Thursday, December 8, 2011
Global Economic Crisis – Immediate Solution
Global Economic Crisis – Immediate Solution
The turbulence we are going through is unprecedented in the world History. What started as A financial institution failure, affected not only the leading financial institutions in the world but also the major developed economic systems in the world leading to a systemic failure.
Unlike in the past , when it had an impact on only a few countries and few asset classes, this time, the crisis had its effect on almost all countries in the world and all asset classes. The crisis had a contagion effect and spread far and wide without an end in sight creating more and more uncertainties day by day.
When Government creates stimulus it goes to increase the government debt making the government vulnerable to financial weakness. In a few cases , where there was a government failure, investors have taken an hair cut in their investments. But in General, Sovereign debt is supposed to be more trustworthy since Central Banks can print money to lend it to the government when in need.
Governments in an effort to stop economic slide, tried many measures including Monetary and Fiscal Stimulus but black swan events had overtaken the efforts of governments. Many of the developed countries printed more money and tried to stimulate the Economic Growth and reduce the unemployment. But it has gone into a spiral. The only effect is the outstanding debts of governments are going up, their credit rating is being downgraded and there was a lot of trust deficit between governments.,Banks and investors.
Everybody is in a dilemma searching for solutions and immediate remedy. The effective solutions are eluding the policy makers
.
According to Classical Economics, Printing money is likely to increase the demand, inflation and reduce the value of money. This is true in cases of countries where the potential for high growth, high employment levels and low debt repayment needs exist.
Economic History has proven that only a few countries at any point in time have high economic growth rates and those who were growing at high rates for long periods of time will see a decline in growth and potential for growth is almost negligible.
The developed countries which are affected by crisis today has less potential for growth , less opportunities for providing additional employment and supply exceeding demand levels for many of the product categories. The scope for stimulating the domestic demand and increasing inflationary tendencies are limited.
The need for new money creation has to continue in these economies till they achieve an economic balance but with a difference. The classical economic theories were created when the world was very simple, the financial architecture in the economies were very simple, the products available in the financial market were very simple and transparent. The world was not integrated like today. The theories proved right, whenever there was an economic crisis.
But we are living in a modern world with many factors influencing the economic performance and it is very difficult to exactly quantify the impact of each factor on the economy. The present crisis gives an impression that there is no solution in sight. There is a fear, gloom and high level of uncertainty.
The crisis in Europe today is due to high level of government debt which was created because of the high acceptance of debt denominated in Euro issued by member countries. Only the Monetary union happened and to some extent economic integration. There was a total absence of Fiscal Union and Political Union and lack of full economic integration. There is a need to move towards a fiscal integration and member countries should give the mandate to Germany and France to evolve a fiscal system within Euro Zone as if it is a Federal Structure. The Fiscal union is the immediate need.
The crisis today is due to Debt at Country Level , Province/State Level, Municipal Level, Corporate level and individual level. All the players in the system are affected but the degree of impact varies on each stake holder. Unlike in the past, it looks like the issue could not be resolved within a short period.
One solution seems to be in sight, that is the way in which the debt levels could be reduced for all stake holders. This could be achieved through creating money by Government without adding debt to its balance sheet. That is to just print money and allocate to all the Stakeholders based on criteria to be evolved which will ensure the viability of the macro economic system, banking system, corporate sector and individuals who are indebted. The amount of money to be created depends on the need of all the stakeholders. It could be capped at 25% of the money in circulation today. This strategy might require, control of inflation within specified levels and managing the currency exchange rate within a specified levels. Since the actions taken in one country will have impact on all other countries in the world there has to be a coordinated action which is facilitated through a body like IMF. This strategy will change how Economic systems function, Capital markets work and transmission of money takes place. How this system will work can be tested through applying this concept to the most affected country in the world today and see the results in six months and if after effects are manageable then this concept could be implemented in other countries.
Introducing this system will make the economic systems viable. Improve the liquidity, bring back the trust levels. , removing the gloom and doom and make the financial systems functional. Today, financial systems are in a limbo and their traditional roles in financial sector have been totally hampered . The employment levels will go up.
Adopting the above strategy might require a close coordination of Fiscal and Monetary functions in a country and both Fiscal and Monetary policies have to be developed in an integrated manner. There has to be an increased integration between all the regulators in a country and continuous exchange of information on the developments in each domain.
The Analysis to be done and the parameters to be tracked.
Analysis of Debt with the average maturity period of the debt with Aging profile.
At the Country Level
State/Province Level
City/Municipal Level
Corporate Debt
Individual debt.
