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Saturday, August 8, 2009

Rebalance 2011

In the latest issue of Harvard Business Review,the editorial board discuss the fall of wall street and its implications on the world politics and power.So much has been said about recession and economics in last one year that people have made all types of assumptions about what lies in store for them in future....poverty,hunger,homelessness etc.Yet the direction of our future is unclear and mired in mystery.
Lets try to analyse what lies in store both politically and economically for the world.

First before moving ahead lets try and think why we are here.For one we all know the world economy was structurally flawed.Nations were living way off their means.Counteries like US,Italy,Uk had typical deflicits about 80-100% of their GDP's.In laymans terms this means that a business spends equal to what he sells in a day (mark the differnce,its sells and not earns)Such grossly over leveraged economies are bound to collapse because of lack of any meaningful contribution to the world production of goods and services.The second reason for current crisis were the grossly overleveraged banks.Historically the leverage ratios for banks are about 4-15% but if you decode the balance sheets of major US banks they were leveraged to the tunes of 30 to mind boggling 134% in september 2009.When you bet in the market,you are sure to be wiped out if you are not big enough to hold your positions.No surrise we had the class of investment banks being wiped out from our dictionary :)
So these were the two major reasons for our current crisis.Now what lies in store for us.HBR talks of two situations of 2011 could be like.In both the prominent feature is that US economy still reels under the thaws of recession,the economy in shambles with a large fiscal deflicit and unemployment.However the most important point that the HBR brings out (and which I agree :))is the probable fall of the greenback along with the growing power of CHINA.If we look the currrent crisis is quite similar to the one that haunted the world in 1929.The recent surge in stock markets seem to allay the fear that recession is coming to an end.However fundamentally we are just seeing the pace of worsening slowing down.The US and European are still in contraction mode contracting by 1 and 3 percentage points respectively.Considering their size this is a significant figure.
In a world where the limitness of the resources is highlighted everyday,with commodities rallying even in trends of decreasing consumer demand,a structurally fawed economy where one country uses its money printing power to give its citizens a high standard of living on the expense of world is bound to fail.Sooner or later we are bound to see China overtake US as not only the leading economy but political and military power as well.
China due to its symbiatic relation with teh US has not tried to openly oppose the continuation of greenback as the international currency but then China's political and military ambitions are widely known and sooner or later it would try to impose the yuan or IMF SDR as int currency.In wake of above a global rebalance of power is inevitable..so when obama comes up for re election in 2011....American elections might nt be so important an affair in world politics
Happy Blogging

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