The last week has seen a subtle shift among businesses and Central banks the world over, India excluded. The shift, more akin to dipping their toes to test the waters, is indicative of a new trend in the making. Since the collapse of the hedge funds of BNP Paribas in August 2007, policy makers have been in denial that the crisis is likely to drag on for years and that the problems are a mirror image of those in 1929. However, due credit needs to be given to them since without the intervention of the Central Banks, the world would have been mired in a depression that would have made 1929 seem like a walk in the park. The Central Banks saved the day by postponing the crisis but they now seem to have realised that their efforts have more or less been wasted by the politicians and the ability of global capital to see to it that their short-term interests are not hurt beyond a scratch. Even as bond yields of the supposed safe havens reach record lows (below that of the Great Depression era), Central Banks seem to have realised that they will soon run out of bullets and hence have started one last attempt to salvage the economies of the world. One, change the goal posts so that they can postpone the inevitable to buy some more time and, two concurrently gradually prepare the masses for the inevitable: the Dawn of the first Depression of the 21st Century. Bankers seem to have joined the effort. First to release the balloon was the CEO of RBS warning that the crisis in Europe will take years. That was actually the best effort at being frank because, he knows very well that if he is too candid then he will lose his job. Next came Morgan Stanley warning that the world was short of US$2 trillion, then came the Chief of the Austrian Central Bank, who is so nervous about the situation in Europe that he blurted out what is probably being discussed in hushed tones by the central banks: compare the situation with the Great Depression.Clearly, the Central Banks know very well that the present situation is irretrievable unless they follow what we have long advocated: write off debts on a biblical scale so that everybody starts on a clean slate. Ultimately there will be such write offs because all the junk paper currency has been exchanged for junk bonds - in the form of bonds that banks are depositing with ECB and borrowing Euros which will anyway will collapse sooner than later.Even the Germans are scandalised by this!!!
It is indeed surprising that there is so much complacency that the economy is going to recover soon. Recovery at a time when there is such great austerity is either a joke or will require a complete overhaul of our understanding of every discipline as it has been taught since 1789. Take the case of Italy which will have to cut 3.2 percent of GDP due to tightening; US will have to cut nearly US$ 1 trillion over the next few years due to fiscal discipline related causes. Greece has to tighten nearly 4.5% of a shrunken GDP, France and a host of others will follow. Such a collapse will only make the ugly balance sheets look worse one year down the line.
The best option, writing off debts, is something that is not palatable at the present juncture. Governments would have the bondholders lose gradually than all at once. Sounds scandalous? Look at those who lent money to Greece over the past five years, and especially those remarkable finance whizkids who lent money over the past three years (since the first package): they have already lost 75% of their principal.
So what is to be done?
For Starters: in the next five years, be prepared for the biggest bull run in the history of the US Dollar Index. The Chart below shows the long-term charts of the US Dollar Index (since 1985) and all the technical patterns seem to indicate that the markets are preparing for the worst. Nothing that seems to be more safe than the US dollar in the era of fiat currencies. After all it is better to loaded up on lousy dollars than being loaded on a sinking currency in the form of Euro.
Two, learn from India: We can still function with active cartels, crony capitalism, an economist PM whose sole USP can do nothing - like even winning a panchayat election for himself and yet has been the PM for so many years, a Finance Minister who is hoping to retire peacefully with a promotion though his skills never went beyond helping over leveraged promoters become directors of the Central bank, and we have a central bank that has solved the problem of bad loans very easily - simply reschedule as many loans as possible. That postpones the problem for up to seven years and after that who really cares, there will always be a new theme. And worse may be in store: if the raingods forget us.
After all this is the era when ignorance is bliss and people will anyway forget that the present list of emerging markets have remained emerging for the last century and those like South Korea which are supposed to have 'developed' will be back to the list of emerging markets that tried to emerge but failed. Remarkable how beautifully useless the rating agencies are in practice: they upgrade an economy that is 95% dependent on exports at a time of the most important economies that consume are suffering from indigestion.
Three, Avoid China - we have highlighted the problems of that country innumerable times and hence no need to repeat it again.
But, all is not lost for Indian speculators. Indian charts seem to indicate that our speculators are all set to rig stock prices once again.
It is indeed surprising that there is so much complacency that the economy is going to recover soon. Recovery at a time when there is such great austerity is either a joke or will require a complete overhaul of our understanding of every discipline as it has been taught since 1789. Take the case of Italy which will have to cut 3.2 percent of GDP due to tightening; US will have to cut nearly US$ 1 trillion over the next few years due to fiscal discipline related causes. Greece has to tighten nearly 4.5% of a shrunken GDP, France and a host of others will follow. Such a collapse will only make the ugly balance sheets look worse one year down the line.
The best option, writing off debts, is something that is not palatable at the present juncture. Governments would have the bondholders lose gradually than all at once. Sounds scandalous? Look at those who lent money to Greece over the past five years, and especially those remarkable finance whizkids who lent money over the past three years (since the first package): they have already lost 75% of their principal.
So what is to be done?
For Starters: in the next five years, be prepared for the biggest bull run in the history of the US Dollar Index. The Chart below shows the long-term charts of the US Dollar Index (since 1985) and all the technical patterns seem to indicate that the markets are preparing for the worst. Nothing that seems to be more safe than the US dollar in the era of fiat currencies. After all it is better to loaded up on lousy dollars than being loaded on a sinking currency in the form of Euro.
Two, learn from India: We can still function with active cartels, crony capitalism, an economist PM whose sole USP can do nothing - like even winning a panchayat election for himself and yet has been the PM for so many years, a Finance Minister who is hoping to retire peacefully with a promotion though his skills never went beyond helping over leveraged promoters become directors of the Central bank, and we have a central bank that has solved the problem of bad loans very easily - simply reschedule as many loans as possible. That postpones the problem for up to seven years and after that who really cares, there will always be a new theme. And worse may be in store: if the raingods forget us.
After all this is the era when ignorance is bliss and people will anyway forget that the present list of emerging markets have remained emerging for the last century and those like South Korea which are supposed to have 'developed' will be back to the list of emerging markets that tried to emerge but failed. Remarkable how beautifully useless the rating agencies are in practice: they upgrade an economy that is 95% dependent on exports at a time of the most important economies that consume are suffering from indigestion.
Three, Avoid China - we have highlighted the problems of that country innumerable times and hence no need to repeat it again.
But, all is not lost for Indian speculators. Indian charts seem to indicate that our speculators are all set to rig stock prices once again.
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