Criteria for determining the Printing of Money without Creating Debt for the Government
Total Debt in the system / GDP
Government Debt / GDP
External Debt / GDP
Repayments/ GDP
External Repayments / Reserves.
Forex Reserves / Negative Balance
Budget Deficit
Current Account Deficit
GDP Growth Rate /Potential Growth rate for next 5 years.
Interest Rates
Inflation and the likely trend in 5 years.
Unemployment level. and the likely trend in 5 years.
Distribution of Money Created.
The end use of money created should go to reduce the debt levels of stake holders including investment in Equity capital . The government can invest in Equity capital of Banks and Companies. Whenever governments had given stimulus in the form of investments in shares of companies, when there was a boom , governments were able to exit the investments at good profits.
There has to be a careful deployment of the money created and as per the criteria to be developed in consultation with a body like IMF, World Bank.
These are my initial thoughts and this concept could be further refined and modified after discussions and debates. Hope adopting this approach would help to address the issues before the world leaders in the Short term.
R.Kannan
Monday, January 31, 2011
Europe
European Economy
After a big decline of 4.1% in GDP growth Euro Area bounced back with a growth of 1.7% in 2010.
It is likely to grow at a rate of more than 1.5% p.a. in the next few years.
Consumer Price Inflation after moderating to 0.3% in 2009 increased to 1.4% in 2010 and it is likely to be in the same range for the next few years.
But in the new Member states, it is likely to be at a higher level at 3.2% in 2011.
To address the present crisis , the policy makers has created a permanent crisis management mechanism which should help to address the economic issues in different countries with increased level of coordination..
The establishment of E 750 bn emergency funding facility by IMF is a great positive which should make the stabilization of economies faster.
After Greece and Ireland, Portugal is likely to draw funds under the above arrangement and Spain is likely to depend on Markets for raising funds for some more time to come.
Hopefully, Spain should be able to manage the requirements from markets instead of seeking the help of IMF facility at least for a few more months.
IMF is hesitant to buy Euro government bonds in large number like the US government and if required IMF should consider large purchases of EU government bonds.
The Euro governments can seek the funds from Soverign wealth funds from other parts of the world. SWF’s are sitting on assets of $$ 4 trn. China has shown interest in buying the government bonds of distressed countries. Japan had shown its inclination to follow a similar strategy. These sources can go a long way in supporting the European Economies under distress..
There is a need for European countries under stress to follow austerity measures and adopt prudential financial and monetary management practices.
At this moment, all the governments in Euro zone should act in Unison to address the issues as if the problem was in their own countries and arrive at political consensus to weather the storm.
Germany has to take a lead role in coordinating this effort and stick to the commitment to Euro and remove the apprehensions of strong countries exiting the Euro Currency Mechanism.
There is an immediate need for increased level of coordination between countries in terms of Political approach , Economic revival and crisis management and differences in ideologies should take a back seat till Euro region revives.
The coordination efforts between the Euro Area countries so far are in the right direction and countries should continue to engage in addressing the crisis together and emerge successfully.
After a big decline of 4.1% in GDP growth Euro Area bounced back with a growth of 1.7% in 2010.
It is likely to grow at a rate of more than 1.5% p.a. in the next few years.
Consumer Price Inflation after moderating to 0.3% in 2009 increased to 1.4% in 2010 and it is likely to be in the same range for the next few years.
But in the new Member states, it is likely to be at a higher level at 3.2% in 2011.
To address the present crisis , the policy makers has created a permanent crisis management mechanism which should help to address the economic issues in different countries with increased level of coordination..
The establishment of E 750 bn emergency funding facility by IMF is a great positive which should make the stabilization of economies faster.
After Greece and Ireland, Portugal is likely to draw funds under the above arrangement and Spain is likely to depend on Markets for raising funds for some more time to come.
Hopefully, Spain should be able to manage the requirements from markets instead of seeking the help of IMF facility at least for a few more months.
IMF is hesitant to buy Euro government bonds in large number like the US government and if required IMF should consider large purchases of EU government bonds.
The Euro governments can seek the funds from Soverign wealth funds from other parts of the world. SWF’s are sitting on assets of $$ 4 trn. China has shown interest in buying the government bonds of distressed countries. Japan had shown its inclination to follow a similar strategy. These sources can go a long way in supporting the European Economies under distress..
There is a need for European countries under stress to follow austerity measures and adopt prudential financial and monetary management practices.
At this moment, all the governments in Euro zone should act in Unison to address the issues as if the problem was in their own countries and arrive at political consensus to weather the storm.
Germany has to take a lead role in coordinating this effort and stick to the commitment to Euro and remove the apprehensions of strong countries exiting the Euro Currency Mechanism.
