Impending Global slowdown and its aftermath A short summary of global economic events

August 30, 2016 | Posted by bobbysrinivasan << back to blog

Janet Yellen US Fed chairman announced on Wednesday 27^th July 2016 that the US discount rate will remain unchanged. Reasons offered are that the US economy is flat and not growing.
The interest rate which has reached the 0% level 10 years ago has more or less remained where it is except for a 25 basis point push up in 2013. This is a unique time in the US financial history and this has never happened before.
The US introduced US $ 4 trillion in to their economy. This is through quantitative easing (QE1, QE2, QE3) which started in 2009 and ended in 2013. All the efforts made by the US Federal Reserve to remove this unearned fiat money from the economy have proved futile so far and continues to do so. The economy absorbed all the monies without causing inflation.
The US cannot revive the economy since it is not in a position to add more money either through interest rate cut or through pumping fiat money. This will result in a stagnant US economy and hence the world.
The US economy which once achieved 4% growth for many decades then settled for 2% growth later is not happy to have a 0% growth.
What will achieve the higher economic growth? We know Y = C + G + I + (X – M). The US economy is a 18.5 trillion economy with a debt level of 19.5 trillion (debt as a percentage of GDP is 105%).
Domestic savings are paltry. The US bonds are readily bought by foreigners. China and Japan leading the list. The US currency remains strong inspite of the trade deficit because of the movement of capital into the US through capital account.
The US created nearly 15 million jobs during Obama presidency. In the recent months the job creation has been spectacular. Why and now? See the evidence.

Yet all signs of deflation are everywhere.

Food and other related commodity prices are around 50% below its peak.
Industrial commodity prices such as zinc, copper, iron ore, aluminium are all down by more than 50%. Infact iron ore price is 50 year low.
Japan, Eurozone all have negative interest rates. Their citizens pay interest for putting money in the bank. This is followed by Switzerland, Denmark, Britain and host of other countries.
Data suggests that what little growth that is achieved, 90% of it goes to the top 1%. This was the US election topics of Bernie Sanders.

The entire world is facing the same scenario. Many countries in the Eurozone 29 of them are facing double digit unemployment. Japan’s job creation has virtually come to a stop. Most of the jobs created are temporary in nature. China’s economic growth which was growing at 10% is now currently settling for 6.6% with the possibility it may hit 6%. To revive their economy one of the possibilities is to export more and achieve a bigger market share and hence the possibility of devaluation. In India the job creation is pathetic. Every year nearly 1.1 Crore people become cohorts. Not even 20% of them can find a decent job. Increase in jobs creates increased consumption and investment in infrastructure. Government will receive more taxes. This precisely is not happening.
The word deflation brings a scary scenario. In this environment today’s prices are cheap and it will be cheaper tomorrow. Hence one can wait for a long time to spend the money.
Competitive devaluation to get a global market share is practiced by many countries with devastating conseques.
Many advanced countries are either engaged in it or the market is taking it there. To list a few

Russian Rouble has moved from 32 to 84 to a dollar.

Brazil Real has moved from 2.5 to 4.5 to a dollar.

British Pound which fetched from 1.75 US dollar is now fetching 1.30 dollar.

Argentinian currency which was 1 Peso = 1 dollar in 2001 is now trading at 16.5 dollars.

Venezuela, Bolivia and Turkish Lira are all practically worthless.

South African Rand has dropped from 8 to 16 to a dollar.

Nigerian Naira from 150 to more than 300 to a dollar.

The wealth level in these countries have been destroyed. Any recovery in the near term is next to impossibility.
The interest rate which is an indicator of how the economy is now pushed to zero and negative levels. Never heard of it before. No textbook is handling this issue because it is all contemporary issues and never happened before.
We talk about the unknown future. Upto now it was talked about but now it is real.
The world is anxiously waiting for China’s reaction to the drop in the global demand. Unemployment in China has always created serious social problems.
Looking to India

We are buried in our own problem, 16 to 17% of lendable funds are NPA and Banks are nowhere near meeting the Basel III standards. Our foreign reserves are 360 billion and our liability against it exceeds 550 billion. Currently we are managing with borrowed money, can’t last forever. For 18 months in a row our exports are falling. Devaluation may not be a solution. Promises made cannot and will not be delivered. The leadership and the ruling party will face this reality.

Finally, it may take several years before the demand gets back to normalcy. The excess money will take many years to get absorbed. Citizens around the world will slowly accept this. In the past war revived the economy. Now it is neither conceivable nor possible.

The world requires redistribution of wealth and fair trade. Such things may only be on paper. Let us hope sanity returns and the leaders see that all problems of the world in the proper light. In this context the US leadership will be very important.

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