The US House of Representatives has passed a "China currency" bill that would authorize the US officials to take economic actions against China, if China was found to manipulate its currency. And we all know that China is indeed keeping its currency artificially low by intervening in foreign-exchange markets and through various capital controls. So, I had a conversation regarding this with the person standing straight against me in the mirror - his name is "Mirror Image".
Me: So, now is the US supposed to take action against China?
Mirror Image: Well, technically looks like that's what US should do as per the rules.
Me: But wait a minute, should the US take actions now? Is this what our priority is now?
Mirror Image: Hey, our priority is to create jobs! And so we need to take action.
Me: But what's trade sanctions against China going to do with creating jobs?
Mirror Image: It will bring the US jobs back.
Me: You mean the capital intensive manufacturing jobs?
Mirror Image: Yes, the capital intensive manufacturing jobs.
Me: Wait a minute, I am confused. So, in other words, if China allows its currency to appreciate then the US will have its manufacturing jobs back?
Mirror Image: Hmmm...I think yes.
Me: Can you explain?
Mirror Image: Well, see, if China allows its currency to appreciate, then the Chinese consumers will have more purchasing power and they can buy more from us. Also, if Chinese currency appreciates, then US consumers will buy less from China while Chinese will buy more from US, thereby reducing US' trade deficit.
Me: Alright, what you said is true but I am still not clear - how will that create jobs in US?
Mirror Image: Well, if Chinese buy more from US, then US will be the producer, creating jobs, and China will be the consumer.
Me: Which Chinese consumer are you talking about - rich, middle-class or poor?
Mirror Image: All
Me: See, consumption by the rich really would not differ much due to the depreciation in the dollar because they are rich and they can afford even at current prices. Now, if you are talking about the middle-class and poor Chinese, you are very misguided. I have told you many times that around 35% - 40% of the Chinese GDP is contributed by exports and any loss in the export sector would lead to innumerable job losses in the middle-class and poor societies of China - then they cannot afford to buy "American" products.
Oh by the way, did you read the news yesterday - Here are some highlights from bloomberg.com -
"The dollar declined 2.2 percent to $1.3790 per euro, the weakest level since March 17" ;
"The U.S. currency weakened to 83.27 yen, from 84.21 yen the previous week";
"The Dollar Index declined 5.4 percent in September, the biggest monthly decline since May 2009 when it fell 6.2 percent";
"South Korea’s won led gains with a 2.2 percent weekly jump to 1,130.45 per dollar";
"The Australian and New Zealand dollars each rose 1.4 this week against the greenback as investors looked for higher interest rates"
"The Bloomberg Correlation-Weighted Currencies Indices show the dollar has declined 2.4 percent this year against a basket of currencies from 10 developed-world nations"
"The Swiss franc gained 1 percent against the greenback finishing the week at 0.0938 per dollar."
What all the above says is that the dollar has weakened against most of the major currencies throughout this year, which tells that the American exporters should have a better export atmosphere. But despite dollar's weakness against all these currencies, is it still the Chinese yuan's weakness against the dollar that is holding up jobs getting created in US?
Mirror Image: You are making me think now.....Hey, but since the Chinese yuan will have better purchasing power if they appreciate their currency, the Chinese govt. can diversify their investments and make the country less export-dependent.
Me: All this you want to happen in a few months from now? Are you dreaming? Did you forget that these are not service jobs to bring it back immediately, these are capital intensive manufacturing jobs and it takes years to build factories and other infra-structure in US, but which China already has and that could be used by other countries to make products cheap in China.
Mirror Image: But then we have to create jobs.
Me: Exactly! That's what I am saying too. We have to concentrate on creating jobs in US rather than complaining about China's currency policy. While undoubtedly, China has to start allowing its currency to float more freely, for which China has to first diversify its economy through investments in "other" areas, we have no time now to fight China over its currency policies - this is just a political distraction.
Mirror Image: But people argue that US is not even facing inflation rather we are facing disinflation and fearing deflation. So, again, its ok if prices go up in US due to China appreciating its currency. IS this because of this "inflation" worry that you don't want to fight China over its currency policy.
