Posts tagged ‘debt crisis’

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

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”)?


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:

Tony Robbins on magnitude of debt:

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