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The Pain and its Cure

August 5, 2008

The singlemost biggest question perhaps running on our mind is, “When does this nightmare end?” As far as answering this question goes, there had been a whole lot of play-catch, smoke and mirrors and the famous game of illusions and mirages are played.

The root cause of all this is US housing collapse. Would’nt have it this big, had it not been the generator of one third the overall emplorment for the last couple of years. And Fed just hung up its coat and went into a hibernation.

Interest rates were kept low, lowered to almost 1% [circa 2004] after the dot com bubble burst and kept too low for too long. The resultant is in front of us.Debt to Disposable income has gone to 140% for US citizens, driving up the consumption to almost triple times and being the overall engine of global economy.

But the situation is, Fed has misread the situation.
All this time it accounted the problem to subprime debt and hence flushed the markets with credit. Unconditional[almost] and endless.
But the problem is not in greenback crunch but in credit. Too much and too soon.
The problems of excessive credit is not only visible on debt based instruments but subprime,near prime,prime,student loans,credit loans, housing loans, [need any more?] etc etc.

Long time back, I fleetingly wrote how there is a distinct possiblity of credit card loans being called in. I would like to reiterate it and strengthen the argument. With what seems from the news coming in, there is a whole lot of pain left.

Banking is in shambles, thanks to the laissez faire management. Markets are in credit overdose, and government is playing ‘catch up’ with this monster. We only are concentrating too much on this one definition of recession: negative GDP growth for two successive quarters.

But the fact is, we have several other markers like emplyment rates,retail sales,wholesale sales and an entire gamut of indicators. And US is definitely in one of those proverbial quicksands. The Quicksand of spiralling recession. Record high unemployment levels, dropping retail and wholesale sales all scream one thing: the R-word.

Now, so much of a post mortem. How long is this pain gonna last?

Quite some time. Banking is in shambles and apparently trying the numerous accounting game to close their eyes to what is ‘clear and present danger’. Only the housing loan bit is called in, and it has become messy. More is yet to come, credit loans for instance, student loans, auto loans, muni loans so many so much.
The result: Giving a huge, a huge hit to the industrial backbone.

And unfortunately, taxpayers’ individual debt in increasing all the same.
Oil is increasing too. Bringing home more troubles for the industry, the main base of economy growth.

So what looks, is as Nouriel Roubini talked about long time back, the pain will last for some time. Possibly till the mid next year. But emerging markets still hold a lot of promise, becuase in the curent scheme of things, they are going to be the engines of growth of the global economy. The world economy will get more multipolar and resilient to individual economy specific shocks. So what follows is that after this bloodbath, we might see a very sustained growth for quite a long time.


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