Questions for the Prime Minister and Finance Minister.

1.  Why are you leading our financial institutions  to sure shot disaster by forcing them to reduce interest rates and lend.  Isnt it basic economics that when there is a scarcity of capital Interest Rates will go Up and not Down?  Isnt it also basic economics that in order to attract more capital that is desparately needed , Interest rates have to remain high.

2.  Don't you realise that our banking system was safer than the those around the world only because of our regulations and safety net available in terms of the higher reserve requirements . By loosening these right now , when there are plenty of bad apples in the system, arent you putting the entire system at risk in the medium  and long run?

3.  Why are you offering lifelines for institutions that are sinking primarily because of their mismanagement and bad business practices ? Allow these to fail in order to cleanse the system and start building from a fresh base.  Increased credit can a good mantra but only after cleansing the system of  the rot.  Otherwise money will only flow to these rotten apples and as a result the system will be in deeper trouble.

4. Hasnt this path of reducing rates/ Increasing liquidity led the developed economies to the state they currently find themselves in?  Why are we treading the same dangerous path?

5.  If within the system,  most participants have behaved rationally while a minority has committed excesses, by trying to save this minority , are'nt you penalizing the majority?

Recession, Depression, Slow Down or whatever you may call it.. These are all part of  normal economic cycles . They are like medicines to cure the system of its excesses.  By trying to artificially prevent it and trying to save all the constituents of the system, you are actually putting the system at greater risk of collapse .  Monetary and Fiscal stimulus is warranted. But only after the system has undergone cleansing and the inefficiencies weeded out

Get Ready for Hyperinflation...

The Central banks all around the world are desparately pumping money into the sytem , trying to unclog the credit pipe.  At the moment it dosent appear to be working.  But sooner than later, it will.  That is the time when a huge wave of liquidity will surge through the markets of the world.  A lot of this money is currency that has been freshly printed ! Its like a pipe that is being highly pressured in order to unclog it. When it does get released , high pressure liquidity is going to flow through the system.  How this is going to get absorbed and what asset classes will this go into is going to be critical and monetary authorities around the world would do well to regulate this.  My own feeling is , we will see a period of extremely high inflation especially in primary commodities like foodgrains.  Also , I see a sharp rise in the bullion prices , particularly gold.  Currencies will be managed by central banks through open market purchases and sales of gold. 

Makes me extremely bullish on the prospects for gold as an investment going forward.

Frozen Credit Lines- RBI two steps too late..

RBI's announcement of a 150 basis point cut in the CRR has come in a bit too late. Already the pipelines carrying the credit system are clogged , even frozen some may say.  The Finance Ministry's assurance that they are 'watching'  the situation hour by hour cuts no ice,  pun intended.  Watching is no good in a market whose dynamics are changing by the second. PREMPTIVE ACTION is what is needed.  

Right now nobody trusts anybody else, me included. Iam moving my cash parked in Mutual Funds even in liquid funds to the sovereign security  of a nationalised bank . Everyone else around me is doing the same till the dust settles down.  People are doing this on the news/rumours that institutions /mutual funds are running from pillar to post to borrow, some borrowing at rates as high as 36 % to 54 %.

Opening up liquidity now will not help. Banks /Individuals will only hoard the excess liquidity as they are scared to let go and lend. What can ease this situiation ?  The government has to temporarily offer backing in the form of guarantees to major Banks, Financial Institutions and Mutual funds at least for the inter bank lending market.  If the Government is so confident of the financial health of ICICI Bank , now is the time to offer it gurantees in the the inter bank market.  If the fundamentals of the economy are sound and our exposure to the contagion in the west is so limited , why are we afraid to act ? 

What is at stake here is the financial health of the nation of which serious questions are being asked.  It is time for the Government to give strong and straight replies...

Globalization is dead.. Long Live Globalisation

The  recent chain of events in the world of  banking and finance Finance have dealt a death blow to the concept of globalization in its present form.  Consider the following events that have happened in the past week

-Icelandic banks have been ordered to start selling foreign-owned assets to help the country avoid bankruptcy, a move that could lead to the fire sale of some of Britain's best known names on the high street.

-A fresh spotlight has been thrown on the culture of American investment banks after the administrator for Lehman Brothers' European business asked for the return of $8 billion (£4.4 billion) transferred from Europe to New York in the days before the bank's collapse .Lehman's London staff are angry that the practice of withdrawing funds to New York at the end of each day left coffers at the European business empty.

-Indian  Banks  appear to be headed for better profits this quarter in sharp contrast to banks in the West which are issuing profit warnings amidst massive writedowns. Most banks in India are likely to show better profits for the quarter ending September compared with the previous quarter .  This is directly a result of the lesser exposure of the Indian Banks to the Banks and Institutions overseas.

-The end of of the yen carry trade could be devastating for capital markets throughout the world. Experts estimate that there are several hundred billion dollars of positions in the carry trade to be unwound. David Bloom, currency analyst at HSBC, says that it has pervaded “every single instrument imaginable”, so that when it comes to an end later this year it’s going to be “ugly.

The past decade has seen capital  being leveraged tremendously and then being allowed to flow freely across geographies and across asset classes in the name of globalization duly dictated and directed by the largest economy of the world.  This has been done by creating an intricate web of interdependence of the entire free world on the USA based on two things- a) The US dollar and  b) Supply of goods and services to the USA.  Ostensibly USA supplied capital to the world that in turn facilitated the enormous consumption and living beyond means of the USA.  The rise and collapse of this model has been predicted so well by Mr M.R. Venkatesh , an Economist, whose lecture I chanced across on the web. In fact I owe the title of this article to him as this was anectodotaly referred to by him.  

Now that this model of Globalization has collapsed, a new financial order will emerge which will start the process of globalisation afresh. I see the following things happening in this process.

- The Dominance  of the US Dollar , Euro , and the  Japanese Yen will end. The world will move to a single common currency for the purpose of  all crossborder transactions including Oil . The Issuing Authority for this currency would be a global central bank on the lines of the IMF.  Each countries reserves of this currency will depend on the financial strength of its economy ie. if the country is a net saver like China or Japan is, it will be a creditor to the global central bank and if the country is a net consumer like the USA is, it will be a debtor to the central bank.  The amount that a country can borrow of lend to the central will be regulated by a global board which will be in charge of the bank.

- Individual countries will continue to have their own currencies which will drive the dynamics of their own economies.  In this process . The strength of the local currency vis a vis the single Global currency will be market driven.

-  Emerging Powers like India and China  and a resurgent Russia are likely to have more of a say in the creation and control of this new Financial Order.

-  The USA's place in the New order will be be the one BIG question which in fact , cannot be solved easily and therefore will act as a barrier to the creation of such a system.

-  Tough Economic and Political Negotiations or the Scary  Possibility of a  World War III  may precede the creation of the new financial order. The winner of this War (hopefully there isnt going to be one) or the negotiations will be the leader of the new multipolar world order.

Thoughts anyone....