Will Obama win ensure world has several Japans?

Nov 7, 2012

In this issue:
» Chinese politico's corruption problems
» Is Iceland bracing for yet another 2008-like crisis?
» Greenspan warns of formidable deficit risks for the US
» Why are companies piling up cash...
» ...and more!

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Japan. The economy was not always snail paced as it is today. In fact its high growth period ran for almost two decades. Right from the mid-1950s to the early 1970s. Japan's average GDP growth was 9.7% during this period, just short of China's 10.1% since 1990. But a loose monetary policy turned the tables. Cheap interest rates did so much structural damage to the economy that all remedial measures failed. Easy money led to defunct companies staying afloat. At the same time, currency problems led to Korean exporters gaining prominence over their Japanese counterparts. The real estate bubble and misallocation of capital across the economy did little to improve its fortunes.

The US Fed continues to believe that cheap liquidity is the answer to all of America's problems. Be it unemployment, low GDP growth or lack of industrial growth. The last four years of President Obama's regime did little to correct any wrongs in the US' fiscal and monetary policies. With today's win, we doubt if the next four years will be any different. On the contrary several more rounds of quantitative easing may see the US inch nearer to its fiscal cliff. But this time the impact of cheap liquidity will not just be seen on the US economy. As per Financial Times, the flood of cheap money could do permanent damage to the two largest economies in the world - US and China. This means by the end of Obama's second term, the global economy may end up with several 'Japans'!

We are indeed frightful and skeptical of such a scenario. It will not be possible for India to be completely delinked to the problem of global excesses. In fact when such a problem stokes inflation across the world, India could be one of the worst affected. Hence it is for our central bank to keep up the vigil and stick to its conservative approach. We sincerely hope the RBI can ensure that India does not end up joining US, China and probably several others in the long list of 'Japans'.

Do you think Obama's second tenure will ensure that the world has several Japans?Let us know your views or post them on our Facebook page / Google+ page

 Chart of the day
A survey by the Royal Institution of Chartered Surveyors estimates that in 2010 India had just over 500,000 civil engineers when it needed nearly 4 m, and 45,000 architects when it needed over 4 lakh. It predicts that by 2020 the cumulative shortfall of core professionals involved in the building trade could be in the tens of millions. This data was recently published by Economist. As seen in the chart, Indians lag their BRIC peers by a huge margin when it comes to enrolments for secondary and tertiary education. The national literacy rate is up from 52% in 1991 to 74%, according to the 2011 census. But gains beyond that are coming far too slowly.

Data source: Economist

Last month, the New York Times published a sensational story about the "hidden wealth" of China's prime minister Wen Jaibao's family. It is alleged that the minister's family had amassed wealth worth over US$ 2.7 bn. If you translate that in Indian rupee terms, the amount is about Rs 146.7 bn. For a lay Indian, this is not very shocking. For decades, we have accepted corruption as part and parcel of democracy. In fact, in China and India alike, this is how business is done. It has only been in recent years that the onslaught of corruption charges on politicians, bureaucrats and corporates in India has gained an unprecedented momentum. There is rising class of Indians who are not ready to take corruption and crony capitalism for granted anymore. India Against Corruption (IAC) activist Arvind Kejriwal and his team have brought some important aspects of the politician-corporate nexus to the fore. The most noteworthy being how seemingly antagonistic political parties tend to be hands-in-glove with each other.

But to bring about any significant change in the system, the citizens of India need to unite and take a strong stance against it. If you feel this way too, then help create a 'snowball' effect to save India's democracy and growth story. Make your voice heard. Participate in our petition to the government

Iceland was one of the early sufferers of the global financial crisis in 2008. This was when the country's biggest banks defaulted on US$ 85 bn of debt. As a result, the government decided to impose capital controls. This with the aim of propping up its currency notably the kronur. But it only ended up creating an imbalance. Because of these controls, offshore kronur can only flow in Icelandic assets. Thus, around US$ 8 bn worth of this has made its way into property. This has then sparked fears of another asset bubble brewing there. Indeed, apartment prices have soared 17% since April 2010. As a result, they are now just 1.7% below the pre-crisis peak in March 2008 according to estimates by Statistics Iceland. These capital control measures are likely to phased out and will not be completely gone till 2015. However, Iceland will have to be on its toes and ensure that another crisis of the scale in 2008 does not materialise.

Ok, President Obama has been re-elected the new American President. But would it have made any difference to the 'dangerous deficits' the US has been accumulating had Mitt Romney won instead? Certainly not if Alan Greenspan, the ex-Chairman of the US Fed is to be believed. He has argued that deficits pose a very formidable risk to the US economy. And yet, neither of the candidates had offered sufficient details on how to tackle the same. All they have offered are spending plans with broad contours. But there are no specific details to fall back on.

However, all this was expected we suppose. Cutting down deficits will need some bold decisions and no voter likes to be told that he will have to brace for few years of hardships. Thus, what come our way were big commitments without any specific action steps. But the reality is coming closer and faster than anyone can imagine. On December 31, a series of tax breaks in the US are scheduled to expire at the same time automatic cuts to Government spending are set to take effect. A lot of experts are of the view that if left unchecked, these series of events could pose the biggest challenge to US economic growth yet. Thus, it will be interesting to see how Obama and company deal with their first big economic challenge after re-assuming office.

The crisis that began in 2008 seems to have taught the corporate world an important lesson. It is necessary to hold cash. This could be one of the reasons why companies have been piling on cash in their balance sheets. This appears to be a worldwide phenomenon as per the Economist. One reason for keeping cash on the books could be the lack of an investment opportunity. Another could be that the companies wish to remain prepared given the economic uncertainty haunting the globe. After all US is on the verge of a fiscal cliff. Euro zone's crisis does not appear to be easing off. At the same time the dragon nation China is showing signs of a recession. The Middle East political scenario is heated up as well. During such times of uncertainty cash is always king. At least the corporate world appears to think so. However, when interest rates are abysmally low in most parts of the world a question that pops into mind is whether this cash is earning healthy returns? The obvious answer to this is of course not. Cash is most productive when applied in attractive investments. But when things are as volatile as what we see in the current scenario the attractiveness of an investment opportunity is dicey. At such times it is better to be safe than to be sorry.

Giving thumbs up to President Obama's victory in the US polls, the benchmark indices in Indian equity markets were amongst the top gainers in Asian region today. The BSE Sensex was trading higher by around 111 points at the time of writing. Other major Asian markets closed higher today while Europe also opened on a positive note.

 Today's Investing Mantra
"Growth benefits investors only when the business in point can invest at incremental returns that are enticing - in other words, only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor." - Warren Buffett

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    3 Responses to "Will Obama win ensure world has several Japans?"


    Nov 8, 2012

    I simply cant accept Arvind Kejriwal as a social activist because he himself has went to corporates for financial assistance. What will happen tommorrow if kejriwal comes to know of any frauds in the corporate from whom he have got donations. will he keep quiet. A man against corruption should try to avoid donations from political parties/corporates.



    Nov 8, 2012

    What is wrong about Japan to day?It is all business as usual.


    ajay kaul

    Nov 7, 2012

    There are many areas that can be addressed towards improving on unemployment i.e stick to fixed retirement age norms across Private and Public sector in US so that youthful productive energy is unleashed to multiply wealth.Reduce Education costs in US so that more people can access quality education and skills that increase their employability.Finally revive Brick and Mortar industry in US.

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