Me: No, go and think again what I said. And since you have brought this inflation/deflation topic, I would like to tell you about the other article that I read in businessweek.com. Here is the head line - "Companies Reluctant to Hike Prices Despite Rising Costs" and it further further goes to say - "Commodity prices and other corporate costs are headed higher, but many consumers refuse to pay more for products. The result could be weaker profits and slower hiring".
So, does that make it clear for you that its not deflation of inflation now - its deflation or stagflation - oh yea, we haven't come to the stagflation stage yet and I do not want to, but if jobs are not created through proper investments in right infrastructure, technology and people and if right incentives are not given to the right people then years down the road stagflation might be a topic of discussion.
Mirror Image: We are facing disinflation now!!!!
Me: Yes, agree, but see the data, we won't face deflation either. Its all because, some countries (both developed and developing) countries are growing at enormous and good rates while some are not growing or are growing too slowly. It's a complicated global macro-economic situation which we will talk later.
Mirror Image: Ok, ok. But again, we need jobs and by the way, we need manufacturing jobs!
Me: Good. I agree. But I don't agree that we have to be concentrating on bringing our jobs back from China, infact they are no more "our" jobs, but instead we should concentrate on creating new jobs and preserving those jobs for future generations of people of the US.
Mirror Image: So what you say should we do for that?
Me: The people of US have a great innovative mind. I don't think they need suggestions, they just need support - "quality" support from policy-makers.
Mirror Image: Is that all?
Me: Seems simple right? But hey, I said that the support is needed from policy-makers. So its not that easy.
Mirror Image: Oh yea, I hear you friend!
Me: All right, got to go, nice talking to you buddy.
Mirror Image: Same here man - see you soon when you comb your hair! :)
Sources:
1. http://www.bbc.co.uk/news/business-11437808
2. http://www.bloomberg.com/news/2010-10-02/dollar-falls-to-6-month-low-versus-euro-as-fed-view-dims-u-s-asset-allure.html
3. http://www.businessweek.com/investor/content/sep2010/pi20100924_590869.htm
Sunday, October 3, 2010
Thursday, September 30, 2010
Rupee Appreciation! - Nothing to worry!
The Asian Development Bank (ADB) in its recent report has projected a GDP growth of 8.5% for India during the fiscal year 2010-11. This is in line with the Indian government's projections. In the same report, ADB has expressed concerns about the high inflation (currently at 8.5% in August) and appreciation of the "Rupee", the Indian currency.
There is no doubt that there is a surge in capital inflows into India. In general, emerging market shares have been performing at record levels compared to developed economies and there is abundant foreign direct investment (FDI) flow into India. While high inflation is definitely a concern (especially food inflation which remains at record levels - 16.44% for the week ended September 18,2010), I don't see the rupee appreciation, at the current levels, to be a great concern.
While the rupee has appreciated more than 11% in real terms between August 2009 and August 2010, most of the appreciation was due to more-than-normal weakening of the rupee during the early part of the year. This was due to the surge in investments in the US dollar, when investors were fleeing for safety due to uncertain economic conditions. But when we look at it from a multi-year perspective, the nominal appreciation of the rupee should be around 5%-7%, which I see as a positive factor.
Remember, only 15% - 20% of India's GDP is contributed by exports and around 60%-70% is contributed by consumer spending . Now, there is no doubt that some very crucial export areas remain which act as drivers of growth and income for many other non-export sectors of the economy. But I still think that the negative effect on these sectors due to rupee appreciation at current levels is bearable and any short-term negative effects in these sectors could be offset to a certain extent by providing incentives. But when looked from the other angle, a stronger rupee would help to diversify investments in the economy which in the longer run should be able to offset the negative impacts of rupee appreciation in certain export industries.
Also, if a major portion of the capital inflows result in real job creation, thereby fuelling consumer demand, then any resulting inflation could be tackled by standard monetary policy tools.
And if right investments are done, with correct monetary policies in place, then a stronger demand from the Indian consumers is actually a boon to the global economy. From a global macro-economic perspective, we need strong demand from the consumers in the emerging markets during the coming years to fill the vacuum left by the consumers in the developed economies.
