Thank God, this man is not our central banker!

Feb 17, 2012

In this issue:
» This could make Greece look like a pygmy
» India's problems are far from over
» What China needs to do for next level of growth?
» Ex-Citigroup employee accuses the bank of bad business practices
» ...and more!

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We understand that things are really getting desperate for the western nations. Despite swimming in liquidity, their economies are barely inching forward. And at such times, being a central banker would certainly be one of the toughest jobs out there. However, we hardly ever imagined that these bankers would take desperation to an altogether different level. What else would explain the comment from the Governor of Bank of England that savers are pushing the UK economy back into recession! We've had central bankers make one illogical comment after another in the past. But this one surely takes the cake we believe.

The reason we take a huge exception to the Governor's comment is because there's no way savings can hurt an economy. Allow us to try and explain our point with the help of Mr Robinson Crusoe, the popular protagonist of the novel by the same name.

Assume for a moment that besides being an adventurist, Crusoe is also an economist. Of the right kind that is. Initially, he spends 10 hrs each day catching around 10 fishes with his bare hands. The economist in him then realises that if he spends one hour less each day catching fish and instead, utilises the same towards building a spear, he would be able to catch more fish in the future. And voila, in about 10 days, he builds a spear and now manages to catch 30 fishes in the same amount of time. Then, another idea dawns on him. How about setting aside couple of hours every day and building a fishing net. Another 20 days pass and out comes the fishing net, now able to catch 100 fishes in the same 10 hours.

As can be seen, Crusoe gave up some of his present consumption so that even higher consumption can be obtained in the future. In other words, he saved in the present to increase his output in the future. You would be surprised to know that modern economy is no different. The single most important reason savings need to be encouraged is that they permit investment in more productive goods and services of the future. Thus, the society as a whole is much better off than in the past.

This simple idea though seems alien to the English central banker as also a lot others. They don't realise that it is the real savings that matter and hence, it should be encouraged and not discouraged as these people are trying to do. Thank God, our own central bank realises this simple fact and tries to deflate bubbles and control inflation at the very first sight of it.

Do you think more savings need to be encouraged or you agree with the Governor of the Bank of England? Share your comments with us or post your views on our Facebook page / Google+ page.

 Chart of the day
Today's chart of the day highlights how it is not just the corporate sector that is reeling from the effect of higher interest rates. The retail loan off take isn't very encouraging either. As the chart shows, sectors like home, education and auto have witnessed far lower growth in loans as compared to the last year. Is it little wonder that the Indian economy will have its GDP growth shaved off by a couple of percentage points in the current fiscal?

Source: LiveMint

A certain gentleman by the name of Art Cashin has some very shocking revelations. According to him, a Greek default would be just the tip of the iceberg. There is a much bigger risk in the credit default swaps (CDS) market. Before delving further, let us tell you what CDS means. Essentially, it is an individually written insurance policy which says for instance- if Greece defaults, we'll pay you what they should have.

The CDS market has grown by leaps and bounds in the last decade. Since CDS contracts are individually written, there is no clear public record of how many outstanding contracts there are in the market. Even regulators have no clue about the quantum of CDS on Greek debt. That is indeed a worrisome fact. So in case Greece defaults, buyers of CDS will line up for redemption. But what if the counterparties are unable to pay? After all, an insurance that doesn't pay is worthless. If at all what Mr Cashin says becomes true, we are going to see a worldwide debt crisis much bigger and dangerous than what we have been thinking.

Concerns have begun to emanate that China is set for a hard landing given that inflation has been rising and that too much has been lent by banks to sectors such as real estate. Veteran investor Gary Shilling also believes so. What is more, for China to take its growth to the next and sustain it for a longer period there are various factors that the dragon nation needs to look into. For starters the economy has to grow at a rapid pace and for that China needs to improve its productivity. What that means is that the country needs to focus more on innovation and building technology rather than emulate what the Western nations are doing.

Some solution has to be found for the wide disparity in incomes. While the economy is huge, the benefits of high growth are only trickling down to a select few especially in the cities, while the hinterland continues to be mired in poverty. Then, the Chinese government has to emphasise on transparency. This means that the country will have to focus on deepening its financial markets and ensure that they are free and open rather than shroud them in an air of secrecy. And lastly, is the reliability of data which in recent times has posed a big question mark. Of course, it will be a while before any of these translates into execution but if done so would certainly benefit the country in the longer run.

The underlying reason for the sub-prime crisis was bad loans. Banks and financial institutions tried to window dress these bad loans and make money out of them. And eventually the pack of cards came tumbling down. But as per a whistleblower, this is something that Citigroup continues to do even today. As per the employee, the institution still continues to engage in the loan practice that created the financial mess. Loans are given out on the basis of fake employer forms and altered tax documents. What's more, Citibank bullies its employees into giving a clean chit to bad loans. The case is now in the hands of the federal authorities. It is shameful to see that a bank of Citi's stature, operating in a so called ethical country, resorts to such practices. These are the banks that have demanded higher valuation premiums over others just on the grounds of their practices and sheer size of operations. What they really deserve is to be treated as very high risk indeed.

