Credit and its impact

Credit and its impact

The easiest way of having growth and improving standards of living in a country are to get to grow on cheap credit. Creditors however have to be paid back one day, such that the growth and progress remains temporary. Rightly said by thinkers across all societies, being in debt remains the biggest curse on an individual and pretty much so on a country.

We have seen some rapid growth in India since 2000 to 2008 a scenario we tend to see across the world. The growth though initially fuelled by cheap Yen and mostly in the European part of the world, with USD rates near zero, cheap dollar fuelled growth from 2000 onwards. In addition most governments across the world have printed money, resulting in inflation seen mostly in necessary items.

Most economies have responded by offering more credit. It’s like Mr. Marc Faber pointed out, you give more drugs to a person who is habituated to drugs to solve the problem.

In the context of India, money printing and cheap credit have created extraordinary bubbles in the last few years, particularly in the real estate market. Markets have an elastic tendency. They always tend to overshoot when bullish beyond the normal and pull back more than normal when bearish.  In addition to the above two factors, money printing and availability of cheap credit we also have the contribution from the black economy. We have seen the greatest so far bubble in India both in the commercial property market as well as the individual home owners market.

The point I am making is that further growth in the real estate sector is unsustainable and a likely recession is going to happen. Tough times for lot of companies since most have taken loans against real estate they own. Once banks will need to do Mark to Market, companies will be forced to look for new loans or pay the bank. Likely to create a further depression in the market.  This is why too much of anything is bad.  In this case too much of credit.

This is an illusion of prosperity, that eventually leads to debasement of one’s currency.  Credit is good as long as one knows how to remove it again after the temporary injection of money to the economy.  In case the created credit stays, it eventually outlives its purpose and creates inflation. Mild inflation might be good, but excessive credit leads to rise in the prices of basic goods and tough times for the common man.

 

 

Why do Stock Markets Go Up!

Stock Markets can only go up under one condition; that is when more money flows into the stock market. This can be by either existing investors, new Local investors entering the market or international investors entering the market, mostly through financial institutions.

All the new investment that comes into the stock market is automatically reduced by a certain percentage due to fees and charges that a broker will charge.

The massive rise in the stock market lately is not due to some extraordinary performance of companies but mainly because of a shift in the way companies and governments work. Governments regulated money supply and debt. Governments have allowed debt to go out of control virtually in all countries. Most debt tends to find its way into the stock market and other speculative activities since huge amounts of money can drive stocks up and give immense profit as against setting up a factory or engaging in a business which takes, time, money and immense effort to set-up and make profitable.

The above is akin to the carry trade in currency trading, where one borrows the YEN a currency giving  zero interest rate. It is wiser for Japanese banks to lend this money to foreign institutions and make some interest. Foreign Institutions on  the other hand use low interest yielding currencies to buy high yielding currencies and keep rolling this over year on year resulting in a risk less profit. Riskless because the currency that is being bought will rise in value, yielding a double whammy for the buyer, first making money on interest and then on the value of the currency. Today the USD is responsible for inflation all over the world.

Likewise when more funds flow into the stock market, the stock market tends to go up and the best performing companies benefit most. This money called as hot money, is also easy to pull out which results in large swings in the market.




 

Indian Politics_23rd October 2013 - Can the Congress Win?

Indian Politics_23rd October 2013 - Can the Congress Win?

It has been my view for a long time now, that the only way that the congress party could come back to power in India is by creating a war. Obviously the war will be with Pakistan. It does not necessarily have to be a full blown war or even a war but rather some sort of military strike on certain terrorist camps in Pakistan.

The current Congress regime has already lost the opportunity of making some sweeping economic reforms. The economy remains precariously bad and in my view its too late now to have any impact on the economy in the short run even if any new policies are made.

The food bill is actually a fool bill, as the country simply does not have the money to execute such a grandiose scheme. The main purpose being to fool the voter.

Mostly when all other things fail and the government is in a bad situation with corruption charges etc against it, as is the case with the current regime, then the only thing left is to go ahead with a war, so that anyone opposing them in effect can be declared a traitor or anti national.

Reading into Mr. Shinde's rhetoric on the violations by Pakistan on our border, I feel this war like scenario building up.