Is human brain preventing a solution in Europe?

Nov 11, 2011

In this issue:
» Will gold touch US$ 2,000 levels?
» IT companies look abroad for hiring
» The next big crisis after Europe implosion
» Has the world said goodbye to cheap Chinese labour?
» ...and more!
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While the crisis in Europe is threatening to spiral out of control, the blame game has also started to reach feverish levels. Anything and everything that could be blamed has come under criticism from experts. And just as we were thinking that the list has almost certainly come to an end, a brand new reason has come to the fore. A well known financial portal has argued that it is nothing but the human brain that has been responsible for the escalation of the Euro crisis and it is also the one that is now preventing a solution to emerge.

Intrigued? Well, even we were when we first read this. Hence, let us try and find out why such a line of thought has emerged. The article in focus has started by saying that if bigger Euro nations like France and Germany are not willing to rescue Italy then the British central bank should step in and start buying Italian bonds. It holds the view that with Italy going down under, UK would anyways face a great deal of pressure and thus, printing money to buy Italian bonds is not that bad an idea after all. So, where does the human brain figure in all of this? It figures in the sense that such a step is not even being remotely considered by the UK authorities as it would have enormous public backlash. And this is where the entire fault of the human brain lies. The write up suggests that for most of us money is finite and we still seem to be of the gold standard mentality. But the fact of the matter is that money is now zeros and ones in some server somewhere and hence, easily producible at will. This is thus the bias that we have in our minds that's preventing a solution to emerge in Europe.

Well, we believe that it is not us but the author of the write up that seems to be suffering from a bias of some kind. Money can certainly be printed at will but throwing it at every financial problem that we have is akin to committing economic suicide. One need not go further back than Zimbabwe to realise how bad the effects of excessive money printing are. Thus, if at all there is a flaw in the brain, it is in those people who believe that the world can continue to be on a perpetual treadmill of prosperity just by creating paper money. And the longer they take to recognise this flaw in their brains, the more we may end up suffering.

Do you think Italy's or all of western world's problem will be solved by more money printing? Let us know your views or you can also comment on our Facebook page / Google+ page.

 Chart of the day

Source: Outlook Profit

It is a well known fact that countries all across the world milk the cigarette companies for earning taxes to the maximum extent possible. While Indian Government may be no different, there are others like France and Germany that go one up on India as well. As shown in the chart of the day, tax component in the selling price of a cigarette at 55% is one of the highest in India whereas the same is a whopping 80% in the case of France. China though seems relatively lenient in this regard as taxes there account for just 36% of the selling price of cigarettes.

Availability of cheap labor has enabled China to be a manufacturing hub of the world. However, it seems that the days of cheap Chinese labor are about to vanish soon. Minimum wages in the Guangdong province, production capital of China, are set to rise by 20% from next year. The rise, if affected, would be second in less than a year. Increase in wages can have two cascading effects. One, things would now cost more in the Western world. Secondly, companies relying on cheap China model will have to explore other countries like Bangladesh and Cambodia for their low end products. While we believe that the wage rise was necessary to keep pace with rising inflation, it can impact the export competitiveness of China. Also, amidst rising cost, many companies in China have already shut down their operations as they were no longer feasible. In such a scenario, progression towards higher wages can decimate the export industry of the dragon nation.

When we think of pension funds what comes to our mind is a fund that will offer us safe 8% return on investment till the time we retire. Thankfully the public provident fund (PPF) in India does offer such return. Also the PPF return is not way off the mark from the risk free interest rate in India (10-year GSec yield). But unlike us, pension funds in the developed world are supposed to achieve the impossible feat of 8% returns when interest rates are near zero. Well known novelist and economic commentator Charles Hugh Smith writes in his blog 'Of Two Minds' that the pension funds are going to be the biggest victim of debt addicted Western economies.

Comparing the bailout of the dysfunctional European economies to the rescue of an alcoholic, Smith says that such acts cannot help forever. Cheap liquidity and bailouts kept the US and European economies afloat from 2009 to 2011. However, none of that seems to be helping this time around. The new debt will not even create the illusion of growth this time. For the economies are already experiencing the contraction that trillions of dollars of debt staved off for three years. Unfortunately, the pension funds will also have to revise their rate of return to near zero rates after this.