There is an immediate need for increased level of coordination between countries in terms of Political approach , Economic revival and crisis management and differences in ideologies should take a back seat till Euro region revives.
The coordination efforts between the Euro Area countries so far are in the right direction and countries should continue to engage in addressing the crisis together and emerge successfully.
Tuesday, January 4, 2011
Gold price Outlook in 2011
Gold price Outlook in 2011
• All the analyst reports are very bullish on Gold in 2011. Most of them expect the silver to reach $ 30.
• Goldman expects, the price to average $ 1575 in 2011.
• Societe General expects this to reach $ 1485.
• BNP Paribus had revised its forecast upwards from 1275 to 1500
• Barclays sees a steady uptrend quarter on quarter and expects by Q3 it will be 1450. By the end of the year it could be 1850.
• Bank of America’s expectation is $1500.
• CIBC Canada expects it to be 1600
• Scotia capital expects the high price will be $ 1500 and it will be at $ 1400. They are the largest traders of gold in the world. 24 months it will be $ 1700.
• UBS expects an average price of 1400.
My observations :
• Gold is always a good hedge when economies don’t do well.
• US and Euro are likely to go through the pain for at least a year.
• Since US Economy is very weak, countries accumulating forex reserves want a save heaven for diversification of their assets.
• Gold provides a safe heaven.
• For the first time, China imported more gold than India.
• Since China has more than $ 2.5 trn of reserves and of that more than $ 1.5 trn has been invested in US bonds ./ treasuries, there is an immediate need for China to diversify.
• The reserves it accumulates in future, it might start investing in gold in a big way.
• Similar trends could be observed when emerging economies with good reserves start diversifying their assets.
• Since Euro is weak, US economy is Weak, Gold can play a role of good hedging against the economic risks.
• Since all the market players, who are not buying gold not for their own use but for speculation expects the prices to go up, their behaviour in the market would reflect their forecast.
• Hence, the price is bound to go up.
• Gold will be a good investment in 2011. Silver is also likely to move up well.
• All the analyst reports are very bullish on Gold in 2011. Most of them expect the silver to reach $ 30.
• Goldman expects, the price to average $ 1575 in 2011.
• Societe General expects this to reach $ 1485.
• BNP Paribus had revised its forecast upwards from 1275 to 1500
• Barclays sees a steady uptrend quarter on quarter and expects by Q3 it will be 1450. By the end of the year it could be 1850.
• Bank of America’s expectation is $1500.
• CIBC Canada expects it to be 1600
• Scotia capital expects the high price will be $ 1500 and it will be at $ 1400. They are the largest traders of gold in the world. 24 months it will be $ 1700.
• UBS expects an average price of 1400.
My observations :
• Gold is always a good hedge when economies don’t do well.
• US and Euro are likely to go through the pain for at least a year.
• Since US Economy is very weak, countries accumulating forex reserves want a save heaven for diversification of their assets.
• Gold provides a safe heaven.
• For the first time, China imported more gold than India.
• Since China has more than $ 2.5 trn of reserves and of that more than $ 1.5 trn has been invested in US bonds ./ treasuries, there is an immediate need for China to diversify.
• The reserves it accumulates in future, it might start investing in gold in a big way.
• Similar trends could be observed when emerging economies with good reserves start diversifying their assets.
• Since Euro is weak, US economy is Weak, Gold can play a role of good hedging against the economic risks.
• Since all the market players, who are not buying gold not for their own use but for speculation expects the prices to go up, their behaviour in the market would reflect their forecast.
• Hence, the price is bound to go up.
• Gold will be a good investment in 2011. Silver is also likely to move up well.
Tuesday, April 13, 2010
Permanent Stimulus For Economic Growth
Permanent Stimulus For Economic Growth
The countries which had shown a good growth rate , growing for long periods of time, provided stimulus to the Economic growth through well defined / planned economic policies which are in contravention of the prescribed economic Policies for Growth. Two examples today are China and USA. In USA, the government went ahead providing stimulus in the form of Moral Support to Industries, Benign Policies, Low interest rates and heavy borrowing from the other countries to Sustain the Economic Growth. This was mainly supported by Dollar which is the most accepted currency in the world coupled with the fact that a robust capital market which provided avenue for raising funds through various instruments not only domestically but also from outside US . The stimulus in US was given at the cost of general health of the Economy, which is very fragile, even today.
Whereas in the case of China, the stimulus for the Economy was provided through many ways and till today, the stimulus continues for a long period of time which is helping the Economy to show continuous good rate of growth. The following factors helped the Chinese Economy to sustain the growth rate even today.
