More debt is right? - The 5 Minute WrapUp by Equitymaster
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More debt is right?

Nov 20, 2010

In this issue:
» Indian IT has grown faster than India
» Growth without gains for the poor is just statistics: Finance Minister
» Cozy winters for India's hotel industry
» US & China: Another cold war?
» ...and more!!

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00:00
 
2008 is a year which will remain etched in the memories of everyone for a lifetime. It signifies a period when the entire world witnessed one of the worst financial crises. The crisis was triggered by too much debt. Everyone had been in a major borrowing phase. Money was cheap and there were several takers. The people, the banks, even the governments. Everyone was borrowing.

Eventually, they all ended up borrowing more than they could afford to. And the entire financial system came tumbling down. The resultant panic sent financial market across the world crashing down.

The outcome was that everyone started to rationalize their debt. But according to Yale Professor, Robert Shiller, this is the wrong way to go about solving the global problems. As per him, the governments need to borrow more money. He believes that the problem of debt would go away only through more debt. The reason being that the bond yield (adjusted for inflation) in most countries is at its rock bottom. This clearly indicates the need to increase borrowing by the government. However, the borrowing so raised needs to be spent on productive investments like infrastructure, health, education, etc instead of being spent on asset bubbles like real asset. Only when this happens can the countries come out of their current state of crisis and subsequent recession.

While we do agree that the governments need to focus on encouraging productive investments to counter the impact of the crisis, we question the idea of raising more debt. Most countries are already facing solvency problems. Ireland's current crisis is just an example of how excess debt has played havoc. So solving the world's existing debt problems with more debt is the right way to go? We don't think so.

01:45
 Chart of the day
 
Sprawling office spaces are a prominent feature in almost every big city of the world. However, for any business, office space rentals form a large part of the administrative costs. As per a leading business magazine, the office space in Mumbai is one of the five most expensive in the world. Today's chart of the day compares the rentals per square feet in the five most expensive office areas of the world. It is interesting to note that these are the 'rationalized' post recession rentals.

Data source: Outlook Money

02:18
 
India has been growing at a blistering pace over the last few years. Strong policy framework and buoyant macroeconomic environment has ensured India a top place amongst the fastest growing economies of the world. However, what is alarming is the fact that despite registering strong growth over the last few years, the income disparity levels in India are high. Recently, Pranab Mukherjee, our finance minister had voiced his opinion over the same issue.

He believes that economic growth sans any benefit to the weaker section of the society is not in national interest. We could not agree with him more. India needs to adopt prudent policy measures and act on it soon so as to bridge the gap between the affluent and weaker sections of the society. For that to happen, banks will have to expand their reach and contribute to the inclusive growth of the country. Till such time, the high GDP figures that we all talk about would merely remain a statistical number rather than anything else.

02:48
 
The Indian hotel industry is witnessing a rebound as bookings for the winter season have surpassed expectations to make it the best October-February season in three years after a slowdown following the Mumbai terrorist attack in November 2008. With the top bracket hotels in major cities and leisure destinations reporting a surge in demand, the industry is on an upward cycle that will peak in 2012. This is driven by growth in all segments of travel that includes corporate, leisure as well as Meeting, Incentives, Conferences & Exhibitions (MICE) segment. Another factor this season is a rebound in inflow of international tourists which is being fuelled by corporate and leisure travellers from markets such as Russia, the UK and Western Europe, while US tourist arrivals are yet to pick up.

Hoteliers say that the room rates and occupancy levels are yet to match 2007-08 figures, but there are clear signs of a pick-up in business and tourist activity in the country. Domestic airlines too have reported a jump in demand and have hiked airfares.

03:28
 
Here's some more on the US-China spat. Close on the heels of Bernanke rapping the Chinese on their knuckles for their low Yuan policy, the Chinese seemed to have shot back. Apparently, it has accused the US of having a 'cold war' mentality about the whole thing. It even went as far as saying that the US harbors a grudge against China.

The US has reasons to be unnerved we believe. Even as it tries to increase production and keep its workers employed, the trade deficit with China just keeps going up. As per Moneynews, the politically sensitive imbalance hit US$ 28 bn in August. Not only is it 21% higher than in 2009 but is also a monthly record. Thus, all the QE efforts by the US seem to be coming to a nought. As we mentioned before, simply taking it out on each other will not solve the problems between US and China.

Both the nations will have to take calibrated steps to reduce their dependence on each other. While the US will have to reduce its consumption and increase its savings, China will have to do the exact opposite. It isn't that both these countries are not aware of what they need to do. It is just that the measures outlined may lead to some short term pain. And both of them seem reluctant to go down this path.

04:11
 
Indian IT sector is having a ball. It was one of the sectors that was most impacted by the global slowdown and saw some slowdown last year. But this year, it is unquestionably witnessing a quick turnaround of fortunes. As per the head of IBM, the growth in the Indian IT sector has outpaced the growth of the Indian economy. He further stated that the fortunes of the Indian IT industry were now being decided by the domestic market, which is increasingly forming a larger part of the IT market. The reason behind this is that consumption of information technology is much faster in countries that have relatively fast growing GDP numbers. Undoubtedly, India has one of the fastest growing GDPs in the world. Will this signify the next round of booming growth for the IT industry? It remains to be seen.

04:32
 
Stock markets across the world saw a mixed week with major Asian countries ending the week on a poor note. This was a result of the debt problems in Ireland and the concerns over China resorting to another rate hike. Leading the pack of losers was China, down 3%, followed by India and Hong Kong that was down 2.5%. The benchmark BSE-Sensex too lost 3% during the week. On the other hand, Japan was the top gainer this week, with a gain of 3%. These gains were led by the nation's auto pack whose earnings prospects seem to have improved due to the weakening Yen. Europe, Germany and France ended with gains of about 1 to 2%. US ended the week on a marginally positive note.

Source: Yahoo Finance

04:50
 Weekend investing mantra
"When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact." - Warren Buffett

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2 Responses to "More debt is right?"

sunilkumar tejwani

Nov 20, 2010

its true that government has been raking in loads of money but it is spent unwise, i.e. ghost welfare schemes where the money lands into the pockets of bureaucrats rather than the intended beneficiaries. Adding insult to the injury rampant corruption in the government offices has been adding woes to the common man's troubles. It is a shame that today politicians & bureaucrats have more money than the government coffers.
The finance minister should stem this rot first & then make his speeches. Mere showing of concern amounts to lip service. Like China, if we make corruption related offenses punishable with death penalty,then only the menace of corruption can be prevented. But this happens only in INDIA! where the corrupt rule the roost! JAI HO!

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GAUTAM TRIVEDI

Nov 20, 2010

SIR, YOU ARE WRITING: "India needs to adopt prudent policy measures and act on it soon so as to bridge the gap between the affluent and weaker sections of the society. For that to happen, banks will have to expand their reach and contribute to the inclusive growth of the country. Till such time, the high GDP figures that we all talk about would merely remain a statistical number rather than anything else."

To my mind WE NEED FOOD FOUNDATIONS which will cater to the needs of Lunch for the POOR & the MIDDLE Class people. If they can get abundant supply of good ready to eat food rather than free RICE / WHEAT / GRAINS etc., it will help them a lot. There may be many NGOs and individuals serving through their "SADAVRATs" - which are generally for food.
Hope you may spread this thought. May GOD help US (NOT the Uncle SAM!)- our own selves - to move in this direction.
Yours truly,
Gautam Trivedi

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