All this being said, ADB is concerned about the over-appreciation of the rupee in the coming years. I still do not see any clear signs for that. If foreign investment policies are rightly structured supported by sound monetary and government policies, then a growth in the inflow of foreign money should be balanced by import demands from the Indian consumers in the coming years, apart from an improvement in the quality of exports - all of which I see as a good sign from a global perspective. There are very many global factors involved in this but assuming the current status-quo of global competitiveness of the countries remain, I don't see a reason to worry about the current trends in the appreciation of the rupee.
Source(s):
1. http://www.adb.org/Media/Articles/2010/13337-indian-development-outlooks/
There is no doubt that there is a surge in capital inflows into India. In general, emerging market shares have been performing at record levels compared to developed economies and there is abundant foreign direct investment (FDI) flow into India. While high inflation is definitely a concern (especially food inflation which remains at record levels - 16.44% for the week ended September 18,2010), I don't see the rupee appreciation, at the current levels, to be a great concern.
While the rupee has appreciated more than 11% in real terms between August 2009 and August 2010, most of the appreciation was due to more-than-normal weakening of the rupee during the early part of the year. This was due to the surge in investments in the US dollar, when investors were fleeing for safety due to uncertain economic conditions. But when we look at it from a multi-year perspective, the nominal appreciation of the rupee should be around 5%-7%, which I see as a positive factor.
Remember, only 15% - 20% of India's GDP is contributed by exports and around 60%-70% is contributed by consumer spending . Now, there is no doubt that some very crucial export areas remain which act as drivers of growth and income for many other non-export sectors of the economy. But I still think that the negative effect on these sectors due to rupee appreciation at current levels is bearable and any short-term negative effects in these sectors could be offset to a certain extent by providing incentives. But when looked from the other angle, a stronger rupee would help to diversify investments in the economy which in the longer run should be able to offset the negative impacts of rupee appreciation in certain export industries.
Also, if a major portion of the capital inflows result in real job creation, thereby fuelling consumer demand, then any resulting inflation could be tackled by standard monetary policy tools.
And if right investments are done, with correct monetary policies in place, then a stronger demand from the Indian consumers is actually a boon to the global economy. From a global macro-economic perspective, we need strong demand from the consumers in the emerging markets during the coming years to fill the vacuum left by the consumers in the developed economies.
All this being said, ADB is concerned about the over-appreciation of the rupee in the coming years. I still do not see any clear signs for that. If foreign investment policies are rightly structured supported by sound monetary and government policies, then a growth in the inflow of foreign money should be balanced by import demands from the Indian consumers in the coming years, apart from an improvement in the quality of exports - all of which I see as a good sign from a global perspective. There are very many global factors involved in this but assuming the current status-quo of global competitiveness of the countries remain, I don't see a reason to worry about the current trends in the appreciation of the rupee.
Source(s):
1. http://www.adb.org/Media/Articles/2010/13337-indian-development-outlooks/
Monday, September 27, 2010
Commonwealth mess! - Nothing Uncommon
India is hosting the Commonwealth Games (CWG) in less than a week from now but we are not short of criticisms about the preparations for the games. In the past one week, there had been complaints of uncleanliness, security risks, poor quality constructions and an uninhabitable athletes village (and not to mention the allegations of fraud and corruption throughout this preparation).
While all this comes as a shame on the face of every Indian, it does not come as a surprise. On almost every civil program, the Govt. of India has repeatedly failed to deliver or has fallen short of what was promised. And when such a failure occurs, the blame game starts - blame on politicians, blame on bureaucrats, blame on diplomats, blame each other, blame on weather and what not. The bottom line is that no one takes responsibility - and yes it is right that no one could be held accountable because every one acts on their own and the whole structure misses a central governing body which would oversee and take complete responsibility for complex projects like these. Well, the Organizing Committee (OC) of CWG was one such body but when the OC fails to act responsibly and sincerely, someone has to step in to take the OC in hand and keep the ball rolling. But when the "5-years-in-office" politicians are given responsibilities to supervise, everything gets out-of-track from the real objective, as the period (and opportunity) of work is seen in the eyes of "5-years". And in addition to that, India's traditional system of giving power and authority to persons based on influence, connections and seniority rather than skill, performance and merit is completely out of sync with the objective of India - to be an economic super power in the 21st century.
