential disinflationary shock. Well, let’s go a little deeper, down the line, a few decades ago, and review how things got fared up in those fair days.

USA had experienced post-war high unemployment rate a couple of times earlier, so it’s not unusual, and it peaked from 6% to 10.5% by the mid 1982. What was unusual was that, inflation was already double digit by 1979!

That was Volcker era, and he left a legacy. For three years following 1979-1982, the ultimate policy target of the Fed was to contain inflation. Well, inflation though did come down to 5%, but unemployment rate rose to double digit (10%). One retort led to another facade!

So what did the Fed try?

Under Fed Reserve Chairman Paul Volcker, they returned to previous interest-rate operating maneuvers and initiated a managed program which reduced unemployment rate to 6%. A decade and a half later, it was 4.7% by 1997, at the same time, when the Euro zone unemployment rate stood at 12% (even now, they aren’t better off yet). So, what brought down the rate? Did they “pass-off” the triad to Europe? Well again, this assumption is moronic.

Actually, the expansionary monetary policy of the Fed during the 1972 led to inflationary build-up. Following this, there were two oil-price shocks- from 1973-74 and 1978-79. But before that, the Vietnam War led to price acceleration due to demand surge. And the counter-inflationary monetary policies led to four successive recessions, starting from the summer of 1969 to most notably of the 1972-76.

So, if on one hand easy monetary policy led to inflation, countering that led to high unemployment rate on the other. And yet again, you need to be back on the same track. But things took different shape from the beginning of the new millennium. Low interest rate, coupled with low inflation triggered a huge credit boom. And when the rates rose, everything fell off. And it’s heading for a stagflation right now which actually never happened in the USA before.

So far, and so well. The Fed seems to be already “fed-up” playing the cat-and-mouse game of “chasingflation”- once inflation, then again unemployment rate, and yet again disinflation. The Fed nowadays is just hoping for 'baby one more time- come back inflation' and we will do the rest! But now, Dr. Bernanke is more concerned with the macro-economic stability for the time being, after so much of economic and financial market chaos. Note that he is armed with a more powerful economic but rather diplomatic stuff- the Fed Fund Rate.

• Dr. Bernanke belongs to the aristocracy of those star economists who have under their credit more than a dozen publications on the cause and effects of recession. So, it’s good to see that the whole of his tenure as Fed Chairmanship has been much devoted to experiencing what a grand recession feels like in practice.

So, it’s a great paradox of who will win the next election? But that doesn’t mean to give up to the political chores. Whoever wins, rationality has to be restored. Since, the synonym (other meaning) of the word “Republican” means “Democracy”, so, that’s all about the two face of a single coin. And that’s democracy after all, in a re-elected republic state. President Obama isn’t happy at all with all those diplomatic leg-pulling politics well adapted by the Republicans, to which, he accused them of holding back developmental initiatives.

Well, I don’t believe this, neither do I doubt.

Still, someone might have learned somehow, something from Anna Hazare- only, the place and the cause isn’t so cogent. But the timing was perfect.

Even if the global markets are fighting among themselves for more genial financial innovation and reforms, the real reform perhaps awaits from the general mass of America, through her people and practice.

Put that all together, you may still get a full one and a year half to observe how things get going, either gaga way, or a way out. The politico may have to take very often, rough and tough decisions, rather few “hard decisions” with some “soft bargains” just to make sure that America doesn’t fall back into an extra double-dip recession( a giant recession with a smaller one free!), and this cannot be some discount shopping anyway, since that would be too awful for the global economy at large.

A New Indian dream

Today is our Independence Day. This is a very special day for each and every Indian, whether at home or abroad. Exactly 64 years ago, our country got liberated from the British Empire. And from then on, we started to move on a new path with new hope, leaving behind the agony of being ruled by colonial power-Britain. Our forefathers and freedom fighters left for us a beautiful country spanning from the Himalayas in the north to the Kanyakumari in the south, from Gujarat in the west to the far eastern province of Arunachal Pradesh to Mizoram, and so is our National Anthem “Jana gana mana” covering each and every state and provinces of this great motherland. Today, we sing our “National Anthem” with full vigor that holds more than our billion souls together on a same string of love, peace, forgiveness, equality and liberty. This day, let us pay homage to those great freedom fighters, who are but our great forefathers, and who selflessly sacrificed their lives to liberate our country from Britain.

