The Eject button doesn’t work!!

But you can hope to avoid a crash landing!!!

The bail-out bill did not pass the Congress and neither would it have worked anyways!!!

Let us for a moment imagine that there was no financial crisis. If you do basic study of some facts – The US is still growing handsomely between 2-3% p.a. whereas India is growing between 7-9%. Indian PPP per capita GDP is $2700 and the US PPP per capita is $ 42000. Indian per capita (est.) national debt is $200 where as US per capita national debt is (est.) $37000. Of course this will/would go up once again after a bail-out. Yes the size of the US economy does matter but debt as a proportion of GDP (per capita) is 88% for a US citizen and 7.4% as an India. These are not strictly comparable nos but it tells you that an average American is leveraged more than 10 times that of an Indian. And that too as a nation! This of course is/was possible because the US economy, till date could attract debt both internally financed and externally by other nations and their central banks. The servicing of this debt remains a huge question.

Imagine, for a minute that the US is unable to draw on extra credit from the central banks of various countries, then US will have no alternative but to print money (inflation) to fulfill the supply of money, if only to provide for debt servicing. At the same time, they have to de-leverage, then they will have to simultaneously contract the economy (recession?). There is only so much more that the US economy can do by way of productivity improvements.

So even it was not for the credit crisis, it was quite clear that most of the growth in the past was indeed financed by the increased borrowing and very little due to productivity changes. A bit like buying a guzzler SUV with borrowed money rather than a Corolla with your own.

Assuming that there is intent to rectify the situation, the following is going to happen:

a. To reduce borrowing, there has to be a zero or near zero growth rate that arise out of borrowing – everybody knows the word “Recession”
b. The dollar value against various key currencies will have a determination of the net impact of all changes in the US economy.
c. Dollar denominated imports need to be replaced by dollar denominated consumption and manufacture and exports. This requires the dollar to be more competitive.
d. The interest rate of the dollar (Fed)will be the peg on which the interest rates of all the other central banks (particularly those that currently export to the US and have significantly ownership of US treasury bills) to make sure that the interest rate differentials are maintained to enable dollar-currency parity.
e. The inflationary pressure in America will be severe and can be only offset by significant productivity improvements.
f. Contraction of leverages will necessarily call for US capital to reach once again US shores.


The impact (US):
1. US companies particularly banks will contract their overseas exposure to optimize investment and returns. There will be flight of capital from various markets
a. Equity markets globally, and also from emerging markets Stock markets around the world will see flight out of their markets from here on. A further decline of 20% from here on (BSE at 13000 at the time of publishing) is possible.

b. Commodity markets particularly OIL by 2008 end year end will fall below $ US100 and will see $80-100 range in 2009

c. A long period of zero growth in consumption of may important items.
i. Food growth negligible
ii. Oil and energy negative
iii. Auto negative
iv. Lifestyle goods and luxury items negative.
v. Staples and daily living products and healthcare will probably do well.

d. Inflation will be higher than ever before (except the great depression)

e. Productivity enhancing technologies and products and services will be needed and hence IT, Technology, Alternative energy etc will be much needed.

f. Money saving ideas such as reuse of products will be back in fashion in the US.

g. Unemployment in certain sectors will be unimaginable. An overall drop in employment will be significant. It is not improbable to expect, for a short time, double digit unemployment. The overall earning potential per job will increase with inflation but number of jobs will shrink. Top end jobs will continue to be strained and average income though higher will be reflected only the lower skilled jobs. Think job incomes will show lower growth.

2. The growth in the US economy will eventually come out of Exports and Infrastructure ( a bit like India) horizon ~ 3 years from now

a. Exports from US energy giants and Capital equipment companies will require markets and technical manpower from India and other countries and this will present global job opportunities for Indians etc.

b. The US will open up investment to sovereign and other funds to a higher investment in infrastructure – Blocking of UAE ports authority will not happen again. This growth will bring immense opportunity to labour in the US and technology and resources of the world.
i. Arising out of this will be the increased demand for Steel and other infrastructure products from the world, giving an impetus to commodities. 2010-2012
ii. The US will be unable to borrow significantly to enhance this expansion of this economy, giving opportunities for global companies to participate for full ownership of both assets and infrastructure.

3. The Dollar as a global currency will be severely put to test. It is almost certain that many commodities will attempt to decouple with Dollar and look at a basket of currencies for determining the price. The proportion of demand from Individual countries and as a result their currency will create a new index for commodity pricing. Hence Indian Rupee will be a significant part in the basket of currencies in a commodity such as Gold or Steel or Ore and so will the Chinese Yuan. OIL may not be traded in Dollars in many markets and the choice of currency will be determined by the contribution to demand and growth of demand. Once again, India and China amongst many other countries will play a role.

The Dollar will be focused on driving value for exports; will reel under shortage from overseas supply; will be replaced by other currency(s) as a primary global currency. Added to this is the indebtedness of the US economy which will force the Dollar to nosedive from here.

The only reason it hasn’t is because nations including India have been unable to unwind their US treasury positions whose returns will turn negative if the Dollar falls. So the grind will be slow and painful. Naximum predicts a 20% fall of the US dollar against all currencies from here on, maybe 12-18 months.

4. Gold as a hedge against inflation or instability has gained promise in recent days. But Gold can no longer fulfill the role of ever stabilizing financial systems and hence a single commodity may not fulfill this role anymore. New international negotiations will begin to understand in which way any other commodity(s)/index or factor can be used to stabilize transnational instability and to reduce the US (and China by then) overhang on the world economy. Naximum believes it will bring forth issues like natural resources of a country, reserves of energy and water into the fold and probably bring about a new way of determining the true value of a currency against which all other currencies will operate ~5-10 years

So, Don’t worry about the bail-out, it was always a parachute not large enough for the US economy and only meant to soften the crash landing. Now, it is up to the pilot of the American economy, the understanding of its people and the cooperation of the whole world that will help bring about a landing with the least amount of internal damage; and collateral damage to the rest of the world!!!!!