US to go bankrupt - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

US to go bankrupt 

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In this issue:
» India lower on 'Best Countries For Business' list
» Now a 90% tax rate on obscene bonuses
» 800 more US banks may fail
» The success of value retailing
» ...and more!

In what could mean dire consequences for the rest of the world, a Washington Post report throws up some alarming implications of President Obama's ambitious plans to cut middle class taxes, revamp health care and increase access to education.

An independent analysis of Obama's budget proposal by the Congressional Budget Office (CBO) has concluded that the government would require massive borrowing over the next decade, leaving the nation encumbered far deeper in debt than previously estimated. Further, it would cause spending to swell above historic levels even after costly programs to ease the recession and stabilise the nation's financial system have ended.

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Tax collections would lag well behind spending, producing huge annual budget deficits that would force the nation to borrow nearly US$ 9.3 trillion over the next decade. Also, the CBO predicts that deficits under these policies would exceed 4% of the overall economy over the next 10 years, which could be unsustainable.

The result would be an ever-expanding national debt that would exceed 82% of the overall economy by 2019 and threaten the nation's financial stability. On this, a senior Republican on the Senate Budget Committee Judd Gregg said "This clearly creates a scenario where the country's going to go bankrupt. It's almost that simple."

If things were to indeed pan out as such, we shudder to think what this could mean for the global economy, and India as an integral part of it.

Speaking of India, as per the RBI's latest weekly statistical supplement, India's foreign exchange reserves increased by US$ 1.4 bn to US$ 249 bn. At the same time, the country's foreign currency assets increased by US$ 1.4 bn to US$ 238 bn. Foreign currency assets expressed in dollar terms include the effect of appreciation or depreciation of non-US currencies. The increase in the reserves was on account of the euro gaining strength against the dollar in the overseas markets. The sustained and gradual increase in India's foreign exchange reserves is very important for the long term strengthening of the economy and the same could also be used for funding the country's infrastructure requirements.

Even as we think that only in India do infrastructure projects get delayed for very long periods due to bureaucratic issues and delay in sanctioning and disbursal of funds, it may surprise you to know that one of the most high profile projects in the US, the rebuilding of the World Trade Center site has had similar fate over the last eight years. The project, already hobbled by years of delays and infighting, is now facing fresh problems as its private developer has asked the government for financial assistance. The result is that the Port Authority of New York and New Jersey, the government entity that owns the site, would take on more of the risk of the project at a time when the agency already faces budget restraints to pursue its core transportation and infrastructure missions. The project, meant to be a symbol of recovery after the September 11, 2001 terrorist attacks, has been through years of costly delays and acrimony.

The private developers had originally planned to finance the project through a combination of insurance proceeds, government-subsidised bonds and private tenancy revenues. However, with the economy and government finances being in a tailspin and the collapse of some of the largest financial entities who were seen as possible customers, smooth financing of the project has become a remote possibility.

Just when trouble was beginning to recede on Wall Street, AIG, the insurance giant has kicked up a fresh storm. And this isn't any ordinary storm. It has the potential to change the dynamics of the current rescue efforts in the US financial markets. As per reports, the company has doled out hefty bonuses to its executives despite the fact that its net worth is in complete disarray and it has been one of the largest recipients of the government money. The average taxpayer in the US is indeed not amused. In fact, the public outburst has been so strong that the US congress has passed a bill that seeks to employ a tax of as much as 90% of the bonus amount for executives at financial firms that have received US government aid of at least US$ 5 bn.

For all the hoopla about India being in a better position than its Western peers in terms of growth in these recessionary times, the Forbes 'Best Countries For Business' list has a somewhat different story to tell. As reported in a leading business daily, India is down by 11 places to the 75th on this list with Denmark and the US rated the top two nations which are better equipped to bounce back. The areas on which India has lost ground are trade freedom, technology, corporate tax rate and not surprisingly corruption. Lack of economic reforms, tariffs on sensitive sectors and the stalling of privatisation of government controlled companies are some of the many issues that Forbes feels has hindered India's growth. And we are of the opinion that the magazine is bang on in this regard. However, all is not gloomy and there is some consolation in the fact that India has maintained its place with respect to factors such as monetary freedom, property rights, innovation, investor protection and personal freedom.

The global financial crisis has reduced the US banking industry to tatters and if a certain investor Mr. Wilbur Ross is to be believed, the scenario is set to get all the more bleaker. Wilbur Ross has made a name for himself by raking a fortune snapping up distressed companies and he is of the opinion that as many as 800 more US banks will fail in the next few years. This includes banks which have accepted funds as part of the federal government's bailout program. Really, no respite seems in sight for the already battered US banking industry.

Wal-Mart has handed out US$ 933 m as bonus to workers as a part of an annual profit sharing program to reward hard working employees. The announcement comes at a time when other retailers the world over are witnessing nearly double digit percentage decline in sales and earnings. The world's largest retailer has been able to offer budget conscious shoppers more value for their buck with its low-priced offerings. Well there's another such exception in the retail industry, but this time in India. And it's none other than Kishore Biyani promoted Pantaloon Retail that has been riding the waves gracefully. Pantaloon remains nearly unscathed from the crisis other retailers are facing, highlighted by the numbers it reported for December 2008 quarter. This only highlights the importance of making affordable products and services available to the masses, keeping costs under control and streamlining operations.

As reported by a leading business daily, a recent study shows how corporate excellence in India is often preceded by education in one of the top tier domestic management institutes. No surprises there. After all, the students generally joining these institutes come with excellent academic credentials. The ultra competitive entrance process, the rigours of the course and the peer pressure further sharpen them. But the key question is why do Indian companies remain low in the world innovation charts? Does it have something to do with these bright students and their alma mater? We believe therein lies a strong case for focusing on original technical and management research in educational institutes.

The past week was a cheerful one for the Asia, as gains were seen in all the major markets, led by China (up 7.2%), Japan (up 5%), Hong Kong (up 2.5%) and Singapore (up 1.2%). India's benchmark index, the BSE-Sensex recorded a gain of 2.4%. The performance was mainly driven by positive global cues.

Source: Yahoo Finance Source: Yahoo Finance

As for other global markets, Europe ended the week on a firm note. France (up 3.2%), Germany (up 2.9%) and UK (up 2.4%) led the pack of gainers. However, the US (up 0.8%) also ended with marginal gains as investors remained cautious after witnessing a positive run in the week before.

04:50  Weekend investing mantra
"Spend at least as much time researching a stock as you would choosing a refrigerator." - Peter Lynch
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