Archive for the ‘Economy’ Category

My Questions on FDI


Following are some questions that I had asked to Vivean Fernandes in the chat organised by CNN-IBN on its website IBNlive.in.com

http://ibnlive.in.com/chat/economic-policy-editor-cnbctv18/has-manmohan-singh-been-a-weak-prime-minister/1193.html

Q. When FDI comes in they buy rupee and it goes up. So far so good. But what will happen when these companies will cash in profits and take dollar out. What happened to 1997 asian tigers crisis. Do you not think currency will eventually be doomed because of this decision of FDI? Specially because we know this money will be used for consumption and not infrastructure development Asked by: Amitabh Pandey

Ans by Vivean: Foreign discount stores will source locally (so that the products they sell can be affordable). For that, they will have to upgrade the quality of locally-produced stuff. Look at the design and workmanship of Ikea products, and look at the quality of our own furniture. When Ikea comes to India it will help its suppliers to produce higher quality goods. These goods will then also have a chance to find export markets. So by allowing foreign discount stores to sell here, we will be able to sell more abroad! For an analogy, just look at the automobile ancillary sector.

Unanswered follow up Question:  If that had been the case, our exports by now after 20 yrs would have surpassed our imports? Proof the pudding lies in its eating, isn’t it? But on the contrary, we are still looking for debt to finance our imports and our trade deficit is exponentially growing. Regarding technology, how much manufacturing growth has happened due to import of technology as a result of FDI? Instead, unlike China, its only services where bulk of our growth belongs to. In fact the only way we got technology was when we invested in research e.g., cryogenic engine, our space and missile programs etc. And on the automobile and ancillary growth, the consumption has been propped up by easy money policies of government where inflow of new money (to a certain section of society) was actually performing a theft on the purchasing power of real wealth generators (read farmers, workers etc) of the economy.

 

Q. 20 yrs of PMs policy and we are in greater debt, exponentially growing trade deficits, BOP crisis again staring us and lower currency value leaving less room for government intervention through QE / stimulus? Do you not think we have been spending debt money on consumption? And this is a failure of PM and his economic policy? Asked by: AP

Ans by Vivean: 20 years of Manmohanomics have also given us 6 percent to 9 percent annual economic growth rate, the fastest reduction in poverty in our history, well stocked shops, the possibility of owning a house well before one’s retirement and also hope for our youngsters. We need more of Manmohanomics and not less.

Unanswered questions:

Q. 20 years of Manmohanomics have also given us 6 percent to 9 percent annual GDP growth rate but that is propped up by debt. 20 yrs of manmohanomics has given us record number of farmer suicides, Forex equals to external debt, exponentially growing trade deficits, higher inflation, BOP crisis staring us, greater rich and poor divide and greater disparity in the economy. Don’t you think your argument of GDP growth is meaningless with all this and 90% debt to GDP ratio? Does GDP take into account a country’s debt? If I get a natural calamity, will the money I spent for rebuilding not show the GDP up (“broken window fallacy”)?

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Few options in the debt crisis


Some economists have been expressing apprehensions of US and EU using India as an external markets to avoid the debt crisis they are facing. While the possibility of India accepting such a proposal is very high because Indian Government desperately needs more debt to meet its exponentially growing fiscal deficit and falling growth, I am convinced that even such a move will not help US and EU in avoiding the ongoing debt crisis and I also believe the current crisis is unfixable now within the framework of current financial system.

The author of one such post I read a few days back says that if India is used as an external market, even a billion dollar that is sucked out of the country can create 20,000 jobs in US and EU. But that will also mean a contraction of 60 billion dollar in India. This is because the velocity of money (money changing hands from one person to other person) in india for $1 is $60.

