Sunday, August 7, 2011

ECONOMY SLOWDOWN: WHAT ARE THE CHANCES?


Somebody has finally asked the question, how are you going to pay up for the US bonds that we hold, Its china that made the comment , as we know that china holds nearly 900 billion dollars in the U.S bonds, to put it in simple words china is a loan shark or a land lord . Now the Chinese have selling these bonds and there is no buyers for these bonds so if there are no buyers then US will have to pay China not only 900 billion dollars but also interest on that 900 billion dollars. Why did this happen? 
Ø  China does not trust any more the U.S treasury new policy of quantitative easing.
Ø  Dollar has started to lose its value the moment it received AA+ credit rating from the S&P or standard and poor. China will take an action to withdraw its holding from U.S bonds to avoid losing its value.
Ø  U.S has not successfully managed to create more jobs.

There is a saying if a bank lends you a couple of thousand dollars then the bank owns you and if the bank lends you a million dollars then you own the bank. 

The situation is something similar. China has reported asked to cut down its expenditure on defense, artillery and instead concentrate on creating jobs. What if china sells all these bonds, then there is sudden outflow of cash from the U.S economy and then there is no one to purchase those U.S bonds.

The Standard and poor have downgraded the ratings of European countries; this has reduced the demand from Europe from the US as Europe happens to be largest importer of goods from US. Thus decreasing the exports of the US and finally dollar value being depreciated.  As a matter of fact Indian exports to the European nations will also decrease as their credit ratings are down and industries like textiles and exports of precious metals will also decrease.  If the dollar value falls down drastically then even IT outsourcing will get a HIT as the value of contracts will fall due to decrease in dollar value and moving forward the US will find it expensive to outsource. All this while the US market was stable and there was no growth but enough money was pumped in to promote jobs.  The housing bubble has created an impact on the mindsets of the public in the US as people have been reluctant towards spending, this is one of the major reasons that business do not see any reason for expand, expenditure on Research and development is almost equal to Null.

The Euro debt crisis is spreading like a virus, all the way from small European countries, now the testing times have come to ITALY, the 3rd largest economy in Europe. If this economy fails how will we bail out ITALY? This is one of the major worries.

In case of INDIA, the FDI (foreign direct investment) has fallen sharply, food inflation takes no sign of reducing below 2%, and our WPI (wholesale price index) does not show signs of abating from 9.4%, RBI have become almost helpless , current account deficit has increased to 2.7% and finally the retail investors will start investing more in commodities like gold, silver etc rather than stocks.

MY VIEWS


How will US repay the debt of china, it has lost majority of its export market of goods from europe. Will it wage one more war and destroy another economy? Or will china ask US to outsource majority of the jobs to china rather than INDIA and other nations? Will it simply print currency and repay the loan? If it repays the loan, then who will buy the bonds from US? Even if it repays the loan the value of dollar depreciates and all the contracts signed with US on the on-going currency exchange rate will become valueless, if so there will be a major hit on not only IT industry in India but other dependent industries also like real estate, infrastructure, textiles, transport, electronic industry , automobiles etc.... all the loan will become NPA (Non performing assets) and banks will get a big hit.... 


As said by Sir M Vishveshwaraiah : Agriculture is the backbone of India and unfortunately we have been neglecting it for years to come, its time we realise and industrialise it.