For a few $ more, starring Ben Bernanke


If Dubai was a shocker, the US would be a tsunami! So thinks Porter Stansberry, in an article 'The run on the $ starts soon' in which he talks about the fact that the US has to refinance $ 2 trillion of short term debt within the next 12 months! Together with additional deficit spending of $ 1.5 trillion (some people are talking about one more stimulus package) the requirement is $ 3.5 trillion! Dubai's $ 60 b. is peanuts!

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Other countries, notably Pakistan, Greece and, heaven forbid, the UK, are also slated to be in deep financial trouble. (God save the Queen!)

Now, in the past, whenever there has been a crisis, investors have flown to safety, which was in US Treasury bills. But are they likely to do so again, in view of the deep fiscal hole in the US or would they diversify into other assets such as gold (which has already shot up), commodities and emerging market assets (stocks, real estate etc).? This is the big question which nobody can answer but only guess at. Porter Stansberry in the article says “If you haven't taken steps to protect yourself from the coming devaluation - like owning gold and silver bullion, foreign real estate, and farmland - make sure you do it soon. The dollar rout is coming.”

Perhaps the $ rout can be an opportunity for India, if we can get our act together. India is an economy that is growing at a pace that is the neighbour's envy, but the owner's pride; Q2 GDP growth clocked in at an unexpectedly high 7.9%. Of course, a lot of this was thanks to the stimulus the Government provided and partly due to payment of arrears of pay after the Pay Commission report. Also partly due to continuing low interest rates.

But low interest rates may be reversed, because food inflation is at a whopping 17.4%. It was low interest rates that were the driver of the fantastic performance by the auto sector; sales of cars in Nov were up a whopping 63%. This is because not only are interest rates low, and financing of new cars easy, but also because petrol and diesel prices are hugely (and foolishly) subsidized by a myopic Government too scared to do anything about it.

But this is likely to change, and soon. An expert committee appointed by the Ministry of Petroleum (one of many such) has recommended ways in which the subsidies on petrol/diesel be phased out. These need to be increased, probably in stages, by Rs 3.68 and Rs 2.90 per litre, respectively, after crude oil prices have shot up to nearly $ 80/barrel.

Subsidised petrol and diesel creates two large holes. One is in Government's budget. The other is in the ozone layer, by encouraging people to drive more. Both holes need to be urgently plugged. India is to commit to a reduction in carbon emissions at the Copenhagen summit and this, in itself, will pressurize the Ministry of Petroleum to act sensibly.

Also pressurizing them are the three private sector companies, RIL, Essar and Shell, who have asked the Ministry to either hike petrol/diesel prices, or to give them the same benefit of subsidy recompense that is being allowed to PSUs IOC, HPCL and BPCL. Since the latter would cause a bigger hole in the Budget, it is an unlikely option. In fact, investors may well look at the three PSU stocks.

In fact, during the past few years, when the economy has been booming and tax revenues have been buoyant, the Government has wasted the opportunity to spend the revenues prudently. They have continued with such wasteful subsidies on petrol/diesel (which cannot be termed as pro poor by any stretch of imagination) on the one hand, and have spent on programmes of poverty alleviation in a manner where the benefits percolating to the deserving poor are minimal. There are too many leakages (read siphoning) along the way.

This is borne out by a wonderful article in the Economist of Nov 28 titled 'The gloves go on', which compares the efforts of three of the BRIC countries, viz. Brazil, China and India, in alleviating poverty. Whilst the Chinese have succeeded in reducing the % of population living below poverty (defined as $ 1.25 per day income on ppp) from 84% of population to just 16%, between 1981 and 2005, Brazil reduced it from 17% to 8% and India from 60 to 42. However, the reduction in Brazil was the most equitable; measured by the Gini index, which measures equitable distribution of wealth, it is the best in Brazil and the lowest in India, of the three countries.

One reason for this is the perverse way in which the Indian government intervenes; ration cards, for example, are given to those who least need it, in urban areas, and not to those who most want it, for want of a 'permanent address'.

More than half our people do not have access to banking facilities. Technology now provides a solution in the form of phone banking, where cell phones are used (as in Nigeria) to do small transactions. This could benefit millions of poor people who cannot be reached by brick and mortar bank branches, for want of viability. Yet such transactions are denied on grounds of 'security'. Security concerns are easily addressable by limiting size of transactions, for Chrissake!

Such usage could, in fact, provide a boost to the telecom sector, which is facing too much competition and is constrained by too little spectrum availability.

The market continued its rally last week, encouraged by the Q2 GDP growth numbers. The sensex rose 558 points, to end at 17290 and the Nifty ended at 5125, up 234.

However, investors must realize that a significant part of the GDP growth was thanks to the fiscal/monetary stimulus. Measures (such as raising interest rates to combat food inflation) are now being contemplated. For Government it will be a tough call because higher interest rates would dampen the mood for equity investors and the Government plans on raising good money through disinvestment. Australia has started the unwinding process and Brazil has put into place control of foreign inflows (India is contemplating this). The European Central Bank has also started tightening measures, although it kept interest rates at a low 1%. If the US $ comes under siege, as it will, Ben Bernanke would rue the day he became Fed Chairman, if he isn't already. In order to get even some of the $ 3.5 trillion, US Fed would need to raise interest rates. That would be something equity investors would need to be very very careful about! Prudence is advocated.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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4 Responses to "For a few $ more, starring Ben Bernanke"


Dec 11, 2009

Bernanke is a tight lipped money printer.The federal reserve in the U.S. needs to be dismantled.
The lax print dollars and save the banks policy of the U.S. has damaged the world economy terribly. This should stop.

As for India, improve the infrastructure, overcome the political pressures and modernize the cities and link the country with good roads. India can become no. 1 in fifty years.


Dr. Anil V. Bhide

Dec 6, 2009

Excellent article and extremely stimulating! Question which arises is, if you were in Bernanke's place, what would you have done?



Dec 5, 2009

Infrastructure development should not be limited to laying roads, but extend to public transporation also. Instead of bearing the unproductive subsidy costs, the same can be spent on public transport, which reduces traffic congestions and consequential pollution problems. It is an urgent and immediate need.



Dec 5, 2009

The article is excellent. you have put all important economic happenings in a nutshell. it is very useful to understand the present scenario. the vote bank politics spoils the economic growth of our nation. You have pin pointed the issue. Hope that GOD will save our Nation. thanks.

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