Thursday, May 26, 2011

China & US Dollar: Marriage of Economics

Since the time Jim ‘O Neal of Goldman Sachs coined the term BRIC in early 2000, the topic of BRIC nations, especially China, taking over the economic & political leadership of the World away from the United States has always been the hot topic. Add to that the Great Recession of 2007 and you have, media hired top economists, concluding that the sun has already set on the US Empire.
Not so quickly, my friends.
Although my cranium might not have the best of economics brain, but I do know that US hegemony is far away from witnessing any sun set.
Let’s focus on the most highlighted of the US problems, the future of the mighty US Dollar.  America has a deficit of around 10% of GDP and a total debt of around 70% of GDP and that was one of the reasons why Standard & Poor’s issued warning against US debt. But then what happened: the day that S&P raised its now famous warning, the markets decided to lower America's borrowing costs, and the dollar rose against its principal alternative, the Euro. Around the world, people, countries and companies are looking for safe, liquid investments. And the market's judgment is that the safest such investment is the US debt. There is a reason why 60% of the world trade still has US dollar as the medium of exchange, why most of the nations have US dollar as the reserve currency.
             We are all familiar with the $11trillion U.S. debt. It's been discussed all over the media, world over and yet during last three years America's borrowing costs have fallen. Markets are still willing to lend Washington more money at astonishingly low rates. The cost of servicing America's debt today is actually lower than it was in 1998, at the height of the Clinton boom. Of course, markets can change their stance, but for that to happen there has to be a more attractive alternative to U.S. debt.
Since there is a scare in the media over China dumping US dollar, I will take China’s example. As of March China had US$3.1 trillion in reserve and over $2t in US debt. Since last six years its reserves are growing at a rate of around $250-$275 billion a year. They need to invest hundreds of billions of dollars every year in some big, secure and liquid market.
Some popular options:
European Debt: Euro market is almost as large as US debt market but the recent scare of default by PIIGS nations doesn’t help the cause. In fact it’s fair to ask, Will the Euro in its current form will even be around 10 years from now?
Japanese Debt: China could invest in Japan, but it has the worst balance sheet of the major countries with debt at 200% of GDP, slow growth and a rapidly aging population. Also, China still hasn’t forgiven Japan for World War II and is not likely to do anything to shore up the yen as a global currency.
Tangible Assets: China can invest in real assets like mineral mines & oil fields but they are illiquid and even if they bought dozens of them, they would still have tens of billions of dollars left over to put somewhere.
China Debt: They could invest in there own debt but that would drive up the value of Reminbi (Yuan) and make exports more expensive, which would mean fewer jobs at local manufacturing companies.

In short, China is buying US debt not out of any love for America but for good, practical economic reasons.

Tuesday, May 24, 2011

Bribe*, for lack of a better word, is Good

Over the years many reports have been published by international bodies like World Bank, IMF, Transparency International about the state of corruption in nation states. In most of them India is near the top of the most corrupt chart. Bribe, in any language is a frowned upon term, but I think that on a grass root level bribe is doing a lot of ‘good’ to India’s economy.

Think about a scenario, you crossed the red light and are stopped by the traffic cop. You get a ticket (chalan) for R200. That R200 goes to the coffer of the Traffic department and from there their is a 50% chance that it might travel overseas with many of its 'colleagues' to one of the tax havens like Liechtenstein (Swiss is so old school). In other words that R200 is out of India and thus a loss to the Indian GDP.

Instead if that traffic cop was bribed with, let’s say R100 you very well know that that R100 would stay in India. Chances are that cop might spend that R100 for personal consumption and unknowingly will help boost the Indian economy. It’s a win-win-win situation for all. Win for the traffic violator for he/she saved R100, win for the cop for he/she made R100 & win for the India’s GDP as that R100 would be spent on goods/services in India.

So next time when you break the ‘petty non-criminal law’ think about our great nation & her corrupt leaders and Please Bribe!!


