Musings

The US is the worlds largest consumer, especially China's. China in turn holds a quarter of dollar forex reserves. China lends this money back to the US and the US banks to its consumers who in turn buy 'made in china'. Now with the liquidity crisis, and some sort of economic realisation, if consumers borrow less and spend less, Chinese exports will take a hit. If exports drop sufficiently to weaken the trade dependency, China would sell some of its forex reserves for which it could call on some of its debt to the US.

With the current trade deficit, America needs debt to sustain its economy, and additional debt to service the initial debt. Till before this crisis the world saw the US as a credit worthy entity. If the worlds creditor nations see the US's credit worthiness drop, expect debt getting more costly.
If nations reduce their dollar holdings the dollar will devalue, which in the current climate will only accentuate inflationary pressures on it thus increasing the expected yields on holding the dollar, of course through treasury bonds etc.

Thus this flight to liquidity, where people are buying treasury bonds moving away from corporate bonds might be flipped right on its head. Treasury bonds will get cheaper, so there will come a time when one would want to go short on treasury bonds. The only issue is finding something to go long on.

Unlimited returns limited liability

First Northern bank, and now AIG. The money crisis has led to government takeover of some of glamor boys and bedrocks of a market driven economy. The fall of these companies would have had severe implications on the economy of these countries, banking sector in particular. So a government bailout with tax payers money. This was the only way to continue operations in these companies. The other option would have been the companies filing for bankruptcy which would lead to the company's assets stripped apart by creditors, and continued operations unlikely.

Now my goat with the whole process is that the government in these occasions made the tax payers pay for operational mistakes for which the management and shareholders who chose the management are responsible, while putting minimum costs on the shareholders. On the event of a bail out, the shareholders can still liquidate their shareholding and leave with whatever they get. They shouldn't be getting anything in a government bailout. A government bail out happens only when the market does not value on going operations of a company higher than the sum of its parts. The first right of whatever is earned out of the parts auctioned in the market is with the employees, debtors etc in that order, and equity holders come last. But a government bail out serves the shareholders before anybody else. And the economic cost of buying at a price higher than the fair market value is passed on to the tax payers. This is not just. This is my goat.

Oil price fluctuations

I was going through a blog the other day and read one of the posts where the author takes MMS into account for claiming in his 15th August adress to the nation, that the current inflation crisis was caused due to oil price hikes. The author's reasoning was something like this. Oil price hikes leads to different price levels decided by the market. Inflation however is a result of the amount of money in the system, which is controlled by MMS and his stooges in the RBI. So MMS was lying. Now I hate MMS and the party he represents as much as the next bloke, but somewhere I felt the blame was a tad too harsh. If the price level has nothing to do with inflation what has? No doubt MMS and his merry minions would have exacerbated the inflationary pressures on the common Indian by short sighted monetory policies, but I do feel like MMS does, that the lead to all this originated somewhere in the middle east!

This current inflationary crisis was caused due to the increase in oil prices, make no mistake about it. The government was implicit in aggravating the crisis by taking a short term view and increasing the money supply in the economy. But did it have any other option? Taking a stand against this price hike would have meant a hit on the GDP growth and employment. An outcome that would have spelt disaster for its impending election campaign. Also, the courage to resist increasing the supply of money to counter the OPEC proclivities to raise oil prices by significant percentages intermittantly, would have been effective only if it was a concerted effort of all oil consuming countries. Something unlikely to happen. So effectively the sheikhs of the OPEC have managed to get a tight grip on our proverbial balls. And whenever they squeeze, our GDP will fall, while unemployment and inflation will rise.

Unless we manage to develop alternate sources of energy to the level where they can be effective substitutes for oil, or take over all the oil fields of the world and distribute their ownership amongst countries in proportion to their population (a socialistic solution to a capitalistic bottleneck anyone? China.. anyone?? greater good anyone???), we will be held hostage to OPEC policies. That is why at some levels the Iraq war, and threats to Iran do serve as signals to oil producing nations that their oligopolic market policies can result in unmarketlike reprisals. It would only be a matter of time before other oil starved nations like China, France etc would undertake their own wars on terror.

At a personal level though I am anxious about the next salary hike, and am calculating what level would be a true reflection of my own productivity growth with inflation arrears for the current year and inflation expectations for the next year considered. This rent seeking activity (anxiety and unnecessary calculation) would undoubtedly have negative impact on our real GDP growth next year. For that I apologise to my countrymen.

The seven year itch

Oh it feels good to finally be rid of it. Like many on both sides of the fence have said 'No deal is better than a bad deal'.

The WTO talks in Doha centred around free trade in a market that is endemically asymmetrical. Ignoring other agendas discussed, the talks around agricultural commodities trade consisted of, on one side, a set of arguments so farcical that you must give it to the American's if they expected they could pull it off. For all the soundbytes about free trade I fail to see how it is different from dumping of goods, as by most estimates American food exports have the characteristic of being below production cost, masked of course by the agriculture subsidies their big agro businesses are provided. This low price is temporary, until the local farmers are crippled to the stage that they can no longer farm, whereafter the food exporters exponentially increase their prices. This 'pull the rug from under your feet' trick is of course sanctioned by the IMF which otherwise prevents other countries under IMF loans the ability to subsidize their own farmers. Tariffs are essential to deal with such skewed supply management.

Kudos to India for calling this bluff. India, of course, has the history of taking moral positions in international forums, on issues of little consequence or interest, see NAM etc. But this time it has emerged something of a hero, with the backing of China of all countries. This stance will no doubt make our comrades a happy lot.

However before we get all elated about this outcome it is essential to realise that status quo has prevailed. The lot of our subsistence farmers, our inefficient granary storage and distribution systems, and our social and banking support systems are far from adequate to deal with the ills that inflict our agriculture industry. We are still inefficient producers, our public distribution system is full of middlemen salivating for a 'cut'. So our consumers also pay more then they should, or would have in a free market. The room for more technology as well as management in agriculture has to be underlined.

Some countries will definitely not be too happy with the outcome of the talks. Countries like New Zealand with low population, large arable tracts of land, and an advanced agricultural industry are desperate for new markets, and they would have benefited if India and China opened up their markets. Free trade would have also have forced techologically backward agriculture sectors/countries to adapt quicker than they are doing right now or face elimination from the industry. So this is a hard dilemma for me to take sides, I am a free trade proponent, but i am not unaware of the dangers to vulnerable segments of society who will inevitably be affected drastically by free trade.

Anyway, good to see the collective clout of the US and Europe not enough for a change. One is almost enticed to say to the US 'It was a good run, but your time is up' and if anybody can do it, it has to be all of us collectively. In doing so we must ensure that the voices of smaller nations are not lost. One can feel for this Burkina Faso minister.

'"We can hardly control our anger," said Burkina Faso's Tade Minister
Mamadou Sanou.
.......
"wanted me to be here to negotiate on cotton. I have been here for 10 days
and I haven't been able to discuss cotton,he said'"

This comment really made me lol!