LAYMAN'S VIEW OF INDIAN ECONOMICS

American Financial crisis. What the heck is it.

2009-03-14T18:54:00.070+05:30

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Very simple. something as easy as 1+1=2 to understand.

But you will have to read very patiently setting aside preconceived perceptions about U.S.A.

If you are okay with that, then go ahead and read this article. Otherwise quit now and enjoy something else.

I will not go too much in detail. Just spare 15 minutes at the max. A brief summary of how they had a very high standard of living so far and how they are in the brink of losing it forever will do.

Here we start with some known facts and their profound implications. ("Profound" means knowing what is really behind something that is obvious in front of your eyes).

Post World war II America was the richest country in the world. Barring pearl harbour not even a single gun shot was fired in U.S.A. during the entire war. America's manufacturing capacity and infrastructure were intact while Britain, Germany, Japan, France and Russia were devastated by the war.

Americans accumulated almost 90% of World's gold by selling arms during ww II.

All other countries were in the brink of bankruptcy. No nation was willing to trust other nation's currency for fear of hyperinflation.

International trade came to a grinding halt.

In this circumstance all World countries assembled at Bretten woods in 1944 to resolve the currency crisis.

The American govt promised to keep its currency stable by maintaining one ounce of Gold for every thirty five dollars in circulation which means any world country can export goods to U.S.A and if they don't know what to do with the dollars, well, they can hand it over to U.S.A govt and get gold at a fixed price of 35 dollars per ounce at any point of time in the future.

Mind here "Any point of time in the future" is a very crucial promise that no other country other than U.S.A was capable of honouring in those days.

The world countries trusted them and some countries pegged their currencies to american dollar at a fixed rate while many other countries accepted only American dollars for transaction between any two countries.

Simply put the American dollar became the dancing queen in a leper colony with nobody around to match its manufacturing capacity.

Then came the Vietnam war in which America was smacked left and right. To manage the war expenses Americans printed dollars like mad far exceeding the Promised Gold reserves value.

In 1971 France began to retaliate by dumping dollars and asking for Gold in return from America as per Bretten woods agreement.

U.S.A did not have the Promised amount of Gold. It could not honour its commitment.

Nixon shut the Gold window and thereby severed the dollar peg to gold at 35 dollars per ounce and let it float freely or simply put the dollar was backed by nothing from then on but the paper it was printed on and mere faith in U.S.A.

The world started to lose confidence in U.S.dollar. Dollar began to depreciate wildly. Gold skyrocketed from 35 dollars per ounce to 800 dollars per ounce. So severe was the loss of purchasing power of the dollar that every country started to avoid the American dollar.

Exactly at this point a crucial ally Saudi Arabia led OPEC came to America's rescue. It was monopoly in oil. It saved the dollar by declaring that it would accept only American dollar for its oil and no other country's currency, not even Gold.

Since every country needed oil and there was no way to get oil except having American dollar in hand. All Foreign countries must export something to U.S.A. first, get their dollars and only then can they buy oil from OPEC. The result being artificial demand for dollars. Once there is a demand for something it only has to appreciate, appreciate and appreciate in value and once a currency appreciates its buying power goes up and up.

And then started the real fun. A dream cycle started sending the American standard of living higher and higher. Foreign goods became cheaper and cheaper to an extent that even a sweeper in U.S.A. has ten times more buying capacity than an I.A.S. officer in India.

But there was a negative side. All their manufacturing industries could not compete with cheap imports due to high wages. Too many factories were shut down or offshored and the American economy transformed itself into a service based economy where all essentials are imported. Majority of People are hired in malls and consumer outlets thereby pretending to have employed everybody for useful purposes.

Now we will take an overall view into the American economy to see how it was functioning since then by borrowing more than what it was producing and how long it could sustain that way.

The American banks loaned money to the American consumer.

The American consumer bought goods from foreign countries with those dollars.

The foreign countries did not buy anything back from America. Instead they saved those dollars by depositing in U.S.Treasuries and kept those T-bills in a never to use trash can called “Forex Reserves" for using it to buy more oil when their economy expands.

The treasury spent that money deposited by foreigners to balance Federal budget deficits and never ending wars.

The dollars spent by way of budget deficits circulated in the US economy and finally ended up in bank deposits again.

This time the banks magically lended ten times of every dollar deposited with them to the American consumer again.

(Thanks to Fractional reserve lending, where American banks can create ten dollars out of thin air for loaning out to consumers electronically subject to a condition that they have one dollar in deposit. Simply put 9 out of 10 dollars of every new loan never at all existed with the bank in the first place even when the consumer applied for a loan. The moment the bank sanctioned the loan the dollars electronically appeared from nowhere. Some sort of legal counterfeiting. Non believers can just type Fractional reserve lending and Google search.)

