When the G-20 leaders meet in Seoul, South Korea, today, this is how the discussion would start:
US: We need a balanced growth in the world economy. Some countries cannot run massive current account surpluses while some others run massive deficits. That is unstable and so to achieve a balanced growth we need countries to allow more flexibility in their currencies’ exchange rates - exchange rates determined by market forces.
China: Alright, wait. I have a question before you proceed further – Why is your Federal Reserve printing $600 billion more and flooding the world with liquidity? We are affected by this action of your Fed in two ways –
a. The dollar’s value is artificially weakened thereby giving an unfair advantage to your exports in the global market.
b. It is flooding emerging markets like ours with speculative capital thereby fuelling concerns about asset-price bubbles.
Can you please answer how this is helpful to achieve a stable global economic growth?
US: Look who is talking about “unfair advantage” to exports. Anyways, here is the answer – by doing this quantitative easing (QE2), that is, buying treasury notes/bonds for $600 billion more, we would drive down the long-term interest rates. And by that it means, the borrowing rate on loans, from car-loans to home-loans to you name it, becomes cheaper, thereby fuelling consumer demand. And when demand becomes more, supply has to become more. And for supply to become more, companies will be investing in production, hiring new employees and there comes the job-creation and further demand and further production and further job-creation and the cycle goes on. The economy will then be back on track and US getting its economy on track will the best thing that US can do to the global economy.
Before China could question/talk any further, a guy from the audience-floor gets up to clarify things. He first requests China not to question any further but instead to go home and start diversifying the economy that will depend less on exports and more on domestic consumption than what it is now. He then turns to US to ask/clarify certain things. Oh by the way his name is “Common-Man”.
Common-Man: What you said about QE2 is true but I still don’t get how that would get the economy back on track. Aren’t the interest rates already low enough?
US: But demand is very weak and hence we fear deflation in US. Driving down the long-term interest rates would make sure that demand picks up domestically and with the dollar becoming less in value relative to other countries’ currencies this would also increase international consumption of American goods. All this will lead to job creation in US. Also, all these steps will help Federal Reserve achieve expected inflation, which would make companies who are hoarding cash now to invest thereby creating jobs and demand.
Common-Man: US exports will undoubtedly grow. I agree. Some jobs will be created out of that. I agree. Inflation (that is needed to an extent now) might kick in. I agree. Due to inflation, people and companies will invest instead of hoarding cash that will bring down the unemployment rate. Hmmm, this is where I am not able to completely agree with you. Well, we might see investments occurring, but do you think that just export-led job creation and investments by companies and people to withstand inflation alone would be enough to achieve the expected economic growth and to bring down the unemployment rate that is so high – 9.6%. We actually need hundreds of thousands of jobs to be created every month to bring down the unemployment rate quicker.
US: See, when all I said happens, the cycle will kick in. It might be a slow start but eventually the economic cycle will run faster and we could achieve the needed growth.
Common-Man: Ok to sum it, why is the economic growth so slow and weak?
US: The demand is very weak.
Common-Man: And what are you trying to do to address this?
US: Basically, bring down the borrowing costs further and trigger a little inflation that will force companies to invest.
Common-Man: Ok, from the monetary-policy side, I completely agree with what the Federal Reserve is trying to do – looks like there is no other choice, even though the concerns expressed by some emerging markets about liquidity flooding their markets is genuine and very real. But that’s a topic for later discussion. Also, there is another fear about commodity prices sky-rocketing in the future due to this Fed action. But again, I would like to discuss it later. But I also have to tell you that monetary-policy alone will not be sufficient. It is not that the interest rates are not sufficiently low enough now or that the companies are without cash that is hindering investments. Infact, as per a news article I read (article source below), US companies are sitting on cash equivalent to $1 trillion, without investing. We have to think why? The answer is “uncertainty”. And from the government side, all that is expected is to induce “confidence” in the economy. Until this is done, I am not convinced that we will see enough investments that would bring the US economy back on track quickly. And remember, the more the time it takes, the more is the probability for the unemployment to become structural rather than cyclical (and this is very dangerous).
