Posts Tagged ‘World Economy’

Mayhem in the Market

Wednesday, February 7th, 2018

Mayhem in the Market

By

Col (Retd) Bhaskar Sarkar VSM

Markets around the world have been jumping up and down, mostly down, since February 2, 2018. The reason for the slide in the Indian Markets could be due to the Indian budget. But what about the markets around the world? I see almost every English Channel around the world every day. I have seen no major upheaval anywhere. It is true that markets have been rising every day for years. At best a correction is due and desirable. At the worst, the bubble is beginning to burst and a collapse is around the corner.

Most analysts will have us believe that the downswing is just a normal correction. There is nothing to worry about market stability. The fundamentals are excellent. Just buy at the dips at the dips is what they advise.

The pessimists like me are not so sure. I believe that if there is smoke, there must be a fire somewhere. What could trigger a collapse of the market like in 2007/08?

Possible Reasons

Collapse of the UD dollar could be one reason for collapse. One of my friends had warned me about this about 3 months back. In my opinion the US dollar is overvalued. The US is the world’s biggest debtor with a debt of over $20 trillion. It printed the Greenback on as required basis since 2000. It has a large trade deficit and astronomical defence expenditure. The Quantitative Easing (QE) at $90 billion per month for about 8 years has created a huge liquidity in the market which has been pushing up share prices as unlimited money supply chases limited number of shares. The US dollar remains strong because most major economies of the world want it to remain high so that their products remain cheap and competitive on the US market. However, as the US tries to restrict imports from China, Japan, Korea, EU and Mexico by imposing import duties, the incentive to keep the dollar strong may be reducing. As China seeks to enhance its super power status, it would like to project the Chinese Yuan as the most stable currency. So it could decide to destabilize the dollar by selling some of its huge holdings of US bonds. Chinese rating agencies do not rate the US dollar very high. US do not have reserves to defend the dollar.

Stock valuations

I read somewhere that the price of a stock should be around 15 to 20 times the earning per share. Today, prices of most shares are above 30 times the earning per share. Thus a major correction becomes a distinct possibility.

War

There are many conflict zones in the world like North Korea, South China Sea, Iran, Syria, and Afghanistan. There is a possibility of a clash between the US and Turkey as Turkey tries to pushback the Kurds from its borders. There is also the possibility of a clash between Israel and Hezbollah over Israeli missile attacks on Hezbollah and Iranian bases in Syria. But these would not destabilize the world. Threat of war is least likely to be spooking the markets.

US Politics

US politics has turned ugly since Trump won the Presidency. There seems to be pathological hatred between the Republicans and the Democrats which is not good for the US and the world. Winning and losing elections is a part of democracy and the will of the people should be accepted gracefully. Unfortunately, that is not happening. Democrats want to discredit Trump. In his State of the Union speech, Trump claimed credit for the rise is US markets over the last year. Some Democrat moneybags may be trying to crash the market to discredit Trump. Republican moneybags could be trying to stabilize the market and hence the rebound. This could be the reason for the recent volatility.

LCGT

The 10% tax proposed on Long Term Capital gains could have spooked the Indian stock market. Most Indians hate paying tax and will go to any length to avoid paying it. The withdrawal of tax on Long Term Capital gains has encouraged all and sundry to invest in mutual funds in the hope of tax free gains. I have never been able to understand why governments of all hues have tried to encourage speculative activity by making it tax free while making manufacturers, traders, service providers, salaried class and consultants pay tax through their noses. This not only totally unfair but diverts funds from productive activities which create employment and real wealth to speculative activity which does not create employment and generates virtual wealth which can disappear in a day. I congratulate Mr. Jaitly on introducing the tax and hope that the next budget will make tax on capital gains from shares at par with any other capital gains. This tax has no effect on the global market.

Conclusion

I am not an investor, financial advisor or fortune teller. I am an humble writer who is not being paid for this piece. So it is not even paid news. I have no idea as to how the markets will behave in the coming days. For all you know, by the time this is published, if at all, the Bulls may be charging up the mountain again. However, I am convinced that if there is danger to economic stability in the world it lies in the value of the US dollar and US politics. If you are an investor using your own money, please go ahead and do what you please. If you are playing the market with someone else’s money or borrowed money, you may like cash your holdings and wait on the sidelines for better times.

Why Economies of the Developed World are not Improving

Friday, October 19th, 2012

Why Economies of the Developed World are not Improving

By

Bhaskar Sarkar

Bhaskar Sarkar’s  Author Profile: http://www.smashwords.com/profile/view/Bhaskarsarkar1940

The economies of the developed world have been in doldrums since 2000. The Dot.Com bubble of 2002 and the Sub-Prime Meltdown of 2008 have seriously affected the economies of the US and Western Europe. The growth rate of the US is barely above 1%. The growth rates of most economies of Western Europe are negative. Unemployment, poverty, hunger and economic inequalities are rising to alarming levels. There is no dearth of investable capital. But the world leaders have been unable to stop the economic downturn, the misery of at least one third of their people and revive the economies.

The learned economists of the world may like to consider the reasons given below.

Inability to Reconcile to Realities in a Changing World

The governments, politicians, economists and intellectual of the world seem to be unable to understand the realities in a changing world. The investor of Europe and the U.S. hold most of the investable capital in the world. But manufacturing and business processes in the developed countries are no longer competitive when compared with the developing world. Multinational companies of the developed world are unwilling to invest in Europe and the US. Developed countries have increasing budget deficits, trade deficits, unemployment, poverty, and hunger.

Use of GDP as a Planning Tool

Per Capita GDP does not reflect the prosperity of the people of a country. It should not be treated as an index for any kind of economic planning. Any poverty alleviation program that is based on per capita GDP will only benefit big business and not the people whose poverty needs to be alleviated.

