Global Macroeconomy - My perspective

Well, I love the power of being able to dump my thoughts through the blog. I need no permission, I don´t care if anyone reads it or for that matter knows that I write a blog... rant and digression aside let me get on with the topic that I wanted to write about:

Global Economy - where in the world are we heading...
I think everyone agrees that the entire globe is going into a recessionary phase, but the trillion dollar question is when are we going to be able to get out of this mess. The answer like most economist would say it depends... it depends where in the world you are and where you sit in the socio-economic pyramid.
Lets take the example of India, the elite the ones sitting on top of the pyramid namely the politicians, bollywood stars, uber industrialist, gundas, bullies etc don´t really care as they have been investing and squeezing every last penny from the rest of the folks that their investments in building things for the past 3 decades or more and there is enough local demand for things that they have build that they will survive the downturn. Lets go all the way to be bottom the guy who is surviving on Rs.100 (approximately $2) per day does not care either as his lively hood has not improved will not improve and will continue to strive to make that Rs. 100 and get on with life. So that basically leaves the middle class the aspiring lot who borrowed money to invest in the stock market or buy their dream house, a car, Plasma TV, fancy mobile phone etc etc are basically in a pickle. They will have to stick to their jobs to make sure they can maintain the cash flow to pay for their borrowed wealth and given the slow down that is happening in the rest of the world, 1/3 rd of them will be affected and will loose all personal equity. The lucky ones will have a rich dad or father-in-law or someone in the family to bail them out.

Why is this analysis important? well, recession is a self fulfilling prophecy every talks the market down and hold on to everything they have that they make the situation worse than it was. The unlucky lot will owe banks in India and they will have provisions to write it off but not all of it so they will start to lend less to reduce "risk" of default and the spiral continues.

Everyone has been touting that India will not be affected there is some truth to it but mostly exaggerated. I believe India and China will bear the brunt of the problems later on say around 2010 or 2011 because for India and China to keep churning things and services there needs to be a buyer. The boom in India is because of Foreign Investors who came into India after Fitch, Moody´s and S&P made India a Investment grade country in January 2007. Maybe the insightful ones started coming into India say a year or two before that... so this slapstick about local demand is actually suedo demand driven by foreign capital. There is hardly any local capital maybe it will get better if India and Non-Resident Indians keep sending their savings back to India. But this takes time and there is no short cut to build a sustainable society.

More later...

Empire Strikes Back- IMHO* Its more like Return of the Jedi

Guardian in UK writes that Tata Steel in rumours of taking over Corus in UK with a headline "Empire strikes back: India forges new steel alliance", in my humble opinion (IMHO) this is more like "The Return of the Jedi". The UK and European media has been rather critical of Indian entreprenuers expanding in the west... Do I need to say more, there have been all kind of legislative barriers put to stop Laxmi Mittals efforts to expand. I think if Indian companies think they can buy and run a profitable organization globally they should be allowed to do that. Globalization goes both ways, it is not the West that is conquring the East it is both ways, the playing field has been levelled and that is why we see a lot more news about Infosys, Lenovo etc of late... I say power to all and let the markets decide who is creating better value and wealth for the consumer!

Subsidizing America the global consumer and Economic Paradoxes

The article in Economist talks about how the emerging economies are subsidizing the American consumer and giving rise to some economic paradoxes. Here are 3 paradoxes that I thought were interesting:

1. America's current-accout deficit is at a record high, yet the dollar has remained relatively strong
2. Global interest rates are still historically low, despite strong growth and heavy government borrowing
3. Oil prices have tripled since 2002, yet global growth remains robust and inflation, though rising, is still relatively low

The article argues that all of the above can be explained by the growing impact of emerging economies.

The 1st point about the dollar's refusal to plunge and the low bond yields are partly due to the way the emerging economy countries have been piling up foreign reserves almost always denominated in the American dollar.

The 3rd point is driven by strong demand from developing countries rather than by an interruption of supply, so they have done less harm to global growth than in the past. The rise in oil prices and its impact on inflation has been offset by falling prices of goods exported by emerging economies... this is probably one of the shocks that is going to have huge global impact. I am positive that there will be case studies and scenarios described in Economics books. I am just glad we are here to see it and learn from it.

The above scenario keeps Central Banks, from raising interest rates as inflation is balanced by cheap goods and services produced by the emerging economies. This action by the Central Banks answers the 2 paradox.

I believe the phenomena is the second half of globalization, where some in the developed economies are hurt by the emerging economies... the concept of Creative Destruction was put forth in 1942, it is now happening to some of the jobs and industries in the developed economies.
Greg Mankiw has written about it here with a different perspective and Ed Sim has written about it here and I had a response to the post by Ed.

BeyondVC: Globalization and the world economy

BeyondVC: Globalization and the world economy Ed writes about Globalization, Off-shoring and the equilibrium shift from the US to China and India in the coming years with regard to GDP output, growth and interestingly number of students entering science and engineering colleages. He argues that right now the quality of a student with Science and Engineering degree from India or China is below that of the one from a US university... I don´t agree with that but never-the-less, he says that India and China will catch up and US should do whatever to boost its competitive advantage.

It was interesting to note that he got this from Greg Mankiw´s blog, which I read as well :) so I am probably in good company linking to these guys.

Anyway coming back to the discussion of quality of students... I think the quality is dependent on how the output is utilized until now the utilization in India (which I can talk about, as I went to school in one of the Indian universities) has not been tapped comprehensively, when the opportunities to innovate and actually drive value comes to India and China... the competitive advantage that is held by the US will be leveled.

Making India a hub of venture capital | CNET News.com

Making India a hub of venture capital CNET News.com, as I wrote in my earlier post India is undergoing some rapid change and development. The article above describes the flow of Venture Capital funds into India, it has increased 400% to $3.6 billion. I personally think India will beat China in this funds race due to the Indian governments great strides in establishing Intellectual Property.

The new India
Cisco to inject $1billion in India
Intel investing in new India
Rediff.com branches into other
CNET.com big picture view