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Fall of Capitalism

Mr. Srinivas Chittaluru | Posted On Tuesday, October 07,2008, 03:37 PM

Fall of Capitalism

 

 

Fall of Capitalism

U.S government is considering $700 Billion bailout of its financial sector, it is nearly equivalent of entire Indian economy. This is just to save one loosing sector. On other hand, I have been trying to find a sector which actually made money consistently – I can only think of hi-tech industry, particularly software industry which actually made real money with almost zero debt.  Of course, many folks argue software sector just prints stock instead of printing debt/money like other industries.  Obviously we had seen bad effects of printing stock in late 90's which caused dot.com bubble to burst and millions to lose their life savings in NASDAQ crash.
 
Soviet Union collapsed in 1991 and virtually disintegrated by 1992, many around the world called it fall of communism.  What about $700 billion dollar bailout and great depression like financial crisis in the U.S, should we call it fall of capitalism.  Let us face the fact; U.S government will be owning most of the financial sector assets after this bailout.  Of course, oil rich Middle East and rest of the world will be owning at least $700 billion more of the U.S debt. 
 
Let us look back into profitability of core industries in the U.S, in 80's most of the steel makers were wiped out, telecom equipment got wiped out along with dot coms in 90's, infamous collapse of Enron which caused entire energy trading companies to collapse in 2001, several airlines have filed bankruptcy multiple times in the past decade, auto sector is virtually at verge of bankruptcy, home builders are surviving on lifeline, then mother of all bankruptcies is the collapse of financial sector.
 
The origin of bankrupt comes from Italian "Money-lenders in Italy used to display the money they had to lend out on a banco or bench. When one of these money-lenders was unable to continue business, his bench or counter was broken up, and he himself was spoken of as a bancorotto —i.e. a bankrupt".  Well several banks and financial institutions in the U.S started saying "bancorotto" too frequently, I guess history repeats itself.  Borrow and spend has been the secret of the U.S economy in the couple of decades, it started during Regan era and took a brief pause under senior Bush then continued economic boom under President Clinton, for a brief period U.S did have balanced budget and forecasting budget surplus.  Thanks to current Bush unwanted tax cuts and Bush doctrine of invading the world purely based on potential threat or suspicious activity or they just don't like them caused uncontrollable current account deficit, loss of U.S dollar strength against most major currencies, burst of housing bubble eventually sheer collapse of capitalism. Average American saves less than 5% of their annual income which is one of the lowest compared to most industrialized economies. Americans are known to be big on everything from their shirt sizes to cars they drive, to energy they consume, to credit they borrow, to products they invent to adventures they take-up now bailout they have.

See Also: What is Crony Capitalism? How Crony Capitalism Affects India?
 
 India should learn lessons from the financial debacle of the U.S, in recent times we started stretching beyond our means. Not too long ago, we were afraid of the strength of Rupee how it can effect our exports once it broke 40 Rupee per dollar mark, within a few months Rupee lost nearly 20% of the value and many financial analysts are forecasting it can cross 50 soon. Lots of our banks are taking higher risk than 70's and 80's in the name of financial reform or opening our markets.  RBI must ask our banks to go back to basics, you should only lend a portion of savings each financial institution has rather than issue paper and lend, even worse in case of derivatives.  It took decades for India to gain investment grade for our national bonds in the international market, we are at verge of falling below investment grade again. Thanks to high commodity prices such as steel, oil, food grains etc. and popularist social programs by our politicians are to be blamed for India's upcoming financial crisis.  All of us can be proud India is one of a few third world countries never had to file for bankruptcy, we always found a way to pay off our debt burden (usually by taking fresh loans) but we are reaching a point that our debt burden will cross military spend and most of our annual national budget. This is what I call, debt more than we can afford.  We are adding nearly 80 to 100 billion dollar to national debt, this is alarming rate.  Our state government is offering free medical service, virtually free ration, free housing several other free deals just to attract votes. Instead of offering free programs our government should figure out a way to create jobs and employment opportunites. It is like good old saying "Teach a man to fish, and you feed him for life"
 
One of the state recently started 1 Rupee per K.G rice scheme and the same political party had election agenda to give away free TV set.  These are unhealthy programs, hope our Election Commission or Supreme Court will start asking political parties by preparing balanced budget against their programs/free scheme spend against the state budget as part of election manifesto. We can not handout a bankrupt economy to our children, it is better to be poor than being bankrupt. While we must take lessons from the U.S about their power of inventions, we must stay away from borrow and spend economic philosophy of the U.S. 
 
India will face tough global economic conditions next couple of years, our software sector will continue to struggle due to severe slow down of the U.S economy and oil will continue to raise and our dependency on oil imports will continue to raise, food shortage is around the horizon, populations will continue to grow and overall national debt will continue to grow at an accelerated pace. To add all of these, we will also be facing election year uncertainty in 2009 so buckle your seat belts we are about to apply sudden breaks to economic growth and prosperity.

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