Freedom is Independence, and Independence is Freedom!
Freedom is the most essential element of our life, as also, for our country. From the shackles of bondage, while turning back the pages of our eternal history, reveals our freedom fighters among many, Mangal Pandey, Rani Laxmibai of Jhansi, Shahid Bhagat Singh, Khudiram, Netaji Subhash Chandra Bose and others who fought bravely for this great country, gave up their life and died fighting valiantly, taking bullets and gallows smiling all the way to reach the heaven of martyrdom. They did this because they thought for us, our new generations, and generations to come, and for this very freedom and independence which we have today, so that, our life will be free from oppression and suppression from the colonial power-Britain, and also because, we can think independently, and work autonomously, which we do today.

Today is our day to be reunited again, by the common melody of harmony and accord, joy and happiness and today is the day to reckon that our independence came after much agony and pain, we lost our greater parts of Bengal and Punjab, forever, following the partition. But again, this is also not the time to look back, but to look ahead for a better India, more prosperous, united and shining with splendor and magnificence while keeping our past hardships in the cover.
From that very auspicious day, August the 15th 1947, we started thinking independently, for us and our nation, collectively. And today, we ought to take that initiative again and reignite our soul to think united for a better India, full of opportunities and new prospects, as our country is racing past the time in full vigor, both economically, and politically.

India today is differently afresh, politically matured, and filled with vigor and potency, undeterred yet committed, firm yet flexible, competent and proficient, with our talent skillful and adept enough with our billion souls boasting just one “single unique dream- The New Indian Dream” that would fulfill those billion dreams. A dream that was dreamt by many, and now, it’s time to turn those into full reality. Nothing can stop India from achieving what other big league countries have achieved.

Our country is at the forefront of the world economy, with 8.5% GDP growth and a GDP on PPP basis at $3.5 trillion, the eleventh largest in the world by output, and third largest by purchasing power parity. This will soon double within no time.

Today, we can think about doing and achieving what any other nation in this world can do. We can also think about doing what others cannot even afford to do. That’s our ability spanning from our deep-rooted history of endurance through hard labour. This arrival on the global platform is different from our past. This is a new day, with new hopes, and no despair, but only bloom and blossom and let the world see what is happening in India, why is there so much of an “Indian Phenomenon”? And in no less time, India will not only catch up, but beat every other “equal” in terms of economic leadership and prosperity, in knowledge and in technology.

So how can one describe India?
Behold this great land of the people who worship Lord Shiva and start their day with a Sun Bath every dawn. India, yes, the mystic land of beauty where the Himalayas abode as the crown of this golden land, and where the Holy Ganges purifies the heart and soul of this ancient “land of the earliest civilization”, and where the oceans and seas washes the feet of this mystic land. Yes, this is our “Incredible India”! A country with a history as old as the history of the world itself, civilizations that was enlightened from the very beginning of sunrise and the country which taught the lessons of love, tolerance, peace, politics, medicine and economics, and what not? In effect, India boasts the largest diversity of her kind both in her ecosystem and her people, yet, united by the rhythmic string of a common song of love and eternal bond with her past legacy and her present people, to her future endeavors. Diverse food habits, customs and practices provide one an entirely unique ground for an inquisitive mind to go deeper inside the heart and soul of this GreatLand and unleash the treasure that this country boasts. India is never truly discovered unless one goes deep into the plain-land of this country, deep enough inside the country-life of Indian villagers which offers the only one-of-its kind in this planet.

About our Cultural and Anthropological Past:
Our Heritage:
Our heritage lies in our deep-rooted treasure-the origin of our knowledge, Veda and Bhagabat Gita that taught us morality, principles and ethics, gave us philosophy and adorned our minds with innumerable jewels that could be found only in this heartland for centuries. Yet, we take pride that we accept others views and adorn secularity in the matter of faith and religion. No matter, whether you are a Hindu, Muslim, Christian or Sikh, or Buddhist and Jains or Jews or Parsis, we invite all and accept all their belief, since, from a point of true intellectuality, it is very difficult to draw even a fine line among any religion, because, they all teach the same! And that is tolerance.