Again the consumer imported ten times more goods from foreign countries exchanging those dollars.

Again those foreign countries did not buy anything in return from America with those dollars. Once again they deposited those dollars in U.S. Treasuries and piled up even more T-bills in a never to use trash can called “Forex reserves”.

Now start reading the overall view from the first line again. Repeat reading as many times as possible till your eyes go sour.

Yes. You guessed it right. This cycle went on for decades together, the result being trillions and trillions of dollars ending up in Chinese, Japanese and all other Asian country’s forex reserves while the American govt became a debtor of 11 trillion dollars on one hand and the average American citizen loaded with thirty years mortgage loans, home equity loans and dozens of credit cards utilized to the fullest limits on the other hand.

Don't know what is a trillion dollars?. This is it. 1,000,000,000,000 dollars.

"arasan evvazhiyo kudigalum avvazhiyae".

Simply put the USA only had to print T-bills while the world had to accept that and give real goods of any sort in return. The Americans never had to do any dirty jobs like Asians. They could just like that write a credit note and import anything they wanted.Their standard of living could only go up and up forever due to reserve currency advantage. Something similar to an unlimited fairy credit card without any due date.

Saddam Hussein tried to break this reserve currency advantage by refusing to accept dollars for oil. He insisted to be paid in Euros for his oil. He was too stupid to believe that once he starts to price his oil in euros then all arab countries which hate America will also price their oil in euros thereby making the American dollar crash and he thought he could get away with it without any consequence.

The dollar started to devalue as a result and once it devalues beyond certain extent the unlimited fairy credit card regime for Americans would be shut forever. Americans had to do something to stop saddam hussein from successfully selling his oil in a non dollar currency and that's the exact reason why Iraq was attacked in 2003 and once the Americans conquered Iraq the first thing they did was to shift its oil sales back to American dollars.

Further Americans ensured that saddam was hanged and there was a deliberate leaking of that saddam's hanging video just to threaten other Arab dictators of what will happen to them if they ditched the dollar.

Iran is threatened today exactly for the same reason. It is refusing to accept American dollars for its oil. Iranian nuclear weapons programme is a pure humbug like Iraq's WMD.

Things have changed much since 1971. Now we have entered a world where OPEC is not a monopoly. Russia is the largest exporter of oil. It has set up its own Oil and Gas exchange at st.petersburg and is also planning to refuse to accept dollars and sell its oil in rouble from mid 2009 thereby reducing the demand for dollars.

Now Russia is not Iraq. It is also a nuclear power. There is nothing Americans can do to stop it. They can only delay things with Russia like that Georgian provocation or Missile shield programme. If not this year next year Russians will do it.Once Russia starts selling oil for roubles Iran and venezuela will shift their sales to roubles too.

In that case a majority of European countries and Some Asian countries have to sell their dollars away and buy Roubles in its place, to buy oil, which will lead to dollar crash and the unlimited credit card with no due date for Americans will come to a sad end by 2010.

That's the future course of action. But so far as of present everything looks fantastic. Should have been an impeccable never ending fairy credit card regime for Americans. Then where the hell from this American financial crisis originate?

Again simple. Sheer greed and stupidity broke the chain. Here's how.

The collateral for the loans the banks made to the American consumer were houses whose prices were assumed to go only up and up forever.

Suddenly new houses were built in every nook and corner leading to supply of new homes far far outpacing demand which leads to sub prime lending.

(Sub prime lending is a concept where the only eligibility for a borrower to buy a house 100% financed by bank is “he should be alive while signing the mortgage’. That’s it. Nothing else like income proof or assessing a person’s prior credit history was reqd. The more the sub prime loans the more the bankers pocketed bonuses. They knew very well that when sub prime borrowers start defaulting their bank will eventually go belly up. Nobody cared because if they cared for their banks then they will stand to lose out the hefty bonus.)

Naturally sub prime borrowers started defaulting leading to foreclosure.

The more and more foreclosed homes come up for sale the less and less the takers for them ultimately resulting in house price collapse.

The worser the house price collapse the more the losses for banks.

Some how the banks want the dollars, they loaned out to consumers back, for mere survival.

But alas the consumer is broke, broke and broke long back. Only reason he survived thus far was by drawing home equity from the appreciated value of his house year after year and also credit cards which again he has started defaulting in droves.

Now that house prices have started going down nowhere could he turn up to refinance the loan.

