The way global economic scene was perceived by me way back in 2007

The following piece is reproduced and would give an insight to students of economics today:

panch-tattva talk


Markets in India demonstrated some resilience in face of a crisis of
yet small proportions but with big potential. The sub-prime woes in US
would have to have its toll on the rest of the world’s markets. India
has somehow become quite intertwined with US as most of surplus money is
generated due to US related Indian software export industry which has
been largely responsible for the decent earning of lacs of youths who
would have not found it easy to make ends meet otherwise. Further ,
the investible funds come from US based Indians. What I mean to say is
that the money that finds way in to stock markets and the banks has a
larger than imagined proportion of US oriented flows. So we have to
put up with the ripple effects that we will experience,however, we
need not be fool hardy.

What has been happening has not come as a surprise, it has a logical
sequence and is a reflection of a paradox about which I have many a
times earlier pointed out. It is ingrained in the fact that the pool
of savings of the savers of yester years have to have a parking place
and to be generating some returns too and be available for future
consumption continuously, safely and conveniently. It was for this
matter that China was condoned for its non-democratic ways and was
transferred a lot of money by the US institutions and later India was
also roped in even by diluting the Pak related anti-India bias.The
Europe and Japan happen to be in the same kind of boat if not in the
same boat as US and could not have absorbed any money of US origin.
The rest of the world has much lower stability and size. Since the
current flows and the pool still had more money,the US based so called
sub-prime borrowers (as the name suggests it is a catagory which does
not meet the prime borrowers criteria entirely) were also taken as
good in the circumstances risk and were doled out funds for purchase
of property. The whole scheme, though , had poor rating as per the old
standards of banking practices , it was made palatable through risk
transferring schemes like securitisation , CDO (collateral debt
obligation) and the participants like hedge funds . There are further
layers of leveraging. It was OK as long as the property markets was
going up and when that is under price pressure something has to give way. I
have tried to explain the whole thing in a brief manner only ,
restricting it to what is necessary to be known as the back ground.

The complexities of business here and else where have increased. The
point to note is the size of sub-prime market which is estimated to be
$1.8 trillion. We can easily understand that any problem with this
size of market would have ripple effects. However, it may or may not
be as much damaging as it is perceived to be, in the short run at
least. Supposing it has contagion effect than any thing my happen. It
is this scenario that I warn against, time and again. The worlds’
central banks seem to have assumed the resposibility to save the
situation from worsening. They are pouring in liquidity all over in
billions of dollars. The remedy may prove to be more dangerous than
the disease itself. The inflationery pressures and huge monetary flows
around the world and difficulty in asset pricing and the spurring of
speculative trading will be the ill effects that will have to faced by
the world economies. The vulnerable economies will find it difficult
to weather the storm and to control the damage later. The south asian
melt down about a decade or so back may be kept in mind.

One welcome thing for India and China may happen too. Such crises will
reduce the iron hold of US on worlds’ economy . Chindian space will
matter more and would provide stability to economic world. It is not
for no reason that Indian currency is appreciating.



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