However, while the billion dollar per se is not even a peanut in the development plan of the economy of the size of US and EU but the key point that needs to be understood here is that EVEN THIS BILLION DOLLAR WILL NOT CREATE ANY PRODUCTIVE JOBS IN THEIR ECONOMY. The reason is that it is not absence of market or consumption that is preventing job creation but due to debt becoming difficult, the jobs sustained on borrowed money are reducing. US and EU DO NOT NEED ANY EXTERNAL MARKET, THEY ALREADY HAVE A HUGE MARKET IN THEIR OWN COUNTRY and that is why they have such a huge trade deficits. The demand contraction there is NOT due to surplus production which requires external market for consumption and to sustain production and thus employment in the economy. The Demand contraction there is due to debt restriction because it is debt which has enabled most of the jobs in these countries and which are in the service sector. These jobs in service sector are creating more consumers and in the absence of required production, the country in increasingly depending on imports thereby increasing trade deficits.  Infact, in this era of easy money, the only thing governments do is to create money from thin air and flood the economy with cheap money without bothering if there is enough production to meet this propped up demand. Often lack of credit in 1930 depression is cited as an explanation on why credit is required, which is though true yet ignores the fact that the economy was productive at that time and running massive trade surplus. Here the situation is different. The economy is not producing and therefore running massive trade deficits to meet the demands propped up by phony service sector jobs. They started abjuring production after WW2 and eventually (in 80s) manufacturing was outsourced to China and Services to nations like India (remember the “buffalo to banglore” catchwords). By selling there cattles and farms, they have made huge money but who is the beneficiary of this globalisation? It is not the common people but the 1% rich, banking and corporate cartel. It is this greedy 1% that is stealing jobs from US and EU citizens.

All this while, when the citizens of these debt-ridden countries were enjoying debt financed prosperity, their economy was not producing. However because of the past credit worthiness, countries like China, Japan etc have not only been providing them goods but also the proceeds from the sold goods are being invested in buying government bonds. Now the problem is that these debt ridden countries like US and EU do not have enough manufacturing left, so the increase in jobs are only taking place in the service sector which means people consuming more. And this consumption is further increasing trade deficit and in turn debt.

Now the problem is why can’t we maintain a certain level of deficit and avoid a collapse? So it is around 1 trillion USD for US which China and Japan and US bond holders, QE etc all together are able to fulfill then whats the problem? First of all, same deficit each year does not mean same level of debt. Deficit each year gets accumulated and increase total debt and growing debt means growing interest payment. So maintaining same level of deficit means increasing interest payments. Secondly, the greedy corporate cartel has an obsession with growth. And the moment growth stops they start throwing people out starting reverse multiplier effect and a slow down (resulting in mortgage defaults etc). THEREFORE EXTERNAL MARKETS ARE NOT GOING TO HELP THEM. If they at all need market then they should focus on domestic market to reduce their trade deficit.

India, per se however may likely to do all wrong things as far as this UPA2 government is there and I strongly believe they will offer India as a market to US & EU, resulting in an inflation explosion because when foreign companies will start sucking out their profit, rupee will further get devalued and inflation will skyrocket. The Indian government anyway have no option but to seek more debt (to postpone the crisis) else the austerity measures will eventually result in liquidity crisis and bank collapse.

For the readers of this blog I would like to share following two very good videos to watch.

Unfixable by Chrismartenson: http://www.youtube.com/watch?v=8WBiTnBwSWc

Tony Robbins on magnitude of debt: http://www.youtube.com/watch?v=jboTeS9Okak&feature=share

Individualism Vs Socialism: What is the way forward?


Free-markets capitalism, supported by Austrian school Institutes like Mises and Marx’s communism are two poles apart philosphies, which are basically an extension of individualism and socialism respectively. I stand for socialism because I believe, in individualism human beings compete with each other and in socialism they compliment each other. I believe (and I may be wrong) that individuals in a society are not free to pursue their interest because they are also tied to other people’s interest. So, imagine we all are tied up as in a three-leg kind of race. Imagine 100s people all tied up in their leg with each other. Imagine if you ask them to run and if they all pursue inividual goals (read interests), will they achieve it? The answer is no. Now if these people adopt greatest common good as the target and instead of competing, compliment each other, towards a common goal, it is a win-win situation.

Today, we are neither true socialist nor true capitalist. Infact this dangerous cocktail of socialism and capitalism can be at best called as crony capitalism which is as dishonest as Russia’s authoritarian communism or China’s authoritarian capitalism.

If the true capitalism (free markets) had been adopted, it would have shown its ugly face much earlier as the market dynamics would have unambiguously resulted into a great depression with end of road scenario. The whole credit would have got centralized in the hands of a few people whom marx called as “bourgeoisie” and without new markets (read exploitation and generating poors) created either by an act of war or coercion, capitalism could not have continued.