Ultimately the consumer and bank both are bankrupt. They don’t have any money. Can you guess where all the money has gone?

Yes. you guessed it right. All the dollars are with foreigners. Asians in particular.

Now the American consumer must find some way to get back the dollars from foreigners to repay the bank.

The only available clean and straight option is to increase exports which requires manufacturing something the world really needs at a competitive price.

For that to happen the federal govt must help him by intervening in forex markets and devaluing the dollar, of course in an orderly manner so that his products are more competitive in international markets.

While at the same time cutting off fresh credit lines by allowing thousands of insolvent banks to collapse will ensure that absent more and more credit cards and home equity loans all unnecessary imports suddenly go beyond his buying power. His standard of living will go down drastically meaning lesser and lesser imports.

Once exports to Asia starts outpacing imports, Asians have no other option than to pay him for the trade deficit in dollars from those never to use trash cans, with which he can repay the surviving banks.

Even though painful to reduce the standard of living it is a win-win option for every body as well as guiding the future of America, sans petrodollars fairy credit card regime, in the right direction.

Now, here comes the stupid USA govt. A devil dressed like an angel. Instead of educating the people what went wrong and helping them to transform from reckless consumerism to a productive economy in a less painful way, it aggravates the problem by doing the stupidest of all stupid actions.

It feels that the best way to counter hangover is to drink more alcohol. Giving more debt to a person crumbling under severe debt is the solution U.S.A. is proposing to get out of the financial crisis.

The Federal reserve (American Central Bank) tries to print money out of thin air and buys up all the debt which the banks think they can't collect. The federal reserve is too stupid to believe that the banks will lend again.

Now the bank is ready to lend. But still the consumer is broke.

The bank doesn’t want to lend to the broken consumer again. The financial crisis worsens.

DEFLATION........ DEFLATION...... DEFLATIONARY DEPRESSION ...... will be the only result

for foreseeable future.

ANY WAY SINCE THE U.S. GOVT IS NOT PREPARED TO ACT RESPONSIBLY AND INSTEAD OF WASTING TIME IN TRYING THINGS THAT WON'T WORK.

I think the following simple layman’s suggestions would be of much help in extending the reckless consumption party for some more time.

Assuming 20,000 dollars is the average mortgage repayment per year by an American consumer and only 20 million consumers have defaulted on their mortgage payments so far, (Oh! my god) the govt can pay 40 million consumer’s yearly mortgage payment for free, to the banks with that 800 billions stimulus funds this year. Some thing like hitting two fruits at the same time with a single stone.

Financial crisis is solved. Both the consumer as well as banks are saved. The consumption party is saved from ending in Recession or Depression.

Next year repeat the same handout. Say loudly “Every body is saved”. The consumer has a good credit rating. The bank is awash with funds. Even the counter party risks plaguing AIG would have vanished by then.

Stop building new houses. House prices go up still.

When house prices go up and up the banks can give away more and more of home equity loans.

Make merry, dance and enjoy. Ensure consumers consume more by importing more.

Go to war with Iran and kill as many Iranians as possible. “AFTER ALL” the govt can explain to the stupid common man “PRODUCING WAR GOODS WILL BE HEALTHY FOR THE ECONOMY AND EMPLOYMENT”. Come what may, never admit the real reason.

By the way do not forget to say time and again that we are the World’s largest economy and American economy is built on strong fundamentals. Make sure this statement comes straight from the mouth of none other than the president himself.

The only grave consequence as per basic law of economics is dollar value crashing in international markets giving American dollar a time of less than a year to come to parity with Zimbabwean dollar and paving way for 1.67—2—3---4—40—400---4000---40000 dollars per gallon gas price.

“But please do mind to close your ears to economists". The U.S. govt can assure its citizens "If the dollar crashes then it is the foreigners who are at loss since all their savings in U.S.Treasuries would become worthless.”

Further some economic genius from AIG can elaborate like this "With a sincere prayer to god on our part and the deep worry of foreigners about the declining value of their dollar reserves it would be very wise of them to keep on buying U.S. T-bills so that there is an artificial demand for dollars. In their own interest they will be kinder and kinder forever to keep on lending to us".

something akin to a borrower telling his lender that " If you don't lend me more I will stop buying goods from you and will also go broke. You will never get a penny back of what you have lent thus far. If you want to count on the money you have lent out to me thus far, then keep lending more and more forever. Never ask me to repay".

Treasury secretary can say like this "The biggest concern of our president right now is the consumerism party ending so abruptly without govt intervention and the inability of American consumer to borrow,borrow and borrow and spend,spend and spend more".