This CWG might have resulted in embarrassment for many Indians but this is a right lesson at the right time for India and Indians. The lessons have to be learnt - the lesson that government is not exempt from the 21st century business principles, the lesson that everyone needs to be accountable to his/her actions, the lesson that government still lacks the skills, resources and experience it needs to do complex projects, the lesson that corruption could not be seen as an everyday expense to the people and an everyday revenue to politicians / bureaucrats / govt.workers (and the list goes on) and the lesson that it is time India acknowledges its shortcomings and lack of experience in certain key sectors.
As an open democratic society, it is time that India acknowledges its weaknesses openly and moves forward with steps to rectify it. Few months back, when I watched an influential Central government minister complain about the outdated laws of the country in a TV channel, I could only laugh - if he complains, what should the people do? If India has to efficiently use its scarce resources, it is time to bring in a new era of work culture in the government and form new independent autonomous bodies, free from political influence, filled with eminent persons, who could oversee complex projects that India is planning to do in the next decade and more and who could be held accountable - accountable to the parliament, judiciary and to the people. Otherwise, there would be an era of wastage of billions and billions of dollars of taxpayers' money through inefficient but complex government programs.
While all this comes as a shame on the face of every Indian, it does not come as a surprise. On almost every civil program, the Govt. of India has repeatedly failed to deliver or has fallen short of what was promised. And when such a failure occurs, the blame game starts - blame on politicians, blame on bureaucrats, blame on diplomats, blame each other, blame on weather and what not. The bottom line is that no one takes responsibility - and yes it is right that no one could be held accountable because every one acts on their own and the whole structure misses a central governing body which would oversee and take complete responsibility for complex projects like these. Well, the Organizing Committee (OC) of CWG was one such body but when the OC fails to act responsibly and sincerely, someone has to step in to take the OC in hand and keep the ball rolling. But when the "5-years-in-office" politicians are given responsibilities to supervise, everything gets out-of-track from the real objective, as the period (and opportunity) of work is seen in the eyes of "5-years". And in addition to that, India's traditional system of giving power and authority to persons based on influence, connections and seniority rather than skill, performance and merit is completely out of sync with the objective of India - to be an economic super power in the 21st century.
This CWG might have resulted in embarrassment for many Indians but this is a right lesson at the right time for India and Indians. The lessons have to be learnt - the lesson that government is not exempt from the 21st century business principles, the lesson that everyone needs to be accountable to his/her actions, the lesson that government still lacks the skills, resources and experience it needs to do complex projects, the lesson that corruption could not be seen as an everyday expense to the people and an everyday revenue to politicians / bureaucrats / govt.workers (and the list goes on) and the lesson that it is time India acknowledges its shortcomings and lack of experience in certain key sectors.
As an open democratic society, it is time that India acknowledges its weaknesses openly and moves forward with steps to rectify it. Few months back, when I watched an influential Central government minister complain about the outdated laws of the country in a TV channel, I could only laugh - if he complains, what should the people do? If India has to efficiently use its scarce resources, it is time to bring in a new era of work culture in the government and form new independent autonomous bodies, free from political influence, filled with eminent persons, who could oversee complex projects that India is planning to do in the next decade and more and who could be held accountable - accountable to the parliament, judiciary and to the people. Otherwise, there would be an era of wastage of billions and billions of dollars of taxpayers' money through inefficient but complex government programs.
Friday, May 21, 2010
Free Trade or Fair Trade
Recently, I followed a debate on Free Trade vs. Fair Trade in "Economist" website. And these days, it is very common to see this topic emerge in many international economic discussions. This debate of free trade versus fair trade is largely misunderstood. People who argue in favor of free trade do not say that the trade should not be fair and most people who say that trade should be fair do not say that trade should not be free. Instead the whole debate is always about which comes first - free or fair? Well, the obvious answer should be "fair". But what is the definition of "fair" here? And how much fair is fair? Who would judge this fairness?