The capitalism would have died in its naked form as people would have understood the futility of a capitalistic structure which has anti-spiritual (anti-dharma) foundations and as such it is inherently faulty. In marx’s words the seeds of distruction of capitalism is in capitalism itself. No wonder why the great leaders of our independence from Hindustan Socialist Republican army (Chandradekhar azad, Bhagat Singh etc) to Subhash Chandra Bose, all had a vision of true socialism or as pandit Sri Ram Sharma Acharya, a great seer sage and visionary of our era has described, ‘spiritual communism’.

Arvind Kejariwal in a recent interview to “chauthi duniya” very beautifully described how our ancient economic model used to be until 1860 which was a real democracy and which Gandhi ji called as Gram Rajya. It was a decentralised model of ‘society owned means of production’ and ‘local governance’. That I believe will be the economic model in the future after the coming economic collapse and that will pave way for the golden age.

FDI in retail – Another form of debt financed consumption


One wonders if he should be happy or sad with the govt’s decision of allowing FDI in retail. The decision marks a sad day for the country but happy that it will hasten to conclusion the obituary of reforms and reformists thus paving the way for a new beginning.

FDI is another form of debt that will attempt to temporarily avert the crisis of falling rupee and rising inflation but alas! only at the cost of greater future pains. FDI gives us capital account surplus, which is a liability. It is a debt which has to be paid back. We have been using this money on capital account not to open factories but to pay FOR OUR IMPORT BILLS because we are a trade deficit (Import > exports) nation. Now when FII’s starts cashing in their profits and pull out from markets, we need to pay them back their money. The point now is that how do we do it? Because we are a trade deficit nation (read it as a poor nation) , options available before us are fairly limited.

1) by raising more debt either by selling our assets or interests to FIIs and asking for investments

or

2) by taking loans from IMF, World bank etc which also we have been doing aggressively last few years.

Any 3rd option of meeting this pull out demand from current account, which is possible for a trade surplus country like China has, in not available to us. From the last 2 decades, we have been adopting both methods to pay our rising import bills and enjoying this debt financed prosperity. This exposes how successful these reforms have been all these years. Recently, we saw another example of how hollow and dangerous this debt financed growth has been, when our rupee was in free fall a few days back and have reached all time low and RBI was scared of intervening due to lack of reserves. The reason was that our foreign exchange reserves is close to external debt. So what good FDIs have been doing in last 20 years? It has made us no wealthy a nation but one that is more on debt than it was earlier.

Wallmart is not here for charity. All it will do is to kill our entrepreneurs and create a few slaves with lesser buying power. It will take the profit out thereby increasing the outflow. When it will do that, rupee will fall and our import bills will drastically rise. On top of it, massive unemployment, that it will cause will mean less purchasing power with people therefore low production. And eventually after sucking the nation when these foreign firms will shut their shops and move out, we will face the same consequence as southeast asian countries had faced in 1997 during the asian tigers crisis. Our rupee would have been devalued to a greater extent thereby giving way to rampant inflation marked with low growth, and massive unemployment. This STAGFLATION causing series of unrest, anarchy and chaos will be the order of the day. That surely looks like the trend unless some intervention saves or change the course.

Does speculation cause inflation?


Amongst the various evils caused by loose monetary policy, one is speculation which further adds and contribute to inflation. Let us see how it happens.

Quantitative easing always causes prices to rise. Price rise encourages speculation and hoarding. Because you tend to buy it today when you know prices will go up tomorrow. What is happening today is that for a speculator, the risk of loosing is very low. Because he knows more money (demand) will be created by govt and as money (demand) will go up prices will go up always. Now if there is no money printing but sustained production, price rise will stop. As people will have to produce before they demand. A speculator in this situation is guaranteed to loose. When speculators will start loosing, the risk will become high and it will discourage people in the business of speculation.

Speculation contributes to price rise because the speculator knowing very well that prices have to rise as a result of quantitative easing, also starts hoarding. Thereby contributing to the momentum of the bubble.