The average American citizen can defend his country's actions like this "If you stop the consumerism party right now won’t you be struck with an economic readjustment hangover? Is a hangover acceptable"?

Hmmm. We can debate, debate and debate a lot about this. But history knows the answer from the demise of previous empires like Rome, France, Britain and as recent as 90's example of U.S.S.R. etc,etc.,

Nope. Not at all. Whatever be the consequences. The U.S. govt is not at all prepared to face the economic readjustment hangover even for a short while. It will rather face an inevitable total cardiac arrest by late 2010. History will record it as the demise of an empire which lived in denial mode in its final days.

Now. Enjoy these evidences of what I have written thus far. Do mind to open them in seperate windows.
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http://www.dollardaze.org/blog/?post_id=00050

http://www.dnaindia.com/report.asp?newsid=1241555

http://www.marketskeptics.com/2009/03/how-big-deal-is-loss-of-dollars-reserve.html
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. Additional links added six months after I wrote this article is here.

http://www.nakedcapitalism.com/2009/08/guest-post-farming-out-housing-crisis.html
http://economictimes.indiatimes.com/news/international-business/UN-calls-for-new-reserve-currency-to-end-dollar-privilege/articleshow/5094057.cms

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PROSPEROUS STEPS FOR INDIA THAT MAY NEVER HAPPEN – PART 1

2008-12-04T11:48:00.053+05:30

This end 2008 we are in looks like doom and gloom everywhere.

Sensex has dropped from 20,000 to 9,000 levels,

Auto sector is teetering on the verge of declining sales,

The inevitable American economy collapse is threatening employment in I.T.Sector.

All hell is cutting loose on textile sector.

Steel and other commodity prices are falling like a rock.

Real estate bubble about to burst.

ARE WE DOOMED. WILL THE I.T.SECTOR COLLAPSE IN TURN COLLAPSING THE AUTOMOBILE AND REAL ESTATE SECTOR?.

What can the answer be?

IS IT YES?

Oh no. YES is too horrible.

The consequences are beyond imagination.

Millions of lost jobs.

Skyrocketing divorce rates sans fat pay cheques.

High delinquency rates in home loans bringing down the real estate prices.

People taking extreme foolish decisions to end their lives.

So on and on and on.

SCARED? Think the entire above are probable in India. Then you can claim to be the dumbest idiot in the world.

THEN IS IT NO?

Might be but there are a few strings attached.

We cannot succeed without painful adjustments.

Painful adjustments? What are they?

Okay. We will first try to understand the basic principles of economics, then identify the recent mistakes we made in the preceding years as well as chronic ones and then analyze the remedies.

Here we go with a simple question.
Note: I risk being mistaken for a communist or a socialist. I hate communism more than you do. Please do not come to a conclusion before reading the entire article.

When you travel outside the city limits have you noticed the slums. Almost 99% of those people are either the ones who constructed the house you are living in, the posh office you are sitting in or the people who grew the food you are eating or the people who laid the roads with bare hands for you to travel in a Honda car or something like that with full a/c on. Now tell me anyone of the above mentioned things without which you can survive.

Don’t say you will do without that car. Your wife may never have married you but for that sort of luxury. It may have happened only on the hope that she could lead a luxurious life with your fat pay pocket. You may be at risk of divorce.

Net net you were dependant on that slum dweller for mere survival but he never needs you a bit for his survival. Then have you ever wondered why you have a high standard of living while he and his children sleep in unguarded slums amidst insects and occasional visitors like venomous snakes, scorpions etc, etc.
If it was because your thatha's thatha or your father's father had amassed huge wealth and you are enjoying it by succession then say "Long live capitalism" and quit now. You are blessed by god and you cannot "feel" the contents of this article through your soul. No Buddy. No complaints. I only wish all Indians are blessed like you.

If you are not in the born rich category and if you think that your high standard of living is because you are highly educated and super efficient and all such nonsense then I am afraid you are seriously wrong. Try resigning your job (or) try closing down your business. In the first case, your company never goes to hell. Next day there is a new person doing your job. For the latter case there is another new business entity grabbing your customers. Then how is this party going on unabated forever?.

If you understand the principles of economics you will appreciate that the trick for your high standard of living and that slum dweller’s sub standard living is not in that MBA you hold but in fiat currency my friend.

Don’t know what fiat currency is? Rupees my friend rupees. .

The way it is created and circulated can change the entire way of our society. It can shatter the myth that you are entitled for a high standard of living and that poor person a sub standard living. Oh no stop muttering “Must be a communist or a socialist”. I am a pure believer of capitalism “Responsible and productive capitalism”. Not the reckless system we have in place today.