Today we have various international institutions - International Monetary Fund (IMF), World Bank, World Trade Organization (WTO) etc. etc. But most of these institutions are structured to represent political power than to truly facilitate economic equality. These institutions, largely dominated by industrialised nations, and voicing their support in favor of views proposed by developed countries, itself is clearly against the "fair" trade that both industrialised and developing countries want. As an example, IMF, for years has been against capital controls in developing countries. This was like telling the developing countries indirectly to open their markets to foreign investors when at the same time it did not propose policies or solutions on ways to increase access to the markets of the developed countries by poor and developing nations. Since in today's world, globalization has integrated the financial markets and economies of the world more closely, fearing that excessive capital flows to emerging markets may result in an unstable global economic situation, IMF has started to advocate for capital controls in emerging markets.
Now what is fair? - yesterday's proposal to be completely open to capital flows or today's proposal to have capital controls? How much capital control is fair? Who will decide what is fair? How? In what time frame? For years, these questions remain unanswered.
The Doha Round of talks on free trade, started in 2001 and still incomplete, co-ordinated by WTO, to achieve a global multilateral free trade agreement is caught in an argument about "fair" trade. One of the major points of disagreement between developed and developing nations is on the agricultural sector. Industrialised nations want the developing nations to fully open their agricultural markets. But at the same time, the industrialised countries do not want to fully cut their agricultural subsidies that the farmers in these countries enjoy. Why? The answer is - Politics!
As of today, the European Union has the largest agricultural subsidy program under its "Common Agricultural Policy". Wikipedia states that agricultural subsidies and programs represent 48% of the EU's budget, which was 49.8 billion Euros (roughly $60 billion) in the year 2006.
The developing countries are also to blame in this economic game where politics take center stage and not economic welfare of the people. When many times, when we have clear evidence that opening up certain markets will benefit the people, the markets still remain closed purely for political reasons. But in the meantime, millions of people, generations after generations are left poor due to flawed economic policies guided by political factors. The United Nations says that at this moment there are around one billion people without access to proper three meals a day (this is one-sixth of the world's population).
These days, when we read newspapers, we see that there are so many bilateral and regional free trade agreements (FTA) signed between nations to promote free trade. Somehow we might even become successful in concluding the multilateral Doha Free Trade agreement but as long as politics stays the guiding factor for economic agreements, we will only be achieving "free" trade agreements and not "fair" trade agreements.
Today we have various international institutions - International Monetary Fund (IMF), World Bank, World Trade Organization (WTO) etc. etc. But most of these institutions are structured to represent political power than to truly facilitate economic equality. These institutions, largely dominated by industrialised nations, and voicing their support in favor of views proposed by developed countries, itself is clearly against the "fair" trade that both industrialised and developing countries want. As an example, IMF, for years has been against capital controls in developing countries. This was like telling the developing countries indirectly to open their markets to foreign investors when at the same time it did not propose policies or solutions on ways to increase access to the markets of the developed countries by poor and developing nations. Since in today's world, globalization has integrated the financial markets and economies of the world more closely, fearing that excessive capital flows to emerging markets may result in an unstable global economic situation, IMF has started to advocate for capital controls in emerging markets.
Now what is fair? - yesterday's proposal to be completely open to capital flows or today's proposal to have capital controls? How much capital control is fair? Who will decide what is fair? How? In what time frame? For years, these questions remain unanswered.
The Doha Round of talks on free trade, started in 2001 and still incomplete, co-ordinated by WTO, to achieve a global multilateral free trade agreement is caught in an argument about "fair" trade. One of the major points of disagreement between developed and developing nations is on the agricultural sector. Industrialised nations want the developing nations to fully open their agricultural markets. But at the same time, the industrialised countries do not want to fully cut their agricultural subsidies that the farmers in these countries enjoy. Why? The answer is - Politics!
As of today, the European Union has the largest agricultural subsidy program under its "Common Agricultural Policy". Wikipedia states that agricultural subsidies and programs represent 48% of the EU's budget, which was 49.8 billion Euros (roughly $60 billion) in the year 2006.
The developing countries are also to blame in this economic game where politics take center stage and not economic welfare of the people. When many times, when we have clear evidence that opening up certain markets will benefit the people, the markets still remain closed purely for political reasons. But in the meantime, millions of people, generations after generations are left poor due to flawed economic policies guided by political factors. The United Nations says that at this moment there are around one billion people without access to proper three meals a day (this is one-sixth of the world's population).