GDP growth rate should never be a factor in economic planning. Poverty alleviation, income growth of individuals, employment generation, infrastructure development, environment protection, conservation of natural resources, balanced trade, inclusive and sustainable growth should be objective of economic planning at all levels in any country.

Use of GDP for Measuring State of Economy

GDP is widely used by economists to gauge the health of an economy, as its indicators are relatively easily identified. The governments of almost all countries of the world use growth rate of GDP for economic planning and assessing the state of the economy. GDP has grave limitations when comparing economies of different countries. For example, the poverty threshold in the US is $ 17500 for family of four or about $12 per head per day while for the developing countries poverty threshold is $2 per day. GDP does not take into account equal value for equal work. For example when a barber gives a haircut in the US, GDP increase by $ 10 but when a barber gives a haircut in India, the GDP increases by about 50 cents. GDP does not take into account free services like domestic work, open source soft wares and internet services like Yahoo, Linux, Google and a host of other activities.

Use of GDP growth rate for economic planning leads to many distortions. Government policies are always encouraging or some times forcing people to spend. The savings bank interest in many countries is zero or close to zero. People have no incentive for saving. Pensioners are unable to invest their retirement benefits in safe bank fixed deposits and get reasonable returns. In India, senior citizen can get as mush as 9.5 to 10 percent interest on bank fixed deposits. They do not have to invest in mutual funds or pension funds which are subject to market risks. Stock market melt downs, as we all know, occur every few years. High interests will not only encourage the economically disadvantaged to save for the proverbial rainy day but discourage speculation with borrowed money. It will increase social security in the developed world.

Whenever there is an economic slowdown, governments tend to release stimulus packages. In other words it increases liquidity and encourages banks to lend indiscriminately. This encourages people to borrow and invest in real estate or the stock market. The construction industry crates jobs and statistical growth is achieved. The rises in the share market gives a good feeling. Property prices and share prices keep rising till something happens. There is turmoil in the Middle East and oil prices shoot up or there is a change in government policy and liquidity dries up. As property and share prices crash, people are unable to pay their mortgages and bank loans. There is a financial crisis. Banks go bankrupt and need bailouts. Jobs are lost. The economically vulnerable are ruined. It happened during the Carter presidency, the Regan presidency and the Bush presidency.

Loss of Businesses Competitiveness

The strength of the U.S. Dollar, Euro and Pound is the real cause of loss of business competitiveness of the developed world. The minimum wage for an unskilled person in the US is $ 7.2 per hr or about $ 57 per day. This would translate to about Rupees 3000 per day in India. The minimum wage in India is around Rupees 220 per day or less than four dollars per day. The labor rates in China, Vietnam, Bangladesh and many other developing countries could be even lesser. How can American or European manufacturers compete with manufacturing in the developing world?

Deregulation of Banking

Bankers are supposed to be conservative and risk averse. But most modern bankers are just the opposite. The Chairmen, CEOs and senior staff with multi million dollar packages are under enormous pressure from shareholders to earn profit. They tend to lend without assessing the repaying abilities of the borrower and the quality of the collateral securities if any. To make matters worse, their cash to deposit and reserve ratios are very low and they borrow from wholesale lenders and lend to retail lenders at higher interests. So when there is an economic slow down and borrowers begin to default on a large scale, banks get into trouble. When the banks default on payments to the wholesale lenders, there is further melt down of the kind we saw during the “Great Depression” of 1929 to 37, depression of 1982-83 or during the Sub-Prime Crisis of 2008.

Government Attempts to Boost Economy

Whenever GDP growth slows down, governments attempt to boost growth with stimulus packages, low interests etc. This creates excess liquidity with investors and banks. Excessive liquidity and cheap credit lead to bull runs on the stock market and a boom in the property market. Real estate prices collapse due to the recession. Collapse of real estate prices caused the Savings and Loans Crisis of the 80s and to the Sub-Prime Crisis of 2007.

Globalization

The concept of Globalization of the world economy was thought out by the Washington Consensus to perpetuate US domination of the world economy. The basic aim of economic globalization is to open up the entire world economy to multinational companies by removing trade barriers imposed by Developing Countries through import restrictions, duties and restrictions on inflow of foreign capital. Globalization has helped export oriented economies of Asia. Globalization has not reversed the pattern of poverty for 30 per cent Americans and Europeans. It is only accentuating it. The U.S. and European markets are flooded with Chinese and Asian imports. Globalization is not working for the U.S. or Europe. Like many other strategies born out of capitalist greed, globalization is bound to fail. U.S. and European economies can thrive only if they can find a way to find a way to globalize trade without hurting its own citizen.

Out sourcing

Out sourcing increases the profits of American and European corporations but reduce employment in their own countries. Unless this is stopped, America and Europe will become countries of high net worth individuals, waiters, taxi drivers, the unemployed and the hungry.

Making the Investor the King

The private investors of the world have most of the investable surplus funds. Governments of most nations of the world have a deficit budget and are short of investable funds. It is therefore only natural that the global investors try to put pressures on the governments to grant them concessions in return for investing. Tax breaks are the main cause of the woeful state of government finances around the world. If the corporations gang up and form cartels, why cannot governments gang up and pass similar taxation laws and launch a war on tax havens and tax cheats?

Conclusion

Non availability of slaves and colonies is the primary cause of the decline of the economies of the developed countries. But that cannot change. What can change are government policies in the developed world which benefit the rich and the corporations at the expense of the middle class, working class and the poor. The financial conditions of central governments, state governments, town councils and municipalities are not going to improve unless there is a major change in economic policies of the developed nations.

This blog is an extract of the book, (Growth and Decline of Economies of Europe and the US.

To sample or purchase Growth and Decline of Economies of Europe and US: http://smashwords.com/b/231033