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Meeting the Debt-Line Research Team | Posted On Sunday, March 01,2009, 10:32 PM

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Meeting the Debt-Line



The exchange of ideas at the Davos met the expectations of financial connoisseur worldwide and of even those who kept their beak dipped in the ongoing turmoil. The words from one of the participants at the meet, China Premier, Jiabao, sounded as customary as most of the guidelines in a RHP (Red Herring Prospectus) – Inapt macroeconomic policy of some economies, their unsustainable model of development, characterized by prolonged low saving and high consumption leading us to a panic-button hitting situation.

We have moved on since Davos, brushing past the local interim budget, which failed to invite even a second glance. We still continue to lurk in the corridors of uncertainty, being awed at regular intervals by the announcement of the irrational rescue packages offered by Uncle Sam. But even in such erratic ways, things have managed to keep the world busy and interestingly poised. There have been many thematic developments in the last couple of weeks like the gold getting brighter, Obama choosing to be a fighter (he has no other options though); rupee turning weak while Europe growing meek. Now you must be wondering why I chose to rhyme in such a grim situation. Well, after all it’s so viciously linked – Fallouts of the self-renovating cyclical economy. But the point that has escalated over the years and has developed into a huge proportion is the Chinese factor (in all its senses). A parallel bubble that kept inflating as the US economy woke up to their home grown miseries. The bulk funding of US debts by China earned Jiabao a tag of the world’s top 20 contributors to the present slump. (The chart is headed by the CEO of Countrywide Financials.)

Chinese economy over the years devised a way to thrive by the virtue of heavy exports, flooding the US markets with “Made in China” stuffs and re-infusing the money into the US markets by buying their debts. Thus fueling US consumption as well as enhancing their production might. This in a way helped their own cause as the US again had money to continue with their extravagant lifestyle, being blissfully ignorant of the platonic shift in power. As a result, China now holds the maximum US debt with the figure running up to $700bn. India, meanwhile, holds a meager $23bn worth of the same instrument. Though the figures do indicate the devouring capacities of nations as individuals, it’ll take a lot of strategic moves to stamp their authority over the world. However, this imbalance in the debt equation will open up a gap in the currency trade with China becoming the prime manipulator. China won’t have much incentive left after a certain period to go on buying US debts, something which the Fed wouldn’t want to happen in the near future. And the slightest selling initiative by the Dragon will sweep away the already shaken economy of US. The current US debt to GDP ratio has grown to almost 150%.

India will have its work cut out amidst this growing chaos. The growing domestic financial deficit will have to be tamed in order to make the rupee healthy and gain when the above mentioned imbalance grows in their favor. The markets don’t seem like heading anywhere for the time being except for the odd rally and a corresponding run for cover. Gold continues to mesmerize as it continues its sweet run being in the midst of its 30 year cycle. The measures taken by the Obama regime seems like it will further help in adding to the already bulged gold portfolio. However, the projection of it being into the $2000 region by 2012 looks a bit too ambitious. Meanwhile, the next Bull Run is being claimed by the experts to be in the bond market, but the irony remains intact as confidence in government itself erodes.

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