These days, when we read newspapers, we see that there are so many bilateral and regional free trade agreements (FTA) signed between nations to promote free trade. Somehow we might even become successful in concluding the multilateral Doha Free Trade agreement but as long as politics stays the guiding factor for economic agreements, we will only be achieving "free" trade agreements and not "fair" trade agreements.
Monday, April 26, 2010
World Bank's capital increase
So finally some good news today! The World Bank's shareholders have agreed to raise the bank's lending capital by $5.1 billion. This will come in two separate increases of $3.5 billion and $1.6 billion (by developing countries). With this, the voting share of the developing economies have also gone up (47.19% from 44.06%). China has surpassed Germany, France and UK to become the third largest shareholder with 4.42% voting rights from an earlier 2.77% voting rights. This is really some good news since its been long overdue to increase the lending and voting share of some major developing countries like China. This makes an international body like World Bank look more representative of the international economies in the current global economic scenario.
Also, I am glad that the lending capital is increased. There will be a total capital increase of $86.2 billion for the International Bank for Reconstruction and Development (IBRD). The difference of the total capital increase of $86.2 billion and the operating capital of $5.1 billion is called "callable capital" that can be drawn upon when emergency arises, from the member countries. There are too many projects that depend on World Bank funding in developing and poor countries. And with the world bank committing itself to large amount of funds during the recession, this has strained its resources. And now I hope that the projects in poor countries will continue unabated.
All this said, I would still like to see more improvements in the governance architecture of the IMF and World Bank. Though this capital increase is a good news, we still need more capital down the road and I hope that gets done. Also, some poorer countries have lost some of their voting share due to this re-allocation. I hope this is also corrected down the road. Personally, I think that European countries have far more voting rights than what is needed. If we consider Europe as a whole from an economic standpoint, we have far more European countries with larger voting rights than what should be to represent Europe. I hope this correction is also done in the near future so that we can accommodate more poorer countries in the governing architecture with more voting rights for them.
Sources:
http://www.businessweek.com/news/2010-04-26/world-bank-says-nations-agreed-to-boost-lender-s-capital.html
http://blogs.worldbank.org/meetings/node/616
http://www.nytimes.com/2010/04/26/business/26bank.html
Also, I am glad that the lending capital is increased. There will be a total capital increase of $86.2 billion for the International Bank for Reconstruction and Development (IBRD). The difference of the total capital increase of $86.2 billion and the operating capital of $5.1 billion is called "callable capital" that can be drawn upon when emergency arises, from the member countries. There are too many projects that depend on World Bank funding in developing and poor countries. And with the world bank committing itself to large amount of funds during the recession, this has strained its resources. And now I hope that the projects in poor countries will continue unabated.
All this said, I would still like to see more improvements in the governance architecture of the IMF and World Bank. Though this capital increase is a good news, we still need more capital down the road and I hope that gets done. Also, some poorer countries have lost some of their voting share due to this re-allocation. I hope this is also corrected down the road. Personally, I think that European countries have far more voting rights than what is needed. If we consider Europe as a whole from an economic standpoint, we have far more European countries with larger voting rights than what should be to represent Europe. I hope this correction is also done in the near future so that we can accommodate more poorer countries in the governing architecture with more voting rights for them.
Sources:
http://www.businessweek.com/news/2010-04-26/world-bank-says-nations-agreed-to-boost-lender-s-capital.html
http://blogs.worldbank.org/meetings/node/616
http://www.nytimes.com/2010/04/26/business/26bank.html
Monday, April 19, 2010
Pathetic Poverty
With tears I write, India's new official poverty estimates were just released by the government panel who worked on this. The poverty rate has gone up from 27.5% in 2004 to 37.2% and this puts almost 100 million more people below the UN estimated poverty line of $1.25 a day. So now, a total of 410 million Indians live in poverty. And the malnutrition rate in children in India still stands at a whopping 46% (in China it has come down to 7% after the start of economic reforms). Just to quote a line from the Reuters article - "A third of the world's poor are believed to be in India, living on less than $2 per day, worse than in many parts of sub-Saharan Africa, experts say." I have no strength to write anything beyond this at the moment other than to say a sarcastic "Thanks!" to the Indian elite political class.