This country is the birthplace of some of the great sages of the ages, and of great personalities adorned far and wide, from the Far East to the Far west, and from polar north to the poles of south, and it is India, who taught the world about non-violence and so we have great leaders like Emperor Asoka and Mahatma Gandhi. And so is the birthplace of Gautama Buddha and his preaching’s in Buddhism, followed widely all across the world. And so we are proud to have great reformers in Swami Vivekananda, Bal Gangadhar Tilak, Raja Rammohan Roy, Dr. Rajendra Prasad, Motilal Nehru , Jawaharlal Nehru, Lal Bahadur Shastri, Dr. B.R. Ambedkar and Rishi Arobindo, among others.

It was a time when the world looked at India, through her excellence in education and knowledge, from far and wide as is evident from relics of Nalanda University (which is soon to be reopened). It is again that the West and the rest- of the world are looking at India again(look India policy), for the immense opportunities that she presents to the world, and share those in equitable vanity.

Indeed there are some problems of inequality and poverty, but these can all be overcome by the collective effort and participative role of all the Indians and to keep alive those dreams, and turn those into reality about -a New Indian dream.

“Jai Hind” and "Jai Ho...."

Is there a future without growth?

I doubted it. This was palpable, but in reality, not palatable. So, questions are invariably being raised on the issue of reliance on ratings and the rating agencies in regulation and for investment mandates.

And that’s not trifling nevertheless. The inebriated public borrowing practices of the US government that led to this ‘debt trap’ cannot but, invite downgrade and that was apparent. So I’m not surprised.

What I am surprised is at; the policy makers are up to some game planning that is undermining the theory of economic growth. They are fantasizing about a future without growth!

The social conception of unemployment has changed much since the last millennium. Now, the art of thinking about growth needs to be examined from a different perspective, given the regular bouts of business cycle fluctuations. And somehow, that equilibrium needs to be quickly restored.

See, you do all sorts of dim-witted things and expect people to admire you-that’s ridiculous! Actually, the ratings agencies did that exactly before the credit crisis. Well, they never expected those things that they call financial innovation (the mortgage-backed securities traded as wind and air-backed instruments) could take ugly shape, and few of them understood the intricacies, payoffs, risks inherent and details of those securitized designs. That was venture pollution, or rather speculative smog and the SEC is working hard to clean-off the haze. Inevitably, that required huge investments, rather bailout programs costing billions of much wanted greenbacks, thus making it weaker.

And now, they won’t do it again. Well, there is no payoff anyway. Mr. Bernanke is stuck to the great idea of zero-percent fed fund rate policy, just to stave off inflation that is never going to happen in the US, well, for the time being. However, in one way or other, these recent episodes will at least dampen global purchase of US debt. Mr. Bernanke since long time is strictly focusing on reviving the economy from a phenomenon known as Stagflation- a very common trend in Japan. Note that Japan’s debt is around 189% of their GDP, the highest so far. They lead them all (in the matter of debt). The toxic recombination of slow growth and high debt does worry everyone concerned with the economy since; Japan is still not out of it (the stagflation) even after a decade. Once, if the US is deeply ever into it, that’s sure to stunt the economy back into some spiraling no-growth-little-inflation story, at least for the next 10-15 years. That’s a bad bet anyhow.

But how is all that helping the American economy anyway? Is it creating enough jobs, bringing down unemployment levels or stimulating business sentiment or credit growth and uptake? The unemployment rate is stubbornly high at 9.1%.

Is there a future without growth?

A package of austerity becomes more painful during hard-times, we all know. It is not a takeaway piecemeal. What could have been imposed rather- enforcing the private sector to shoulder some of the burden of debt restructuring and their participation would ensure that they understand and respect what a debt crisis really means (People like Madoff). And that’s not just extending bailout funds to rescue those deeply indebted. There is something more than that- responsibility and restraint.

Everything works well during boom times. Things are taken as granted, even if they seem to be murkier. So did the happy business of credit therapy and leverage spas. They mushroomed all over the Wall-Street, in hidden alleys and gloomy corners. They did some brisk business. But those were so fair times!