* on a micro level
PS: Please focus on the phrase ‘petty, non-criminal law’


Friday, May 20, 2011

Is Democracy Overrated?

Born and brought up in the world’s largest democracy, immigrated to the world’s oldest democracy, I might not be the right person to question it, but considering what are the stakes, I feel obligated.
Is Democracy Overrated?
According to Merriam-Webster dictionary, democracy "is government by the people in which the supreme power is vested in the people and exercised directly by them or by their elected agents under a free electoral system." The more popular phrase coined by Abraham Lincoln, Democracy is a government "of the people, by the people, and for the people."
My personal feeling is that the way democratic system stands today it has become a ‘version’ of original democratic values. It has become Capitalistic Democracy. Every one is on there own once the elections are exercised. Following are the two great examples of democratic society, one oldest and one largest.

In the most mature of the democracies, United States, you have the ‘lobbying groups’ on K Street that has tremendous influence on the elected officials. All the election promises must pass through the K street officials. Not that I am in its favor but the most powerful person on earth, can’t abolish the comparatively small amount of $4b aid given out to the oil industry. Reason: some of the member of congress who are sitting on the Ways & Means committee and Budget committee are been ‘advised’ by the K street not to approve the bill. The road from Capital Hill leads to the K Street. Most of the lobbyists are former congressmen or have a family member in the congress. One of the election promises of President Obama was to break all the White house ties to the K Street, but it seems that some changes are too hard to come by!!

India is the epitome of the ‘capitalist’ approach of the present day democracy. India might not have implemented pure capitalist laws in the economic sector, but it sure has in the political sector. Democracy is only witnessed 2-3 months prior to the elections; the rest four & a half year is a dictatorship of the majority party. Common people can’t do much but flip the news channels for the latest corruption news or watch elected officials changing the party lines during some crucial vote in the parliament. If death & taxes are the surest of the things, I will definitely add, Indian politicians becoming millionaires within days of there election victory, in the list of sure things. 

I am not against the democratic society, but I don’t approve the current capitalist version also. Some one rightly said if Campaigning is a Beautiful Poetry then running the government is a Sad Prose.

Friday, May 6, 2011

Death of a Belief: Osama Bin Laden

            When one gets sick and is tied to bed for a week, one can’t do much but watch ‘tv’ & ‘think’. Think about the sickness, medication, home, family, finances & life! One tends to become more philosophical during this phase.
           Two important things happened during this week. First and foremost, my 4 year old daughter went on rides on her own.
           Secondly, I watched my first IPL game and to say it was amazing would be an understatement. I saw Bangalore playing Punjab and Chris Gayle making a century in 45 balls. His inning was just spectacular. I am not surprised why everyone in India is so hooked up to IPL. But given a choice I will still watch 50 over game.
          Also there was news of some terrorist named Osama Bin Laden getting killed by US Navy SEALs in Abbottabad, Pakistan. He was living in a mansion 40 miles from Pakistani capital, next to a Garrison town. He defined the new millennium by attacking America and killing over 3500. He globalized terrorism. To say he was a person is wrong. He was a ‘belief’ and the people who saw him as messiah (God) carried out attacks in different parts of the globe killing innocent people. That’s why I feel that White House should release pictures of his dead body. So that people who ‘believed’ in him could see that he was no ‘God’ but a freak who killed people in the name of religion.  He bleeds just as any other psycho who thought he was a superior being. But I do understand why White House doesn’t want to publish his pictures.
          Not that it wasn’t clear before, but now it’s for the world media to see how in-competent Pakistani government and there intelligence agency (ISI) is. There is no doubt that Pakistanis knew where OBL was all this time. He was there cash cow, because as long as he was not caught Pakistan knew that US will keep pouring billions of dollars to Pakistan in form of aid, $3.5B a year to be precise. That’s almost 7% of Pakistan’s GDP.
Sorry Gandhiji, but in this case, ‘Revenge was Sweet’.