I would like to quote a classic example recently given by Ron Paul in the republican presidential debate in US. “A dime of silver minted before 1960 can still buy the same gasoline today as it could buy in at that time”. What does it mean? It is not the price of commodity rising but the value of currency going down. We know that govt is printing and dumping the money in the economy. Money printing cost nothing but production of commodities is not that easy and cannot grow at the same rate as money printing. Availability of more money (demand) and less supplies are causing inflation.

A Clueless Government?


The Indian govt has decided to once again raise the price of petrol. And this followed RBI’s decisions to raise the interest rates. As previously mentioned in this blog, this was well anticipated because Government is doing nothing to improve fundamentals problems but only taking forward its failed policy of debt financed consumption.

Govt deficits are the real reasons for price rise. Deficits are high because govt spending is high and way beyond its means. Now since RBI is tightening and cost of borrowing going up they are trying to fill the gap by directly taxing people. The tax could be in various ways , raising the prices of petrol, LPG, Train fairs, etc. The bottom line is they have to get money for their deficits.

The question then is why and where they are spending so much to create such high deficits. Ideally when you borrow to open a factory that produces something, the borrower can repay to the lender. But what will happen if we start taking personal loan from bank and consume it. Once this money is over, thats it…there is no way the lender can get his money back because the debt money was never used efficiently. Govt has propped up a huge service sector of govt employee whose contribution to the economy is almost zero. Govt debt is used to finance the salaries of this service sector and several of its useless schemes which are like cash distribution to people to get votes. Recently when the petrol prices are hiked, you might also have noticed that govt has also increased the DA and pensions by 7%. It is not that I do not want people’s salary to increase at this time of inflation but from where this money is coming? When govt does not have money, they either print money (QE) or take debt. In both cases the problem of production is not solved but the crisis is only pushed forward. We are not taking debt to open factories but actually consuming on debt and thats the problem. I am wondering why the TV anchors are not calling and questioning the likes of Sudhir Bhalla, Gurcharan Das, Montek Singh Ahluwalia who all these 20 years supporting the current economic policy of Manmohan Singh.

Analysing and deciphering trends of Indian economy as well as the minds of our leadership is not very difficult…just listen to what their western fathers are saying and you will hear the echo in action. Our leadership is so hollow that they simply believe that by copying west all their problems will vanish. First they followed west like a loyal soldier without the slightest of application of mind and then when the west got into trouble, their faith and inferiority complex is so high that they are unwilling to think differently. Everything that Bernanke and Geithner or their masters like Paul Kruggman are thinking and doing, rest assured the same policy will be followed here. So if Bernanke said, “we don’t have enough tools”, Chidambaram repeated the same thing few days after. In the G8 summit in Canada in 2009 (If I remember correctly) when the Europe called for austerity fearing inflation and US was alone demanding stimulus, our much trumpeted economist PM called for more spending supporting Ben Bernanke.

Now when Pranam Mukherji called rising inflation as “sad news” … it means he is clueless and does not have a right to be in his position. If inflation is to be predicted by astrologers what is this ICRIER type instituions are doing?

Why China will dump treasuries?


(This article was written in response to a comment from author Venkatesan Vembu’s comments in http://www.firstpost.com -> “Here’s the real reason why gold prices are soaring”.http://www.firstpost.com/economy/here%E2%80%99s-the-real-reason-why-gold-prices-are-soaring-65530.html

I strongly believe that China has no options but to dump treasuries and the delay they do in realising it, the more money they will loose.

There are only 3 ways to pay debt.
a) produce : export (with interest) to get dollars back into economy.
b) default : declare bankruptcy
c) inflate : print money and devalue currency

Having a glance at the total debt + unfunded liabilities US has, producing its way out of debt is out of question. If it is option b) which is default, it means extreme levels of austerity, much much more severe then we are seeing in Greece. Expecting this level of honesty from US, to bear extreme pain, to repay debt, is simply insane. The whole nation will erupt in violent revolution and no govt has the guts to accept it. Infact that situation has to happen eventually until the crisis is pushed to a point beyond which it can not be pushed any further. How the crisis is pushed further, we will see it in 3rd point.