This “uncertainty” about the future of the economy needs to be beaten by inducing “confidence” in the economy through a tool called – “fiscal policy”. Yes, monetary policy is needed but that alone is not going to solve our problem. It is the lack of a clear, long-term fiscal policy that is creating tensions and fears, not just in US but in the entire world about the stability of the future US economy and thereby the dollar. The question behind the fears of the global companies and community is not “Why are you printing money?” but instead it is the anxiety about – “Ok, you have printed money, now what?”. The world in one way or other will accept the difficulties that will come along with the loose monetary policy that the US is following, provided a confidence is built in them by assurances through a long-term credible US fiscal policy. And the responsibility for this lies directly with the US administration and the US Congress. As long as this concern remains unaddressed, there will be questions and anxiety about the future strength of the US economy and the dollar.
News Article Source:
1. http://finance.yahoo.com/news/US-companies-hoarding-almost-rb-2687745036.html?x=0&.v=1
Wednesday, November 10, 2010
Friday, November 5, 2010
President Obama is going to India!
Come Saturday, November 6, 2010, the United States President, Barack Obama will be in India - his first official trip to the country. Expectations are running high over his visit and the Indian govt. made it clear not to expect any big bangs or breakthrough deals. I expect that this trip is going to be a consolidation of all gains obtained in the past decade or so in the US-India relationship and finding ways to increase this positive momentum built over the decade and push the relationship forward. Here are a few issues that will possibly come up in discussions and questions asked to the leaders of the two countries:
UNSC Permanent Seat: It has been India's long-held desire to get a permanent seat in the United Nations Security Council (UNSC) and almost all major powers seem to support an extended UNSC, with India as a new permanent member - except two "hesitant" countries - China and the United States. And the Indians ask: Well China, it is expected, but why US? Yesterday when this question of whether US would support India's bid to become a permanent member in the UNSC was asked to President Obama, he said that it is "complicated". During this year's World Economic Forum gathering, a poll conducted by India's TV channel NDTV and Facebook on "What does India expect from the world?" - showed that the majority expected the world to support India's bid to a permanent seat at the UNSC. This issue has been close to Indians' heart for sometime. So this question is definitely going to come up and I hope that President Obama makes it clear that though there are "sensitivities" on the US side on this issue and some unfulfilled expectations on India from a "US perspective" remain, the US would like to see India being an important part of any reformed international institution. But also, such words are uttered almost everyday by someone in the US administration but some kind of credible action would calm India's anxiety about how America envisions a future India - a credible action like that did by former former President George W Bush on the civilian nuclear program that brought the two countries closer than any other time in history.
Civilian Nuclear Deal:
The passage of a Civil Nuclear Liability bill by the Indian Parliament that holds the suppliers of the nuclear equipments liable, in addition to the operators, for any nuclear accident involving a faulty equipment, has become a thorny issue in this matter. US companies say that this is not in sync with international norms. But in a country where one of the world's disastrous industrial accident (Bhopal gas tragedy) happened and where people are still affected by this accident, both mentally and physically, this was the least the people expected from the Indian govt. and which the govt. had to oblige. When US companies say that such an inclusion of supplier-liability is out-of-sync with international norms, I would like to question who influenced the international norms? It's going to be a vain-effort if President Obama tries to push India for an amendment in the bill. While French and Russian nuclear companies are okay with this bill since they have state-backing to support them for any liability claims, amending the law just for US' request will not go favorable among Indian people. India has invited the US Nuclear companies to visit and get all clarifications - including what kind of suppliers would be held liable and under what circumstances. I hope the US companies understand the extreme sensitivity involved in this issue and I hope that all the hard-work done by both US and India on this deal do not go vain.
Economics:
i) Outsourcing: President Obama is sometimes seen as anti-outsourcing and protectionist by the Indian business community. But so be it - I strongly support President Obama on his decision to provide incentives to companies who invest in US (and this has to be done by cutting back incentives to companies who invest outside US or outsource jobs). Few things that we have to note here is - these are tough times in the US economy and it is nothing wrong in US policies to support investments in US. While I strongly denounce any protectionist policy, I also don't believe that all so-called "protectionist" polices are actually protectionist (Admission: Though I also noticed some clear protectionist policies by the US during the course of the last year). Secondly, the Indian IT companies have actually moved up the value-chain and most of them are no more just call centers or business process outsourcing centers, but are actually involved in research and development and other value-added services. Bottom line: Outsourcing is not going to stop and the Indian IT companies are not going to be drastically affected (we only have to look at the profits reported by some of these companies in the recent quarter) but atleast Obama's strict words and real-incentives would encourage investments in US. Infact, if someone had noticed closely, then they can see the investments by the same IT companies in US recently. And currently the private sector in US is not investing and so atleast the public sector can (actually should) invest through any additional resources obtained this way.
