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'US will be soon back on its feet'

Oct 16, 2009

The 'maestro' seems to be at it again. Alan Greenspan, who many feel to be amongst the chief architects of creating one of the biggest bubbles in the history of mankind, has already made up his mind of looking ahead. In fact, he seems to possess one of the most optimistic of lenses. Talking to Moneynews, Greenspan has argued that the US economy could grow as much as 3% in the fourth quarter of 2009. Also, he does not see any further need for more fiscal stimulus. And Greenspan is not alone. Larry Summers, Obama's chief economic advisor has also been seen veering towards a similar view. "I would be very reluctant to accept the idea that the American economy no longer has the potential to grow rapidly", Summers is believed to have said in a recent speech. Well, we don't know if they are referring to the same of US of A as us. Because the America that we have come to think of, may not grow at such a fast rate as the figure quoted by Greenspan for few years to come. It should be noted that the 3% growth rate was the rate achieved by the US economy at the height of the boom when leverage was at its peak. Since the bursting of the bubble, there has been a massive deleveraging process underway and despite best efforts by the government to once again inflate a bubble, nothing has come out of it. The US consumer, which accounts for nearly 70% of the country, has chosen to cut back on its spending and unless it once again starts splurging freely, the US GDP growth may continue to be lackluster.

India: Dilemma of a different kind
While the US authorities are pulling out all stops to inflate another bubble, their counterparts in India are beset with a problem of exactly the opposite kind. How to prevent one from being created that is. And that too, without harming the country's long term growth prospects. The fiscal and monetary stimuli that both the central government and the RBI had unleashed a few months back have been proven successful in their efforts. India has avoided a massive slowdown in its economy and now looks well poised to achieve a GDP growth well in excess of 6% for the current fiscal.

However, there are a couple of things that could throw the proverbial spanner in the wheel. The liquidity that the central bank had injected into the economy has now been supplemented by strong capital inflows and this has created a problem of plenty in the monetary system. While excess liquidity is always good as long as it does not lead to rising inflation, that is not currently the case with India. Inflation is on the rise steadily and many believe it could touch the 6%-7% mark by as early as March. Letting inflation run amok may not be the best strategy to have. Not only does it make life miserable for a large number of population, it also creates bigger asset bubbles, the bursting of which could lead to bigger problems in the future.

Hence, absorbing the excess liquidity and nipping the asset bubble in the bud should be the central bank's foremost priority. In fact, the government could also do its bit by rolling back fiscal incentives. But it is not as easy as it sounds. It has to be done at the right time and has to have the right mix. Overdoing it would mean hurting India's growth prospects and not taking enough measures would mean letting the problem persist. The authorities indeed have a few tough months ahead of them.

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