Time is different now, and more precious than money. And it is running out.

America doesn’t have a labor centric jobs-for-votes electorate system, as like Greece or India. But that seems to be changing now. The recent Reuter/Ipsos poll proves that. As much as 73% of the results say that US is on the wrong track. As Ipsos pollster Julia Clark summed it up with a beautiful moral-“When the economy is bad, people look for a Change”. And so, there’s much to worry about a reelection campaign for the Nobel Prize winner President Obama who will be seeking a second term. The balance of power is tilting slowly against all odds. Now, it seems that the Republicans too aren’t as popular as they used be before the debt deal negotiations. So, what’s the third option?

Learn from Chindia! Cheekooo!!!

Well, there is at least one common principle among the Chinese. They don’t think too much about what has happened!

Things destined to happen has already occurred. No use in churning back those gone-by episodes. You can’t change your past, yet you can make a huge difference in your future, and so, they try to make their present as memorable as possible. They work hard to achieve those. Americans will have to work harder, even more than they used to, to put their house in order.
Expect a new decade of cheaper “Made in Wonderland-(America)” products flooding the world markets. Those would be much cheaper than China I can tell you! And better off course.

As for us Indians, we do not used to think too much as well complicated and hence, we seldom play with risk. However, we do think too much about what went wrong and do spend half of our life lamenting about those episodes. So, we are rather half-way down the line between US and China. Yet, for the Chinese, they have a huge appetite for victuals, but a very small one for their hard-earned money. That’s the reason they invest in risk free productive assets (they invest in labor-intensive industry, having the highest number of SEZ per country in the world) and hence savings rate more (savings rate @54% of GDP). Same goes with us, Indians, the exception being, we do not invest humanly in productivity and yet, saving rate is still one of the highest (savings rate @35.7% of GDP) - due to over-regulated labour market, and off course, economic growth!
As for the Americans, ahoy, they followed an entirely innovative trend- invest all your money in risky assets and just do the job of counting your chicken before they hatch. Hey, that’s funny.

The reason they are working hard to count those ever burgeoning national debt and the clock is still ticking! In terms of savings rate, Japan and Germany are still better off, both at 26% of GDP, compared to USA’s 13%.

That’s a different way of thinking after all! And the reason that is why it is; America-the Wonderland! They took the risk, which did pay off in those good times and the economy is still now by far the largest. A huge, complex economy is sure to have many intricacies, a few hiccoughs can occur, and problems can indeed get too tricky. A few sneezes from the US, and the rest of the world is destined to catch cold.

So now, rather than thinking too far beyond temporal domains, they have much important work on too near at hand to clean up the mess.

Nobody desires a ghost economy!

Is this a "Fair Deal"?

“Science the Endless Frontier”-Do you remember? At least, one Bush was correct.

We had two Hot wars, one Cold war, well, this War is freezing!

So well, so it’s over. And that’s for the time being. The stalemate was broken, albeit with some compromise. The debt ceiling was raised, just-in-time. Save the last word-default.

This episode reminds me of a Roman Polanski film. Always somewhere, there tends to remain something sort of a fiscal mess. And somehow, it gets ignored.

So, the new question that certainly lingers in our capacitive mind is- are there any possibilities of a growth rebound in the US? After so much of traumatic deliberations and anxious moments of despair and hope, when we see a certain glimpse of light that offer us some optimism, that’s sure to boost up our expectations. Expectations that hang around in our mind -is of a better tomorrow, about winds of fresh reforms, those sunbathed and tanned brown enough to glitter as golden twilights at the end of the day. Visit snookville, you will feel it!

But all that glitter is not gold. True it is- as an old saying. Considering the structure of the deal, with some cuts here and there to cover budget expenses and trim down expenditures, that doesn’t really seem to be an extraordinary deal. As was evident by the subsequent downgrade by S&P (some others are in the line) that’s however, may not be a great concern for investors. There had to be some concessions anyway, yet, it was tough enough to bargain.