ii) Financial Services: US has been pushing India to open up their financial and banking sectors further. But the with the "credibility" of the US banking and finance industry is not-so-good condition, India is wary to oblige to any American request in this matter - especially feared of the thinking of how the "common-man" would view this in a country with a large number of "socialism-influenced" voters.
iii) Retail Industry: Now from the Indian side, opening up of the retail sector is not just a politically sensitive issue but also a confusing one. Retail industry is one of the largest employer in India and with 90% - 95% being in the unorganized sector (mom-and-pop shops), it has really been a tough time to analyse the positive and negative implications on the hundreds of millions of people (and most of them are poor). But India has to make it clear to the visiting US President that it has launched a serious study on this issue and is positive on opening this sector - though the time and pace remains largely undecided. One assurance India can give is to soon relax some FDI rules in the sector for greater foreign participation.
iv) Agricultural Sector: We all know that one of the contentious issue holding back Doha Agreement is developing countries' (read: India) stubborn position to not open this sector fully to foreign produce/commodities while developed countries (read: US) having political problems in cutting back farm-subsidies. I hope the two countries don't waste time in talking about opening this sector - since the answer is going to be a clear "NO" from both sides to any request by the other.
But the two countries should talk on forging closer ties on agricultural-related technologies and research (this also includes co-operation in space programs for activities such as weather-forecasting). India should give clear signs on how its going to formulate the public sector investment policy and the related procurement policy in irrigation related technologies (so far, India doesn't have clear policies in this regard but giving an assurance that it is serious about formulating a long-term agricultural policy involving greater foreign participation in related technology areas will be good.) Such policies will help the hundreds of millions of desperately poor Indian farmers, with increased business opportunity for US.
v) Export Control Restrictions: Any clue that US would ease restrictions on exports of high-tech and dual-use technologies will make Indians happy to the core - for, a message will be derived from such an action - that US sees India as the most important Asian "strategic" partner and not just as a business partner. But again, the sensitivities of US are understood but gradual reduction in restrictions will be a very good signal. There have already been improvements in this area of discussion and it would be great to see more.
vi) Infrastructure: This is an area where great co-operation could be achieved, not just in words but in action. India is in desperate need for foreign capital and technology to build infrastructure such as roads, ports, highways, bridges etc. We have the right demand in one hand and the right supply in the other, its just a matter of time before the two hands could be brought together for a business handshake.
Climate Change:
US and India almost stand on opposite sides on this issue - especially the argument that both sides put forward - one blaming the other of not doing enough. But discussion should instead be on co-operation in climate research and how the scientists could come on a common platform for the better benefit of mankind. India has made clear that for foreseeable future, fossil fuels are going to be the ingredient in the development of its economy. The reasoning behind this - extreme levels of poverty - needs to be recognized by the US, and America can come forward to initiate a consolidation and augmentation of resources by offsetting the weaknesses of one with the strengths of the other.
Geo-Politics:
Sorry this blog stays away from sensitive and complex geo-politics but one thing I can say is that when looked on a longer-term, the aspirations, goals, interests and values of the two countries remain aligned, though the degree of alignment varies currently. But I am very confident that the two countries would become the 21st century best-friends.
I wish President Obama a safe and successful trip. And Happy Deepavali friends! :)
UNSC Permanent Seat: It has been India's long-held desire to get a permanent seat in the United Nations Security Council (UNSC) and almost all major powers seem to support an extended UNSC, with India as a new permanent member - except two "hesitant" countries - China and the United States. And the Indians ask: Well China, it is expected, but why US? Yesterday when this question of whether US would support India's bid to become a permanent member in the UNSC was asked to President Obama, he said that it is "complicated". During this year's World Economic Forum gathering, a poll conducted by India's TV channel NDTV and Facebook on "What does India expect from the world?" - showed that the majority expected the world to support India's bid to a permanent seat at the UNSC. This issue has been close to Indians' heart for sometime. So this question is definitely going to come up and I hope that President Obama makes it clear that though there are "sensitivities" on the US side on this issue and some unfulfilled expectations on India from a "US perspective" remain, the US would like to see India being an important part of any reformed international institution. But also, such words are uttered almost everyday by someone in the US administration but some kind of credible action would calm India's anxiety about how America envisions a future India - a credible action like that did by former former President George W Bush on the civilian nuclear program that brought the two countries closer than any other time in history.