Source: "Reuters" which published the numbers from the poverty estimate report.
http://news.yahoo.com/s/nm/20100420/india_nm/india478257
http://news.yahoo.com/s/nm/20100419/india_nm/india477918
Source: "Reuters" which published the numbers from the poverty estimate report.
http://news.yahoo.com/s/nm/20100420/india_nm/india478257
http://news.yahoo.com/s/nm/20100419/india_nm/india477918
Tuesday, March 9, 2010
Reform or Bubble? Choose one
Why is it very important to prevent the banks from speculative trading? Let's consider these facts that are relevant today:
1. America has injected enormous amount of liquidity into the financial system and the interest rates in US are near zero.
2. Asia, especially China and India, seem to be in a comfortable zone (relatively) out of the recession and have started monetary-tightening.
Is there a relationship between American financial system and Asia? Yes there is. With the US interest rates at an all time low near zero and expected to remain low throughout this year, there are huge amounts of capital outflows from US into emerging markets. This capital-outflow is supported by the speculation that emerging markets will do better than the US, atleast in the shorter term. There are good reasons to believe this - economies like China and India have had tremendous growth in recent years, have financially sound banks, have huge foreign reserves and high savings rate. And all these are currently being deployed and will be deployed in their respective economies to promote and support growth.
In both China and India, I expect strong government spending during the coming years. China, I would expect, to spend on factors that would drive consumer-spending. China is already embarking on a $150 billion nation-wide health-care package.
India has plans to spend heavily on its broken infrastructure like roads, ports, bridges, public-transportation etc. India is expected to need $500 billion in the next five years to meet the growing infrastructure demand (and the govt. acknowledges this).
Both China and India have huge savings rate and large amount of foreign reserves that should see the planned investments get implemented. United States is also expected to invest on a large scale in infrastructure related projects to push the economy higher. So all this should ensure a considerable amount of global capital-sector spending.
But the recovery from this recession is very different from the earlier ones. In this recession, the US consumers are hit hard and they are likely to spend less in the coming years. Can this decrease in US private consumption be compensated by an increase in private consumption from Asian economies like China and India? I very much doubt it. In 2007, US consumed $9.7 trillion worth of goods and services which is six times more than the combined consumption of China and India in the same year (source: "The Next Asia" book by Stephen Roach, Morgan Stanley Asia Chairman).
And this time, Asia leads the recovery and US will follow, which means exports are going to be a key for growth in the US in the coming years. Will this mean that America will need a weaker dollar? Well, I am not in favor of this idea. With enormous capital spending expected in the coming years in the world's two most populous nations and other developing countries, a weaker dollar will shoot up the commodity prices to unsustainable levels and that combined with the large liquidity in the US financial system and with low interest rates will make a good recipe for inflation in US.
Now there are two questions that we have to answer here:
1. How are we going to make American exports more competitive?
2. But even before answering the first question, how can we be sure that Asian economies don't get into any kind of economic trouble, which if they, will bring down the world again into recession?
One of the solutions to the second question, which will be a very good first step towards a stable global economy, will be to bring about financial and banking reforms in the US. If the commercial banks are allowed again to get involved in proprietary trading, which is done using the abstract concept called "speculation", then there is high-risk of asset-bubbles forming in Asian economies due to cross-border capital flows. Many Asian economies, especially China and India have some sort of capital-controls but this will not be sufficient to stop the speculative inflows. And this may cause unsustainable shoot-up in real estate and stock prices. At the same time, allowing banks to do proprietary trading will seriously reduce bank-lending in US. This is especially true after the credit-bubble burst. Bank-lending is very much needed now for small businesses and to an extent to consumers in the US. By preventing banks to speculate using depositors' money, we can bring a balance between exports and domestic consumption in US and this will also help reduce the currently unsustainable current account deficit.
