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Posts Tagged ‘European economy’

Defla-inflation – the Answer to Europe’s Problems

July 19, 2010 10 comments

If the USA could ride on a dollar-float equal to US GDP, for the last 60 years (1950-2010), could EU be left standing, watching, inactive and hurting (as in envy).

The problem of stagnant economies! (Cartoonist - Chip Bok; published on 2005-06-05; source and courtesy - cartoonistgroup.com).

The problem of stagnant economies! (Cartoonist - Chip Bok; published on 2005-06-05; source and courtesy - cartoonistgroup.com).

Curse of the ‘Strong-Euro’

Euro-zone would not have gotten itself into such a twist but for chasing the ‘strong’ Euro chimera.

An over-valued Euro made imports cheaper, gave excess inflows, liquidity, and the average Europeans abroad, a false sense of prosperity.

The strong Euro also made way for stagnating, indebted, deficit-prone economies of Europe.

Behind the ‘Strong-Euro’

Of course, Europe needed to make a success of the Euro. If the USA could ride on a dollar-float equal to US GDP, for the last 60 years (1950-2010), could EU be left standing, watching, inactive and hurting (as in envy).

USA let the Euro-Ride continue for the last 7 years (2002-2009) knowing that this can only result in a over-priced, stagnant, option-less Europe. Makes me wonder if Goldman Sachs acted alone in arranging all those off-book loans to Greece?

Hank Paulson … have you been naughty, again?

This may look like Bleak House on 'Bleaker' Street! But the situation ain't so bad. (Cartoonist Bruce Tinsley; Mallard Fillmore series; published on 2010-04-15; source and courtesy - cartoonistgroup.com).

This may look like Bleak House on 'Bleaker' Street! But the situation ain't so bad. (Cartoonist Bruce Tinsley; Mallard Fillmore series; published on 2010-04-15; source and courtesy - cartoonistgroup.com).

A nervous Europe

Erosion of Western dominance makes Europe resort to underhand ideas, legalistic sleights of hand that stretch definitions and prolongs the war of attrition.

  1. With Indian and Chinese manufacturing on the roll a nervous Europe is stuck for answers.
  2. With Indian pharma and auto sectors challenging the world, Euro-powers are nervous and fidgety.
  3. With surging Chinese manufacturing, Europe has run out of answers.
  4. With an indifferent USAon one side and the economic expansion of Asia on the other side makes for one, very nervous Europe.

Luring Kenya, with an Uganda waiting in the wings, by the use of ‘incentives’ to create legal hurdles for pharma-imports is a demonstration of this strategy.

TRIPS recognises IPRs as territorial rights and IP is protected only in the jurisdiction where it is registered. However, Kenya’s recent Anti-Counterfeit Act even recognises IPRs protected in other countries . This would make generic goods imported into or transiting through Kenya illegal if a patent exists anywhere in the world. This has serious repercussions not only for Indian exports but also takes away right of Kenya to independently define patentability criteria based on its development requirements. This is also a loss for Kenya, which in initial stages of its development would be denied the opportunity of drawing innovation and encouraging economic growth within the country.

Many other African countries are being lured into the same trap. There were allegations that EU provided funds for a similar bill in Uganda. Such legislations would deny public access to generic drugs and make them dependent on monopoly of a few patent drug suppliers. Three AIDS victims had to move Kenya’s Constitutional Court against the Anti-Counterfeit Act for a stay on the grounds that it denied them access to generic anti-retroviral drugs and, thus, violated their Right to Life. (via Time to challenge plus-size IPRs-Comments & Analysis-Opinion-The Economic Times).

How will Europe get out of this pit?

How will Europe unwind this complex knot?

The way out for Europe will mean severe belt-tightening. Not an easy thing in easy times, belt-tightening is the bitter pill that Europe may need to swallow.

A mix of defla-inflation with Euro-devaluation will be needed to fix things for some time. Deflation in wages, property and stock prices, inflation in consumer prices combined with Euro devaluation below dollar parity may see Euro zone on the road to growth! Not an easy road!

Is it a wonder that you get to hear a stuck Europe, squealing!


End of the Asian premium on oil?

Citibank has been saved 3 times in 30 years!

Citibank has been saved 3 times in 30 years!

Resource-scarce economies, such as China, India, Japan and South Korea, have long been heavily dependent on oil from the Middle East, giving producers there the upper hand in pricing. The surcharge, known as the “Asian premium,” has averaged about $1.20 a barrel since 1988.

Now, the tables are turning, handing an advantage to the region’s fast-growing countries in the form of relatively less expensive energy.

In March, Saudi Arabia, the world’s largest oil exporter, sold its Arab Light crude to Asia for $6.37 less per barrel than it charged European buyers … Kuwait and Iraq also followed suit … though official statistics aren’t yet available.

The latest flip in prices has led many analysts to conclude that fundamental changes in the global oil trade will soon eliminate the Asian premium for good, eliminating a drag on the region’s economy. In 2008, for example, Asian customers bought about 14 million barrels of oil a day from the Middle East, according to BP Statistical Review of World Energy. The premium averaged $8.08 a barrel that year, amounting to about $41 billion. (via Economic Clout Earns Asia an Oil Discount – WSJ.com).