Civilian Nuclear Deal:
The passage of a Civil Nuclear Liability bill by the Indian Parliament that holds the suppliers of the nuclear equipments liable, in addition to the operators, for any nuclear accident involving a faulty equipment, has become a thorny issue in this matter. US companies say that this is not in sync with international norms. But in a country where one of the world's disastrous industrial accident (Bhopal gas tragedy) happened and where people are still affected by this accident, both mentally and physically, this was the least the people expected from the Indian govt. and which the govt. had to oblige. When US companies say that such an inclusion of supplier-liability is out-of-sync with international norms, I would like to question who influenced the international norms? It's going to be a vain-effort if President Obama tries to push India for an amendment in the bill. While French and Russian nuclear companies are okay with this bill since they have state-backing to support them for any liability claims, amending the law just for US' request will not go favorable among Indian people. India has invited the US Nuclear companies to visit and get all clarifications - including what kind of suppliers would be held liable and under what circumstances. I hope the US companies understand the extreme sensitivity involved in this issue and I hope that all the hard-work done by both US and India on this deal do not go vain.
Economics:
i) Outsourcing: President Obama is sometimes seen as anti-outsourcing and protectionist by the Indian business community. But so be it - I strongly support President Obama on his decision to provide incentives to companies who invest in US (and this has to be done by cutting back incentives to companies who invest outside US or outsource jobs). Few things that we have to note here is - these are tough times in the US economy and it is nothing wrong in US policies to support investments in US. While I strongly denounce any protectionist policy, I also don't believe that all so-called "protectionist" polices are actually protectionist (Admission: Though I also noticed some clear protectionist policies by the US during the course of the last year). Secondly, the Indian IT companies have actually moved up the value-chain and most of them are no more just call centers or business process outsourcing centers, but are actually involved in research and development and other value-added services. Bottom line: Outsourcing is not going to stop and the Indian IT companies are not going to be drastically affected (we only have to look at the profits reported by some of these companies in the recent quarter) but atleast Obama's strict words and real-incentives would encourage investments in US. Infact, if someone had noticed closely, then they can see the investments by the same IT companies in US recently. And currently the private sector in US is not investing and so atleast the public sector can (actually should) invest through any additional resources obtained this way.
ii) Financial Services: US has been pushing India to open up their financial and banking sectors further. But the with the "credibility" of the US banking and finance industry is not-so-good condition, India is wary to oblige to any American request in this matter - especially feared of the thinking of how the "common-man" would view this in a country with a large number of "socialism-influenced" voters.
iii) Retail Industry: Now from the Indian side, opening up of the retail sector is not just a politically sensitive issue but also a confusing one. Retail industry is one of the largest employer in India and with 90% - 95% being in the unorganized sector (mom-and-pop shops), it has really been a tough time to analyse the positive and negative implications on the hundreds of millions of people (and most of them are poor). But India has to make it clear to the visiting US President that it has launched a serious study on this issue and is positive on opening this sector - though the time and pace remains largely undecided. One assurance India can give is to soon relax some FDI rules in the sector for greater foreign participation.
iv) Agricultural Sector: We all know that one of the contentious issue holding back Doha Agreement is developing countries' (read: India) stubborn position to not open this sector fully to foreign produce/commodities while developed countries (read: US) having political problems in cutting back farm-subsidies. I hope the two countries don't waste time in talking about opening this sector - since the answer is going to be a clear "NO" from both sides to any request by the other.
But the two countries should talk on forging closer ties on agricultural-related technologies and research (this also includes co-operation in space programs for activities such as weather-forecasting). India should give clear signs on how its going to formulate the public sector investment policy and the related procurement policy in irrigation related technologies (so far, India doesn't have clear policies in this regard but giving an assurance that it is serious about formulating a long-term agricultural policy involving greater foreign participation in related technology areas will be good.) Such policies will help the hundreds of millions of desperately poor Indian farmers, with increased business opportunity for US.
v) Export Control Restrictions: Any clue that US would ease restrictions on exports of high-tech and dual-use technologies will make Indians happy to the core - for, a message will be derived from such an action - that US sees India as the most important Asian "strategic" partner and not just as a business partner. But again, the sensitivities of US are understood but gradual reduction in restrictions will be a very good signal. There have already been improvements in this area of discussion and it would be great to see more.
vi) Infrastructure: This is an area where great co-operation could be achieved, not just in words but in action. India is in desperate need for foreign capital and technology to build infrastructure such as roads, ports, highways, bridges etc. We have the right demand in one hand and the right supply in the other, its just a matter of time before the two hands could be brought together for a business handshake.
