Friday, April 3, 2009

Obama, G20, IMF and BJP. BJP? - Weekend Musings

Dear Readers,
Last few days (or weeks?) have been very rewarding for bulls and bears are getting slaughtered every time they try to fight. Today, there are some news that are of important significance, so I thought let me put my perspective for my dear readers.

The first news is from G20 meeting. Yet another TRILLION DOLLARS to fight global meltdown! The news is that USD 1.1 Trillion is there at IMF's disposal to save world economy from going under. Obama, the US President acted more as a facilitator at the G20 meeting and in the end there were smiley faces all over the place with some leaders playful like playschool children. Is this new struck deal between biggest 20 developed and developing countries so important? Is this really start of a New World Order as British cousin of Obama says? Let us come to the facts.

We have been hearing this TRILLION word for quite some time during this ongoing crisis and and this overuse of the word has made it taken for granted. Let me put some facts so that we once again could be able to imagine the size of this word in real senses. Being a millionaire meant something not long ago and one billion means the potential to create 1000 millionaires! That makes one billion a big amount of money. Now consider a trillion - it is as if there are 1000 x 1000 = 1000000 = ONE MILLION MILLIONAIRES! That's the value of a TRILLION! Simple maths, isn't it?

Now let us take an Emerging Economy - India for the comparison. India has population exceeding one billion and for simplicity, let us assume there are exactly one billion heads living in India. If we were to distribute USD one trillion to all, each individual receives USD 1000. If we consider the family shape of Indians there are roughly 10 members on an average in a joint family. This makes USD 10000 per family! So, you can distribute USD 1 Trillion to each family of world's second most populated country and they receive USD 10000 apiece!

Let us look at it the other way round. The GDP of India is slightly above the $1.1 Trillion figure announced at G20! So, it effectively means they are putting in an amount nearly equal to the ENTIRE GDP of INDIA! And to make things look rational, India fairs at 12th rank in the world in terms of GDP which means that is really a big amount!

From the above comparison we should be clear what a TRILLION means and look at the way mainstream media puts it - as if its a child's play to play around with such big sums. Even in the start of crisis when Bush distributed $200 billion as stimulus package, it was considered real big amount. Hardly one year after that BILLIONS (hundreds of them) don't seem to be enough money! what a wonderful situation! If this is the way things go on then very soon they will be dealing with quadrillions ! like Gono introduced trillion dollar currency note in Zimbabwe !

Now, the issue is will it be able to fight of global meltdown? I am certain it will not. Its very simple, these leaders and there economists are only worsening the situation day by day, dollar by dollar. This problem was caused by excess of cheap fiat money and it will not end before the excesses are wiped out. Even if things look like stabilizing, it would be merely a postponement of real big crisis that is inevitable and the more it is postponed the more it grows in severity.

The second news is of BJP, the main opposition party of India declaring so many populist measures its election manifesto. Many pundits don't think BJP will be able to get big majority and perhaps that is the reason they (BJP) decided to announce such big populist promises. The manifesto says they will spend in massive infrastructure programs to generate employment, give farmers and hawkers loans at four percent and housing loan at six percent! And add to this they will subsidize rice to Rs. 2/- per Kg for BPL (Below Poverty Line) families! If they come to power and they keep their promise then they will need to run special charity to get money for all these govt expenditure and subsidy measures! The fiscal deficit may jump manifold if they go on with that. There is a point though, that may go in their favour - if deflation gets hold in the meantime, then that low interest rate thing is not going to be that difficult. Who knows they may be aware of this possibility and so are not worried about the promise!

1 comment:

  1. Your analysis is true. More and more massive inflow of money into the market is not the realtion solution. The present recesion is most likely to eat up all this huge infusion of money and only thereafter, one can see some early signs of end of the recession. As of now, the recession is likely to intensify further as expressed by several famous economists.


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