Archive for August, 2009

Is America Jumping or Slumping ????

August 9, 2009

I would like to start off thanking Alan Greenspan and Ben Bernanke for running the Federal Reserve tenaciously without even raising the interest rates from 1999 and keeping it as low as 0.25% per annum  and also printing money out of thin air (through open market operations) which is  tantamounting  to bubble after bubble and  completely ruining the entire economic system and thereby creating  a bigger  mother of the bubbles i.e., Bailout Bubble. (The upcoming mother of all the bubbles).

Firstly, the intention behind giving the bailout was to stimulate the economy thinking that the Americans spend again to restore the growth in the economy (as 70% of the GDP is through consumption) but the growth doesn’t happen because the most of the people in the country are exposed to foreclosures and at the same time unemployment skyrocketing (jobs not being cooled but disappearing) , money being blocked in the housing sector and pay cuts from the companies. And I don’t know how will people start spending their money after they receive it from the obama’s administration which is issued to public without any transparency and good governance. Henceforth , the growth in the country shrinks and thereby again leading to the same old cascading effect.

Seconldy , Americans doesn’t save much. The problem with the Americans is that they are living at others countries expense and their currency has lost its 95% of its purchasing power (1930) so everytime where there is a federal deficit they try and devalue their currency to tune the economy to a growth trajectory without concentrating on improving the competitiveness of the country’s exports. This is the major problem of American style of economy instead of concentrating on the enhancement of cost efficient techniques and real production they start spending too much on the imports (leads to ballooning trade deficit) and leading to big federal deficits in the longer run. When this deficits are coupled by our bailout spending money it turns out to be a red ocean of deficits.

Thirdly, the obama administration is very confident of getting the federal deficit  down  because of the china’s willingness to buy the treasury bonds issued by federal reserve which will inturn lead to  huge capital account surplus. But this doesn’t happen because china which has all its assets in dollars wanted to put it back in some kind of sovereign wealth funds due to loss of the purchasing power of the dollar(although knowing that it will get into turmoil and will be very confident to getting back to growth track again after few years with upper hand in EM pack because of its competitiveness). Even though the treasury bonds be collapsed (due to the upcoming rise in the interest rates to get in tandem with the devaluation of currency to attract foreign capital) the Chinese will withdraw its support  to buy more treasury bonds leading to American govt. Bond bubble. This bond bubble with penultimately ruin the system by making the American govt. Bankrupt and just lifting its hands at the time of severe downturn.( Because no surplus anywhere in the BOP but more deficits and erosion of foreign exchange reserves leads to more expenditure but less revenue and henceforth in longrun becoming bankrupt.)

Lastly, due to American currency losing value coupled with lack of real growth in the economy eventually lead to the increase in the real value of the commodities (which are left out in the system )thereby leading to hyperinflation i.e, long term secular bull market of commodities  and the long term bull market of commodities will dip the earnings of the companies(High Costs+ Higher Interest Rates +Low Margins = Low Earnings).

Obamageddon  or  Real Economic Growth ……!!!!

So now we may be flushed by the stupid policies of the American government  inorder  to stop the inevitable collapse but  just prolonging  the pain for more number of years.  My dear readers, this is not rhetoric but the hard reality which we are going to face in the upcoming days.

Disclaimer: The views expressed here are of the author and the readers are advised to consult their own financial advisors before taking any financial decisions or whatsoever.