Climate Change:
US and India almost stand on opposite sides on this issue - especially the argument that both sides put forward - one blaming the other of not doing enough. But discussion should instead be on co-operation in climate research and how the scientists could come on a common platform for the better benefit of mankind. India has made clear that for foreseeable future, fossil fuels are going to be the ingredient in the development of its economy. The reasoning behind this - extreme levels of poverty - needs to be recognized by the US, and America can come forward to initiate a consolidation and augmentation of resources by offsetting the weaknesses of one with the strengths of the other.
Geo-Politics:
Sorry this blog stays away from sensitive and complex geo-politics but one thing I can say is that when looked on a longer-term, the aspirations, goals, interests and values of the two countries remain aligned, though the degree of alignment varies currently. But I am very confident that the two countries would become the 21st century best-friends.
I wish President Obama a safe and successful trip. And Happy Deepavali friends! :)
Thursday, October 7, 2010
Part 2: My Conversation with Myself - Dollar Dilemma and the China Complaint!
Alright, alright, too much of Chinese currency talk at the International Monetary Fund (IMF) meetings today. Mirror Image just asked me a question which we missed to discuss the other day. So here it goes -
Mirror Image: The other day, I raised the possibility about the advantage of Chinese people being a greater consumer of American products if China appreciates it currency, which you did not accept, but how about this case - Let's say that a product 'X' is manufactured by American and Chinese manufacturers. Now forget the Chinese consumer, instead, think about American and global consumers. Will it not be advantageous to American manufacturers, if Chinese yuan, also called renminbi, appreciates? Then the American manufactured product 'X' will become cheaper vis-a-vis Chinese manufactured product 'X' (relative to the current levels). Now a higher quality but a relatively cheaper American manufactured product 'X' will be able to compete "fairly" with the Chinese product 'X' in the global market. What's your answer to this?
Me: Very good question. And yes, we should have discussed it the other day. Ok, so here's my explanation - American manufacturers say that the Chinese renminbi is undervalued by about 40%. So, let's assume here that China bows to international pressure and appreciates its currency. Now in reality, even if China appreciates its currency by 40% (which will then become somewhere around $1 = 4.01 renminbi from around 6.69 renminbi now), it would still be cheap to manufacture products in China than in US. Simple reason - US labor costs are too high compared to China's. Apart from this, one point many fail to realize is the supply-chain establishment in that part of the world. China did not become a global manufacturing base in the past 2 to 3 years. It has taken years and years of government planning and investment that resulted in development and establishment of massive supply chains in that part of the world, which subsequently made China a low-cost manufacturing base. Western corporations who manufacture their products in China will simply face an erosion in profit-margins due to the drastic appreciation of the renminbi.
But as I said, the supply chain that exists in that part of the world, from Australia (raw materials) to Japan (R&D, Design and high-end manufacturing) to China (low-cost manufacturing) and not-to-mention the other East/South Asian economies that form a part of this chain, will simply tempt corporations to shift their manufacturing base to nearby low-wage country (possibly India or Indonesia) without affecting the other establishments in the supply chain. And not-to-mention the fact that China will not completely bow to international pressure (so 40% appreciation is a distant dream) and the potential retaliation a communist government may try to do to US companies operating in China.
I understand what many tend to think when they ask for an appreciation in the Chinese currency - their reasoning is that an inflation in the US due to renminbi appreciation is actually good to the US economy, since that would make companies in US, who are hoarding cash now (and the people, to certain extent) to invest, that would spur job-creation and consumer spending in US. But my thoughts are this - just because China appreciates its currency, corporations are not going to shift their entire supply chain and manufacturing base, but instead they would just replace one component in the chain - the new replacement being another low-wage Asian economy.
Mirror Image: The other day, I raised the possibility about the advantage of Chinese people being a greater consumer of American products if China appreciates it currency, which you did not accept, but how about this case - Let's say that a product 'X' is manufactured by American and Chinese manufacturers. Now forget the Chinese consumer, instead, think about American and global consumers. Will it not be advantageous to American manufacturers, if Chinese yuan, also called renminbi, appreciates? Then the American manufactured product 'X' will become cheaper vis-a-vis Chinese manufactured product 'X' (relative to the current levels). Now a higher quality but a relatively cheaper American manufactured product 'X' will be able to compete "fairly" with the Chinese product 'X' in the global market. What's your answer to this?