The 3rd and the most convenient way is inflation, which means devalue your currency and print more money to get out of debt. This suits the borrower if it is the issuer of the currency in which debt is taken. But the creditor is going to suffer because he will get the money back with REDUCED PURCHASING POWER.

Let me quote what our own RBI says about Rupee denominated debt, in “India’s External Debt, A Status Report 2009-10”, (page 11) … “Unlike foreign currency denominated debt, where the currency risk is borne by the borrower, the characteristic feature of domestic currency denominated debt is that the exchange risk is borne by the creditor. The contractual liability, however, is settled in terms of the designated foreign currency (through exports in case of Rupee debt owed to Russia).This implies that the borrower gains (and the creditor loses) when the local currency depreciates since less has to be repaid in foreign currency terms and vice versa.”.

So we clearly see that central banks knows fully well that if they are the issuer of the currency in which debt exists, they can devalue and pay less. And that is what we have been seeing federal reserve doing all these decades, while at the same time accumulating more debt. The reason was that US was having the unique advantage of being the issuer of world’s reserve currency and they were exploiting this position. Therefore I believe that US will continue to inflate to get out of debt. Falling dollar means, China as a creditor in dollar denominated debt looses the value of its money anyway even if it does not do anything.

Understanding this risk of loosing value of its dollar investments, China offlate has been aggressively trying to diversify. But thats where it gets trapped in the web, because to ensure that its dollar investments do not loose value China has to continue to invest in US treasuries so that US doesn’t have to do quantitative easing and devalue its dollar. Since US is the biggest market for China, later has to continue to work and provide more goods to US to get  dollars to be invested in US treasuries. So effectively goods provided by China is filling up the supply gap  caused due to massive dollar printing by US. Now the trap here is that if China does not invest in US treasuries, quantitative easing will be required resulting in more dollar devaluation  thereby loss of Chinese investments. Since the US deficits are growing exponentially, China will have to do greater investment in US treasuries, to save dollar value. To do this greater investment, China will need to supply more goods to US (so that it gets more money to invest). So basically to get back its money from US, China has to lend them more. The pace with which China reduces the investment in treasuries, dollar devaluation will increase (because of quantitative easing). On the other hand, if China increases the investment in US treasuries to save dollar value, inflation in China will increase causing civil unrest, thereby destabilising the government. The situation as it stands today is that, thanks to trillions of dollars worth deficit US has, despite of Chinese investments the debt requirements are growing exponentially, requiring massive quantitative easing and thereby causing dollar devaluation. To help dollar retain its value, China so far has been devaluing its currency almost at the same pace but it can not do so without threatening its internal political stability as the inflation is breaking all records and causing civil unrest. China will have to quit dollar when the cost of saving dollar (inflation) will start to threaten the national stability itself. Infact China will also see that despite of their sufferings of inflation, US deficits are growing exponentially causing greater dollar devaluation and therefore making their efforts futile, to save their dollar investments’ value.

Some people argues that in the absence of other currency alternative dollar will not crash. They say that Euro, GBP and almost all major currencies are falling. Yuan and Yen both are deliberately devalued to maintain the exchange rate with dollar. So there is no alternative to dollar and therefore it will not crash. The point these people miss in their assessment is that what is the purpose of currency? Why does one holds the currency? Only to buy commodities. If the currency is fast loosing value, people will instead of holding currency will start holding the commodity. So investors will start diversifying its investments from currency to commodity because currency is loosing its function “store of value”.

Here we are talking about China particularly and same principle applies to them. When they will realise that to hold dollars they are actually investing more (providing debt to US) and in turn getting negative returns (loosing money to dollar devaluation), they will definitely aggressively offload dollars which will create a panic in the currency market and global economy. This will  result in inflation which actually means prices of commodity in terms of currency will go very high.

WHEN THE BETTER SENSE PREVAILS UPON CHINA, the unthinkable will happen and IT WILL DUMP THE TREASURIES. Gold will be the real money as nobody will trust currencies. China and US both will blame each other and the likes of Marc Faber are not wrong in saying that there may be War. I see a serious US vs China war / conflict whatever you want to say, as a strong possibility. And I strongly believe that Arab’s will support China because they also have huge investments in dollars. The clock is ticking for the OPEC / China to pull the trigger…

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