1. Grand Vision. The Political Leadership decided that China should become an Industrial power and in line with the Population rank, they should develop their industries and take them to number one in the field they were operating. With that in Mind, the plans drawn for Economic Development and Infrastructure Development were in line with the objectives of reaching number one position in many segments of the industry.
2. Export Led Strategy. The policy makers identified that to become an industrial power they had to go for cost leadership strategy which would help to achieve a very high level of exports, since the strategy would create a competitive position which would be difficult for other countries to challenge. The cost leadership was pursued with great vigour and the country achieved the cost leadership position in the areas where they became leaders in exports. This helped to increase the size of manufacturing in the overall economy as well as earn Forex in a big way. The exports were subsidized at every level of value chain in the production system.
3. Risky Lending practices. Since most of the enterprises in China belonged to Government and earlier government owned enterprises, the loans were disbursed violating the prudent practices on lending. At one point in time, in this century, the NPA in Chinese Banking system was close to 50%. Since there was no pressure for the enterprises to worry about financial management, they pursued the production targets with increased focus. The focus of corporates were on production than on any other function.
4. Low Interest Rates. The government has a full control on the banking system and ensured that the loans are available at very competitive rates. The interest constituted a very small portion of the overall cost of products. The competitive interest rates in the economy helped Large, Medium and Small Enterprises to avail loans at attractive rates. This has substituted the minimal participation of stock markets in the Chinese Economy. Only in the last few years, the stock markets have become vibrant and Investment in equity by retail investors is showing signs of promise.
5. Inflation. Since there was a good control on Interest rates and the domestic economy was under the full control of the government, Inflation levels were at reasonable levels. The government had taken concerted efforts to control inflation .At CPI level , only in 2007, the it was above 4 at 4.8 and at 5.9 in 2008 but it came down to – 0.7% in 2009.
6. Fixed Exchange rate. For a long period of time, the government pegged its currency to the dollar and even after deciding that they should move towards realistic rates, the currency was allowed to appreciate marginally, only for a few months and again a strategy of pegging the currency to the dollar policy was pursued. This helped the country to retain its competitiveness in exports.
7. Large inflow of funds. Since the economy had shown a good promise for growth and the currency fluctuation was minimized, the country was able to attract large amount of foreign funds. Despite, large inflow of foreign funds, the enterprises were certain about exchange rates and its minimal impact on financial performance . Hence they concentrated more on the core business than on managing finance.
8. Control on Cost of other resources. There is a system of permission for workers to work in one city , thereby restricting the free movement of labour across the cities/towns. Further, the workers are made to work long hours with clearly defined targets for production. Since government transferred the companies to private sector, in most cases, the transfer price of enterprises to private sector was at very low rates which resulted in lower Depreciation and other infrastructure costs.
9. Good Implementation. After planning large projects, the best practices in project implementation was adopted and mammoth projects were completed as per the plans and achievement of physical targets took precedence over the financial aspects.
10. Political System. All the above was possible , since the entire country is run like a Corporate Enterprise. Those who reach the central leadership should have demonstrated their skills at lower levels of administration ,where they were able to demonstrate their competence and management skills. When investment takes place at a provincial level, the provincial authority has the full powers to give licenses and the levels of decision making was less and the uncertainity in implementation of projects was minimized. This will be very difficult in a democratic and plural society where the views of all the stakeholders are to be taken before making decisions.
There are concerns that the Chinese growth will come to a stop and the bubble will burst. This is not likely to happen, since China is a large country and still many regions are in the process of development and many people are under poverty line. The growth in China would be sustained through the increase in Domestic consumption even if the Trade position deteriorates with developed countries but likely to be off set by trade with developing countries ( where China has started increasing the engagement with these countries in a big way). China is likely to continue the Stimulus it is providing for many more years and it has developed the required resources to support this growth. But the extent and nature of stimulus provided will vary from what was observed in the past.
It will be a challenge for Democratic countries and countries with higher level of transparency to adopt all the practices like in China but at least the aspects relating to Management of the Economy including Management of Interest rates, Inflation, Currency Management and Project Planning and Management could be strengthened to achieve higher levels of Economic Growth.
The countries which had shown a good growth rate , growing for long periods of time, provided stimulus to the Economic growth through well defined / planned economic policies which are in contravention of the prescribed economic Policies for Growth. Two examples today are China and USA. In USA, the government went ahead providing stimulus in the form of Moral Support to Industries, Benign Policies, Low interest rates and heavy borrowing from the other countries to Sustain the Economic Growth. This was mainly supported by Dollar which is the most accepted currency in the world coupled with the fact that a robust capital market which provided avenue for raising funds through various instruments not only domestically but also from outside US . The stimulus in US was given at the cost of general health of the Economy, which is very fragile, even today.