Ever since the global financial crisis deepened in 2008, gold has zoomed as governments in the developed world chose to deal with their problems by printing more money and thereby threatening to devalue their currencies. But the rise has not always been one-sided and gold prices have melted in certain instances of extreme panic among investors. For instance recently, gold has refused to behave like a safe haven and has mirrored the moves in the stock markets. But all this is set to change as European governments struggle to stay afloat which will once again send investors flocking to this precious metal.

While gold prices plunged in the immediate aftermath of the Lehman collapse and the commodities 'flash crash' in May this year, most are optimistic that this kind of mass selling in gold is unlikely to repeat itself. The key here is the Europe crisis. The continent is deep in debt and as long as the authorities continue to provide stimulus packages to bail out economies, gold will continue to rise. That is why the precious metal is most likely to touch the US$ 2,000 mark as the crisis in Europe spreads. Moreover, given that most of these economies including the US are still mired in recession, the likelihood of interest rates being raised appear quite dim making the case for a rally in gold prices that much stronger.

The Indian IT industry came under fire when the crisis broke out in the developed world. It was accused of 'stealing' jobs from the latter. As a result, the industry was blamed for the higher unemployment rates prevalent in those economies. So for all those who thought that the Indian IT industry consisted of 'chop shops', it's time maybe to eat back their words. The IT industry has rolled out plans of increasing its local recruitments in countries like the US. IT major HCL Technologies plans to hire nearly 10,000 people or 12% of its workforce from US and Europe. Peers Infosys, TCS and Wipro also have plans to hire 1,500, 1,200 and 400 employees respectively from US alone.

While such hires may improve the image of the industry in the eyes of the developed world, it may also lead to higher costs for the companies. It is a well known fact that one of the major reasons as to why India is a favoured destination for outsourcing is its low labour costs. If the companies decide to hire local people in the developed countries, then they would have to pay the higher labour charges as well. And this would bring their margins under pressure.

Meanwhile, nervousness about Europe has kept indices in the Indian stock market quite weak today with the Sensex trading lower by around 200 points at the time of writing. Heavyweights like ICICI Bank and Infosys were seen driving most of the decline. While most other Asian markets closed strong today, Europe is trading weak currently.

 Today's investing mantra
"A goal is a dream with a deadline." - Napolean Hill

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5 Responses to "Is human brain preventing a solution in Europe?"

chiman gandhi

Nov 14, 2011

remember 'east is is east and west i west,,,,, very relevant intime for europe and usa. people there have not learn to live simple and economical to save and live economically forgoing some style and luxury, they will find it difficult to live in austerity because there is no alternativebut to earn and save repay the debt this will take years.Helping with printing money will not end the decease


sunilkumar tejwani

Nov 12, 2011

The financial portal which published the idea of England printing money & give to Italy, may have emanated from some vested interest source. Otherwise why British parliament had a marathon debate in 1999 to join Euro currency or not. Thank god! the Britishers (majority) refused to join.They knew this fallacy well in advance, that the ease with which euro was born, with the same ease it will disintegrate & with which many countries will sink along with it. At that time the media criticized England living with false pride of Pound Sterling. But time & again England has been proved right in not joining the Euro Currency.


Raghvinder Nath Joshi

Nov 12, 2011

Printing of its currency should be proportionate to the GNP of the subject country. If money is printed without any such standard, nations will end up defaulting.

When young, my friend's children wondered what was all the fuss regarding shortage of money about. They thought whenever you have to eat out/buy ice-cream/pizza/games/toys/expensive shoes etc, all that their parents need to do is just go to the ATM and get as much money as was required.

The portal that says that the cause of the crisis is the limitation of the Human Brain has the same logic as the children mentioned above.



Nov 11, 2011

Printing money appears to be an immediate solution to relieve the problem, but austerity measures like reducing Government spending and cutting down the facilities to Government staff including reduction in salaries is more effective solution. Most countries don't do it due to political reasons.



Nov 11, 2011

We should have our FM/PM print up a lot of rupees (digital of course), exchange them for euros (again, digital) and buy up all Italian bonds (also digital!). We'll have Italy and Europe forever indebted to us! Just imagine!!

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