The Indian economy and for that matter the benchmark indices have initiated a recovery of sorts in 2012. Inflation has cooled, adding impetus to the Reserve Bank of India's (RBI's) anticipated rate cuts. Rate cuts in turn may lead to higher economic growth. A number of companies had delayed expansion plans earlier on account of high borrowing costs. But, one important variable may just spoil the party.

Oil prices are once again rising. Currently, Brent crude is above US$ 120 a barrel, an 8 month high. This was mainly due to supply concerns from Iran and the North Sea. High oil prices can once again cause inflation to spike and inflate India's import bill. A widening current account deficit and the deteriorating fiscal position of the country are already major risk factors. Plus high oil prices also affect other input costs which could cause corporate margins to shrink once again. We hope investors are keeping these risk factors in mind before jumping into equities to just ride the current momentum.

Meanwhile, in what is turning out to be yet another strong session for the Indian stock markets, benchmark indices were perched well above the dotted line at the time of writing. Sensex was trading higher by more than 230 points with heavyweights like Infosys and BHEL contributing the most. Almost all the Asian indices also closed higher today. Europe too has opened mostly on a positive note.

 Today's Investing Mantra
"Organized common (or uncommon) sense is an enormously powerful tool. There are huge dangers with computers. People calculate too much and think too little." - Charlie Munger

Note: We would like to inform our readers that on account of holidays, there will be no issue of the 5MinWrapUp tomorrow and also the coming Monday i.e. 18th Feb 2012 and 20th Feb 2012 respectively.

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18 Responses to "Thank God, this man is not our central banker!"

Partha Sen

Feb 28, 2012

Consumption defined in the opening para changes meaning content in the explanation para. If consumption (demand) falls short of supply, over time there is no incentive to increase production. If on the other hand consumption (demand) was to out-strip supply, then he has all the reasons to innovate. In this particular case, cost to supply is not an issue.

Increasing rates of Savings in consumer spending can lead to deflation in the economy.

Like (2)

m arumugam

Feb 25, 2012

I do agree with you and feel that anybody who borrows and spends leave the family in lurch that applies to governments too! If the present government goes on spending on unproductive activities the successor government suffers and follows the same route. Like Tamilnadu Governments investing in TASMAC shops rather than investing in quality education to its citizens. Robinson Crusoe invested his time in improving his ability to earn more by innovating.

Like (2)

Raphael Dsouza

Feb 24, 2012

I completely agree with the author. There is no incentive to the middle class tax payer in the UK to save money except for contributing to the pension pot. Most of the banks in the UK are private banks and people are reluctant to leave large sums in the bank after the colapse of the major banks. Low interest rates are not helping either. By contrast the recent interest hike for NRE deposits by Indian Central Bank is a blessing in disguise for the NRIs living in the western countries. It is time, the chancellor and the governor encourage the savings to revive the economy rather than cutting government spending. Should we thank God for giving us this Central Banker???

Like (2)


Feb 21, 2012



Like (1)


Feb 21, 2012


Like (1)

rajkaran singh

Feb 19, 2012

'Today's savings are always handy for tomorrow', its an old saying that stands right even today, only one thing is to be remembered in today's context its application is different. Today we have lot of means to invest our saving in such a safe way that it appreciates more than the inflation and thereby beats the inflation.Till the saver requires this money it is used by the bank or the institute for purpose of overall growth of the nation.
Keeping individual's saving with himself in a locker of course is not the right way of saving as this in real terms may not even appreciate and may be marred by the inflation and shall have many added risks of being stolen/lost.

Like (1)

Vijay Malhotra

Feb 19, 2012

A fair %age(25-30%) of savings must be laid and achieved as required for a nation to grow at a respectable rate, say 9-10%. These must be deployed towards sincere,planned and futuristic needs of the nation as a whole. If they lie idle or are frittered away on policies such as NHRM/NAREGA/SUBSIDIES then its worthless, as these are schemes riddled in corrupt practices.

Like (1)

sarat palat

Feb 18, 2012

Savings are essential for the individual and for the society. No matter the amount. Even a small amount which is saved consistently and with a future plan will definetely bear fruit. Indians are good in this and that is why Indians are relaxing now and the west is sweating.

Like (1)

Neerav Koli

Feb 18, 2012

In addition to the first analogy one should read "How an Economy Grows & Why it Crashes" by PETER D. SCHIFF

Like (6)


Feb 18, 2012

In addition to that first analogy one should read "How an economy grows and Why it crashes" by PETER D. SCHIFF

Like (6)
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