Me: Very good question. And yes, we should have discussed it the other day. Ok, so here's my explanation - American manufacturers say that the Chinese renminbi is undervalued by about 40%. So, let's assume here that China bows to international pressure and appreciates its currency. Now in reality, even if China appreciates its currency by 40% (which will then become somewhere around $1 = 4.01 renminbi from around 6.69 renminbi now), it would still be cheap to manufacture products in China than in US. Simple reason - US labor costs are too high compared to China's. Apart from this, one point many fail to realize is the supply-chain establishment in that part of the world. China did not become a global manufacturing base in the past 2 to 3 years. It has taken years and years of government planning and investment that resulted in development and establishment of massive supply chains in that part of the world, which subsequently made China a low-cost manufacturing base. Western corporations who manufacture their products in China will simply face an erosion in profit-margins due to the drastic appreciation of the renminbi.
But as I said, the supply chain that exists in that part of the world, from Australia (raw materials) to Japan (R&D, Design and high-end manufacturing) to China (low-cost manufacturing) and not-to-mention the other East/South Asian economies that form a part of this chain, will simply tempt corporations to shift their manufacturing base to nearby low-wage country (possibly India or Indonesia) without affecting the other establishments in the supply chain. And not-to-mention the fact that China will not completely bow to international pressure (so 40% appreciation is a distant dream) and the potential retaliation a communist government may try to do to US companies operating in China.
I understand what many tend to think when they ask for an appreciation in the Chinese currency - their reasoning is that an inflation in the US due to renminbi appreciation is actually good to the US economy, since that would make companies in US, who are hoarding cash now (and the people, to certain extent) to invest, that would spur job-creation and consumer spending in US. But my thoughts are this - just because China appreciates its currency, corporations are not going to shift their entire supply chain and manufacturing base, but instead they would just replace one component in the chain - the new replacement being another low-wage Asian economy.
Tuesday, October 5, 2010
Estimated Net Private Capital Flows into Emerging Markets
I read a news article in Reuters.com - this gives us a picture of the amount of money flowing into emerging markets from developed nations. Here are some highlights from the news article -
"The Institute of International Finance estimated that net private capital flows to emerging markets would rise sharply to $825 billion this year from $581 billion last year. Capital flows into these economies will remain strong next year, amounting to about $833 billion".
Now that's almost a 42% increase from last year and these numbers don't include sovereign investments. I still don't see this huge capital inflow into these emerging markets as a big problem but definitely countries that are too much export-dependent need to be careful on this. I hope the central-bankers in these countries are watchful of this huge inflow of money especially I hope they pay attention to this line from the news article -
"The IIF said the biggest share of private capital flows is likely to come from portfolio equity investments by foreigners. This is forecast to be $186 billion in 2010, up from an average of about $62 billion a year in 2005 to 2009, and higher by $94 billion from the IIF's April estimate."
I still don't see a reason to panic or worry, but net portfolio investments into emerging markets are something that needs to watched on a regular basis, due to the volatility that they may bring.
Article Link (Source):
http://www.reuters.com/article/idUSNLL4LE6IP20101004
"The Institute of International Finance estimated that net private capital flows to emerging markets would rise sharply to $825 billion this year from $581 billion last year. Capital flows into these economies will remain strong next year, amounting to about $833 billion".
Now that's almost a 42% increase from last year and these numbers don't include sovereign investments. I still don't see this huge capital inflow into these emerging markets as a big problem but definitely countries that are too much export-dependent need to be careful on this. I hope the central-bankers in these countries are watchful of this huge inflow of money especially I hope they pay attention to this line from the news article -
"The IIF said the biggest share of private capital flows is likely to come from portfolio equity investments by foreigners. This is forecast to be $186 billion in 2010, up from an average of about $62 billion a year in 2005 to 2009, and higher by $94 billion from the IIF's April estimate."
I still don't see a reason to panic or worry, but net portfolio investments into emerging markets are something that needs to watched on a regular basis, due to the volatility that they may bring.
Article Link (Source):
http://www.reuters.com/article/idUSNLL4LE6IP20101004
Sunday, October 3, 2010
My conversation with Myself - Dollar Dilemma and the China Complaint!
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
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
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.
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