But was there anything stimulating? Perhaps not!
A Tea party break;

The effort should have aimed, in part, for some growth-minded fiscal consolidation, similar to one that of Canada. That means, cutting spending judiciously and not to burden the already overburdened taxpayers. This is roughly striking a deal to avoid default just to borrow more! What was required is to reignite the old economy with a new spark plug.

And that’s what was done following the WWII. That time, the requirement was Investment in education and ‘Blue Skies Research’ to regenerate ‘quality capital’- human and technological, both. That’s what led to the origin of genetics and stem cell of which we talk much about today. What is required now, rather than cutting funding in fundamental research, reallocate and ‘flush’ the education system with new capital.

This would in time ripe enough to generate innovation and entrepreneurship (growth), new product, leadership, and technology development, which means (more business) and technology leverage. That was the goal of that report. And that should have been now, yet again!

One can’t expect a workforce to end up doing job like “counting of national public debt” forever. The debt clock in Times Square will do that.

It is always a better option to “leverage” technology as far as possible, for scientific research rather than leveraging liquidity for financial gains. Someday, that liquidity may vanish, with all those financers as well (hope we all remember) but technology would leave a mark on the society. It’s better to avoid such a “liquidity trap”-in future. But what about the fat pay checks of Wall-Street hunkers? They got some lesson by investing in the wind and air of Wall-Street. Balloon bubbled and blew off. So, they opted for $1 pay checks. That’s a surreal austerity.

What’s required is investment in something productive-human capital, as Warren Buffet once said. And that means growth which means surplus, and no future debt concern-no hangover episodes. It is true that extraordinary growth leads to surplus- China is already there, and there is oversupply of growth in China (trying hard to cool it off). So, it’s better to emulate and get stimulated rather than to sit back and think over it again, what went wrong.

Rational choice! That’s what the Scientific Committee on Research presented as a report to the then President Roosevelt by Vannevar Bush, Director of Office, Science R&D which read as, “Science the Endless Frontier”.

Full report: http://www.nsf.gov/about/history/vbush1945.htm#ch1.1

This is vital, just to evolve not to devolve and fall back behind.
Obama administration had few options. On one hand, a credit downgrade would have raised borrowing costs. On the other, an abrupt default, well, you can guess. So in some tune, it is much like a credible plan to reduce debt by at least $2 trillion over 10 years. But to some noted economists, fiscal consolidation at the midst of a crisis of this sort is not a receptive action. That was attempted before, in 1937 following the Great depression and which led to a greater misery. But it’s not that austerity measures do not help at all. It worked miracle following the German reunification when East Germany was absorbed and build by the theory based on reducing spending and raising taxes.

Why it’s struggling with Greece then? And why it won’t work with America anyway?
East Germany has been an eastern bloc nation post WWII under the Soviet proscribed communist zone. The sphere of influence was arguably, some sort of communist sponsored economic hardship-molded in austerity regime and so, ‘that stuff’ was already there, as part and parcel. Hence nothing new when compared to the dream of an economic autonomy and liberty that the West Germany already had. In another tune, it was not America in that sense. They accepted what was destined to be provided by the West Germany post reunification. And they accepted the challenge. They did well. While, Greece going by their charismatic survival of great pantheons and a hedonistic history in profligacy, that’s not enough. Nobody wants to lose something when one gets used to the stuff. That’s addiction.

So austerity drive won’t work for America.

The point is, Growth creates expectation-Deflation results in anxiety, and more austerity!
Can’t say whether George Bush & Co. was right or wrong-but Vannevar Bush was in fact, correct in 1945. That’s a ‘Bush’ legacy. Follow it up!

Source: IHT, Bloomberg, Reuters.

Learning the art of defaulting!

Well, it’s almost rush hour time at the White House. That reminds me of Jackie Chan.

Yes, perhaps, the Obama team must be pursuing something-some kind of ‘fiscal miracle’ much acrobatically at the last hour. They don’t need stuntmen. They are ought to do the stunts by themselves. Something special, that would ensure that he keeps his last pledge. Just to make certain that the rest of the world worry less about the debt hangover III episode.

And keep faith in American economy, he says amongst all those “Rumble in the Whitehouse”.

That’s not a bad saying. After all, people tend to work hard under pressure, and ideas flourish better under stress, which I buy, ‘sometimes default pressure is a welcoming stimulus for a lame economy’.