Economic miracles

Going down the drain!

Going down the drain!

One by one, each Asian country has been able to pull itself out colonial cess-pit that seemed bottomless at one point of time. Barring a few like Pakistan, Bangladesh, Afghanistan, some Central Asian republics, Asia is truly on its way out of the 20th century misery.

There are two economic miracles. One we have seen.

It is a miracle that Asia has been able to come out of its poverty pit, where it found itself in the 20th century – especially after WW2.

The greater miracle will be when Europe and Middle East find a way to rebuild their economic model – without the Asian premium!

And that is the miracle we may not see!

The bubble you know

September 6, 2009 Leave a comment

A Chinese bubble has been deflated. Too bad it’s the wrong one. The main Shanghai stock market index has fallen 23% from its peak at the beginning of August, reversing half of the run-up that started early in 2009. That’s a welcome correction, but it doesn’t mean a return to normality, or address the bigger bubble round the corner.

Shares were driven up by a belief in China’s recovery – and by a rush of liquidity. The fall occurred because both were gently dampened. Politicians have warned that economic recovery isn’t a done deal. Monetary authorities drained some liquidity from the market, curbed certain kinds of lending and asked banks to show restraint. (via The bubble you know).

Look ma, Green shoots

Look ma, "Green shoots"

The long and short

The US economy is going to take some time to recover – a long time. Green shoots versus Brown Weeds is the kind of empty debate which covers the complete lack of visibility on the probable outcome that economists have.

The Japanese have finally decided to sack the LDP – after more than 50 years. The Japanese do not expect any major recovery or growth to happen for the next few years.

Europe is in the boondocks – and is unlikely to come out out of this soon. Their most feasible European option is a greater role for public sector – which the Europeans seem to have embraced in a bear hug.

The BRICs of global economy

Which leaves the BRIC countries. Russia is too dependent on high raw material prices – which need greater demand from the world economy to make a difference. Russia feeds on high growth rates – but cannot be the reason for growth of the global economy.

Ditto for Brazil. Which leaves the world with India and China. Let us first take the Chinese case first.

How ln can this model work

How ln can this model work

Biting the bullet

Most economists believe that to kill the Beast of Great Recession, the world is left with one, single  magic bullet – China. This being the only bullet in the chamber, makes everyone very nervous, keeps everyone busy, reading Chinese tea leaves with great care.

There is overall consensus that the Chinese growth figures need to be ‘tempered’ – and significantly. The fears seems to be in two areas: –

1. Overstated growth rates.

“The Chinese government is one of the few governments in the world that knows its GDP numbers three years in advance,” Marc Faber told CNBC. Combine this with the other preoccupation where “China is desperately trying to figure out how to withdraw its funds from the dollar without driving it down — not an easy feat.”

2. Understated bad loans by banks.

an astonishing $300 billion vanishing act … the amount of bad debt the top three banks offloaded in the early 2000s. Back then, the People’s Bank created four asset management companies to scrub away the dirt from two decades of policy-driven lending. There was a big catch. The AMCs bought the loans for up to 100 per cent of face value, while recoveries were in the 20-30 per cent range. That means the top three lenders’ Rmb1.2 trillion of AMC bonds, which start to mature this year, are likely to be almost worthless. In theory, the Ministry of Finance is ultimately on the hook, but it is unlikely to make good for the banks. The amount due to all three is roughly one-sixth of China’s fiscal revenues for 2008. (from If in doubt, rub it out BY John Foley /  August 29, 2009, 0:03 IST).

Housing makes up roughly a quarter of investment spending, which is in turn 40% of gross domestic product. The differences between China’s big cities make a bubble harder to spot. But record bids for land are cause for concern, as is falling affordability in big cities. Meanwhile, stagnant residential rents suggest speculation, not demand for somewhere to live, is pushing up house prices. A burst real estate bubble could be fiendishly tricky to clear up. While stock markets clear in a day, property gluts can take months – if they clear at all. ( from The bubble you know by John Foley, Septemeber 1st, 2009, 01:33 IST).

Everything is made in China

Everything is made in China

Both these severely strain the economic outlook and the banking sector. This may lead to, what the WSJ.COM says, a situation, where “China in the medium term will face just the overcapacity and bad debt that many observers feared already existed.”

But some of these observations and scare stories are exaggerations – and need to be read with the caveat that the dominant Western media portrays all competitors in a similar manner.

What about the Indian economy

That pretty much leaves India as the sole candidate. India cannot absorb the kind of imports that are required to make a difference to the global economy. Or boost exports to the rest of the world – to create consumer led growth. World Bank estimates are that India will grow faster than China by 2010. So, no go!

A plan for Indian businesses

What this means is that India needs to do: –

1. Not bank on any kind of global recovery soon.

2. And island itself – by ensuring that any kind of global mayhem, counter-party risks do not hit Indian banks, corporates, exporters, et al. This may need some strong alliances on export guarantees and credit enhancement by importers for exports from India.

The Indian Government, may not take any major initiative in this regard, but it is the Indian businessmen, who should and must understand this situation – and take the necessary precautions, actions, insurance, guarantees, due diligence, comfort letters – the entire gamut.

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