Whereas in the case of China, the stimulus for the Economy was provided through many ways and till today, the stimulus continues for a long period of time which is helping the Economy to show continuous good rate of growth. The following factors helped the Chinese Economy to sustain the growth rate even today.
1. Grand Vision. The Political Leadership decided that China should become an Industrial power and in line with the Population rank, they should develop their industries and take them to number one in the field they were operating. With that in Mind, the plans drawn for Economic Development and Infrastructure Development were in line with the objectives of reaching number one position in many segments of the industry.
2. Export Led Strategy. The policy makers identified that to become an industrial power they had to go for cost leadership strategy which would help to achieve a very high level of exports, since the strategy would create a competitive position which would be difficult for other countries to challenge. The cost leadership was pursued with great vigour and the country achieved the cost leadership position in the areas where they became leaders in exports. This helped to increase the size of manufacturing in the overall economy as well as earn Forex in a big way. The exports were subsidized at every level of value chain in the production system.
3. Risky Lending practices. Since most of the enterprises in China belonged to Government and earlier government owned enterprises, the loans were disbursed violating the prudent practices on lending. At one point in time, in this century, the NPA in Chinese Banking system was close to 50%. Since there was no pressure for the enterprises to worry about financial management, they pursued the production targets with increased focus. The focus of corporates were on production than on any other function.
4. Low Interest Rates. The government has a full control on the banking system and ensured that the loans are available at very competitive rates. The interest constituted a very small portion of the overall cost of products. The competitive interest rates in the economy helped Large, Medium and Small Enterprises to avail loans at attractive rates. This has substituted the minimal participation of stock markets in the Chinese Economy. Only in the last few years, the stock markets have become vibrant and Investment in equity by retail investors is showing signs of promise.
5. Inflation. Since there was a good control on Interest rates and the domestic economy was under the full control of the government, Inflation levels were at reasonable levels. The government had taken concerted efforts to control inflation .At CPI level , only in 2007, the it was above 4 at 4.8 and at 5.9 in 2008 but it came down to – 0.7% in 2009.
6. Fixed Exchange rate. For a long period of time, the government pegged its currency to the dollar and even after deciding that they should move towards realistic rates, the currency was allowed to appreciate marginally, only for a few months and again a strategy of pegging the currency to the dollar policy was pursued. This helped the country to retain its competitiveness in exports.
7. Large inflow of funds. Since the economy had shown a good promise for growth and the currency fluctuation was minimized, the country was able to attract large amount of foreign funds. Despite, large inflow of foreign funds, the enterprises were certain about exchange rates and its minimal impact on financial performance . Hence they concentrated more on the core business than on managing finance.
8. Control on Cost of other resources. There is a system of permission for workers to work in one city , thereby restricting the free movement of labour across the cities/towns. Further, the workers are made to work long hours with clearly defined targets for production. Since government transferred the companies to private sector, in most cases, the transfer price of enterprises to private sector was at very low rates which resulted in lower Depreciation and other infrastructure costs.
9. Good Implementation. After planning large projects, the best practices in project implementation was adopted and mammoth projects were completed as per the plans and achievement of physical targets took precedence over the financial aspects.
10. Political System. All the above was possible , since the entire country is run like a Corporate Enterprise. Those who reach the central leadership should have demonstrated their skills at lower levels of administration ,where they were able to demonstrate their competence and management skills. When investment takes place at a provincial level, the provincial authority has the full powers to give licenses and the levels of decision making was less and the uncertainity in implementation of projects was minimized. This will be very difficult in a democratic and plural society where the views of all the stakeholders are to be taken before making decisions.
There are concerns that the Chinese growth will come to a stop and the bubble will burst. This is not likely to happen, since China is a large country and still many regions are in the process of development and many people are under poverty line. The growth in China would be sustained through the increase in Domestic consumption even if the Trade position deteriorates with developed countries but likely to be off set by trade with developing countries ( where China has started increasing the engagement with these countries in a big way). China is likely to continue the Stimulus it is providing for many more years and it has developed the required resources to support this growth. But the extent and nature of stimulus provided will vary from what was observed in the past.
It will be a challenge for Democratic countries and countries with higher level of transparency to adopt all the practices like in China but at least the aspects relating to Management of the Economy including Management of Interest rates, Inflation, Currency Management and Project Planning and Management could be strengthened to achieve higher levels of Economic Growth.
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