However, in fear of losing sovereign credit status and to prove the credibility of the government in handling crisis, the crisis management team has swung in full action to avert an inevitable default. What better can they do? Work hard- it’s now or never!

It seems they are working really hard to counter all odds.

Indeed, it wouldn’t have gone so far if the Washington would have managed endogenous (domestic) deficits with prudency that has now bubbled into exogenous (external) debt. Well, the blame game goes on...

There is a lesson to be learned from this violent yet lurid episode. Be rational.

Yet, for all those countries that does not have sustainable fiscal policies and are in the act of merrymaking with their fiscal ascendancy, this is a perfect time to rethink about fiscal prudency. Else, they will need to perform stunts in future.

The pitfalls of conspicuously raising debt ceilings are evident as it laid the foundation stone for many a country toward defaulting on their sovereign debts. Consider Italy- the tenth largest in the world and fifth largest economy in the eurozone by output measured at $2.01 trillion(2010), has a debt ratio to GDP at 119%. The fact is, borrowing costs are increasing for Italy and a rise above 6% risks contagion. The cost of debt financing now stands at 5.67% for Italy. Even Germany is not spared and has debt-to-GDP ratio at 83%. For instance, just concerns about high debt induce a rise in borrowing costs similar as mouthwatering happens when we think of sausages (Pavlov was right about dogs!). Sausages are to cost more as investors are always fine-tuned to drive borrowing costs to unsustainable levels. Can’t blame them, it’s their money chick.

And when there are the Republicans up in arms against the Democrats, Italy is not far back. There is an ongoing tussle between Finance Minister Giulio Tremonti and Prime Minister Berlusconi. They don’t agree and love discordances. That's...what you call animal instinct. Can't blame, we all have this!

Italy has few options to avoid default, and some options not to. How? By selling more debt by issuing more bonds. Yes, that’s the tip. Italy issues largest amounts of bonds in the Eurozone. It is a cunning jackal in E.U. But that made Italy’s accumulated debt load surpass 119% of GDP. Tough job for the new IMF boss only if Italy defaults! Rating agencies are more cautious since the days of subprime blame game started, and they would not hesitate declaring a country as ‘selective default’ or cut ratings outright.

Nobody wants to take the blame.

It seems that they are into some competition of borrowing and selling debt. Being proud owner of debt is now a fad and fashion. But this fashion was more prevalent among the emerging markets a few decades ago. Yehee! Times have changed but they have not!

It seems now that the IMF boss Lagarde is following the legacy of Bernanke and President Obama by inheriting nothing at all!

An assessment of debt-burdened euro area reveals more crowning jewels. This growing turmoil in the financial markets is leading to head spinoff spooky dog trails, making one country a bedfellow to another. What a theatrical performance!

Greece has three potential and active lenders, the IMF, ECB and the EC. But these institutions are having many borrowers queuing up for alms. And the IMF and the ECB are out to reducing burdens on Greece by cutting their interest rates and extending loan maturities as well, helping buyback their bonds above all, with two tranches of bailout packages. It’s urgent that ECB should look into governance reforms in the eurozone area.

But money doesn’t grow in plants. They grow by practice of hard labor and productivity. These lenders ought to think about financing bailouts that is growing by the day, and emerging by night. And that’s about economic growth. But eurozone countries are not growing and that’s troubling for these lenders of last resort.

Germany has well learned the lesson when it tasted recession at the very beginning of this millennium (2003) at the same time, when the world started to walk into the path of bubbly stardom. However, Germany revived their economy, and now being on a remarkably high growth territory, has become neighbor’s envy but owner’s (Merkel’s) pride.

Endless bouts of austerity may lead to stagnant growth and expanding bailout funds is putting pressure on the euro currency. And following all this, they then have another job to perform- resuscitating the capital market reputation of sovereign defaulters.

So, Obama team must be at something between the two ends of a hotdog- which is better, defaulting on the external debt or tighter macroeconomic measures?

And who knows and cares about some “other hidden debts” of the government?

The real fact is, every button has a hole. The question is, how big it is?

Source: IHT

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.