Now coming back to question number 1 - how can we make American exports more competitive? The answer to this does not lie in a weaker dollar but instead in increasing productivity. For this to be achieved, US must direct the cheap money available into education, investments to achieve higher energy-efficiency, investments in people, scientific-research and other areas of technology. What the US does NOT want now is the government and Federal Reserve trying to increase the retail-spending of American consumers through cheap money to pre-crisis levels that were already unsustainable, to prop up the economy. Trying to do this may look right now but going back to the old-ways will likely make our economy present us something in the future, which has been presented to us again and again - a "bubble"
1. America has injected enormous amount of liquidity into the financial system and the interest rates in US are near zero.
2. Asia, especially China and India, seem to be in a comfortable zone (relatively) out of the recession and have started monetary-tightening.
Is there a relationship between American financial system and Asia? Yes there is. With the US interest rates at an all time low near zero and expected to remain low throughout this year, there are huge amounts of capital outflows from US into emerging markets. This capital-outflow is supported by the speculation that emerging markets will do better than the US, atleast in the shorter term. There are good reasons to believe this - economies like China and India have had tremendous growth in recent years, have financially sound banks, have huge foreign reserves and high savings rate. And all these are currently being deployed and will be deployed in their respective economies to promote and support growth.
In both China and India, I expect strong government spending during the coming years. China, I would expect, to spend on factors that would drive consumer-spending. China is already embarking on a $150 billion nation-wide health-care package.
India has plans to spend heavily on its broken infrastructure like roads, ports, bridges, public-transportation etc. India is expected to need $500 billion in the next five years to meet the growing infrastructure demand (and the govt. acknowledges this).
Both China and India have huge savings rate and large amount of foreign reserves that should see the planned investments get implemented. United States is also expected to invest on a large scale in infrastructure related projects to push the economy higher. So all this should ensure a considerable amount of global capital-sector spending.
But the recovery from this recession is very different from the earlier ones. In this recession, the US consumers are hit hard and they are likely to spend less in the coming years. Can this decrease in US private consumption be compensated by an increase in private consumption from Asian economies like China and India? I very much doubt it. In 2007, US consumed $9.7 trillion worth of goods and services which is six times more than the combined consumption of China and India in the same year (source: "The Next Asia" book by Stephen Roach, Morgan Stanley Asia Chairman).
And this time, Asia leads the recovery and US will follow, which means exports are going to be a key for growth in the US in the coming years. Will this mean that America will need a weaker dollar? Well, I am not in favor of this idea. With enormous capital spending expected in the coming years in the world's two most populous nations and other developing countries, a weaker dollar will shoot up the commodity prices to unsustainable levels and that combined with the large liquidity in the US financial system and with low interest rates will make a good recipe for inflation in US.
Now there are two questions that we have to answer here:
1. How are we going to make American exports more competitive?
2. But even before answering the first question, how can we be sure that Asian economies don't get into any kind of economic trouble, which if they, will bring down the world again into recession?
One of the solutions to the second question, which will be a very good first step towards a stable global economy, will be to bring about financial and banking reforms in the US. If the commercial banks are allowed again to get involved in proprietary trading, which is done using the abstract concept called "speculation", then there is high-risk of asset-bubbles forming in Asian economies due to cross-border capital flows. Many Asian economies, especially China and India have some sort of capital-controls but this will not be sufficient to stop the speculative inflows. And this may cause unsustainable shoot-up in real estate and stock prices. At the same time, allowing banks to do proprietary trading will seriously reduce bank-lending in US. This is especially true after the credit-bubble burst. Bank-lending is very much needed now for small businesses and to an extent to consumers in the US. By preventing banks to speculate using depositors' money, we can bring a balance between exports and domestic consumption in US and this will also help reduce the currently unsustainable current account deficit.
Now coming back to question number 1 - how can we make American exports more competitive? The answer to this does not lie in a weaker dollar but instead in increasing productivity. For this to be achieved, US must direct the cheap money available into education, investments to achieve higher energy-efficiency, investments in people, scientific-research and other areas of technology. What the US does NOT want now is the government and Federal Reserve trying to increase the retail-spending of American consumers through cheap money to pre-crisis levels that were already unsustainable, to prop up the economy. Trying to do this may look right now but going back to the old-ways will likely make our economy present us something in the future, which has been presented to us again and again - a "bubble"
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