Confusing? To understand that we will have to start from a new rupee’s birth in nasik, where all it travels and how the heck did it land in your pocket even when you never did anything directly to the govt while that slumdweller could not even dream a small fraction of that amount inspite of so much of real value he has added to our nation.

Don't expect a straight forward answer in the next paragraph about that imbalance. I don't know how to answer it straight away.But in due course of this article I hope I can give you a better understanding.

The govt has the right to print new rupees whenever it requires without anything of real value like gold backing it. There is no compulsion that if our govt prints some 10,000 Rs then it should keep 10 gms of gold or some other thing of equivalent value in place first and then only start printing. It needs only a few gms of paper and a few drops of ink costing roughly some 10 to 15 Rs to create those 10,000 Rs.

It is for this reason it is called fiat currency or in plain Tamil “dubakkur”.

There are good and bad effects of doing this. Moderate and prudent printing as and when it is required will ensure prosperity and growth.

Too much of printing will bring hyperinflation like what is going on in Zimbabwe now (Eg: 100 crore Zimbabwean dollar will buy only a loaf of bread today. Just a few years back one Zimbabwean dollar equaled one American dollar).

If there is no printing at all then deflation which is opposite to inflation results. At some point in the business cycle some tata, birla or ambani will hoard all the available cash and there will not be any money circulating in the economy and that 1400 sq.ft apartment which sold for 50 lakhs just last year might not have any takers for even 5 lakhs next year.

Similar is the case for all other commodities, your salaries, my business income, etc, etc. Print too much everything raises, don’t print at all everything falls.

Now don’t be silly. when the govt prints new money so easily don’t expect it to give it free to somebody or don’t expect some group of ministers to pile them up in their secret vaults. Our Indian system is very stringent. No nonsense of that sort. The only intolerable thing is the stupid and non productive way those rupees travel all the way from Nasik to your pocket.

The steps adopted by the govt in inducting those rupees into the economy are encouraging inefficiency, misguiding our younger generation and creating so much inequality between that slumdweller and your highness. Instead of flowing like Ganges River bringing prosperity all along the way it runs it is flowing like something else.

Even though the govt has lots of ways to induct the newly born rupees into the economy, Let me explain you two steps where the govt intended good but things got worse and increased inefficiency in transforming our nation into a developed nation.

The first step is govt spending more than what it collects by way of taxes. Then it balances the overspending with newly printed rupees.

Example:
Govt revenue = 100 Rs.
Govt expenditure = 120 Rs.
Deficit = 20 Rs.

If this deficit is because the govt laid 12 roads @ 10 Rs/road instead of 10 roads with that 100 Rs revenue then it is productive way of deficit spending. If the govt simply increased its employee compensation from 100 Rs to 120 Rs like that sixth pay commission recommendation then it is inefficient deficit spending.

Either way it has spent more than its revenue. What to do now. The bills have to be paid. Okay print 20 Rs and pay the difference. This is called Keynesian economics. This thing is not as easy as I write. Zimbabwe tried the same trick and they were freakingly doomed. As I said one loaf of bread costs 100 crore Zimbabwean dollars today and may be 1000 crore dollars tomorrow. The bottom line is this

“WITHOUT ENSURING SUSTAINABLE AVAILABILITY OF BREAD FIRST ZIMBABWE THOUGHT THAT IF IT PRINTS MORE MONEY, THEN BREAD WILL COME BY MAGIC.”

Everybody had bundles and bundles of money while nobody had the bread. Bread is simply an example. The fate of everything in Zimbabwe is the same.

Our Indian govt along with many other govts around the world is doing the same thing what Zimbabwe has done. But the only reason why we are escaping the same fate as Zimbabwe is, besides being a reasonably productive economy, we have lots of inflation suppressing tools like govt borrowing the already circulating currency instead of newly printing them. It can borrow from your fixed deposits or from that insurance premium you and I paid last week and spend it again thus avoiding printing new rupees.

These steps are not a solution. They can only buy some more time to post pone printing money and create a false illusion that everything is going great in our country (or) simply put pushing it into a credit card which our children and grand children have to pay for the luxuries we enjoyed today.

If the govt keeps on spending more than what it collects by way of taxes and without ensuring sufficient and sustainable resources in our economy then someday when your fixed deposit matures the bank will come screaming to govt asking the govt to repay the loan it took.

At that point the govt has no other option than to print new rupees and pay the bank so that you can redeem your fixed deposit and again alike Zimbabwe too much money and no bread anywhere if we are a full fledged inefficient and non productive economy at that point of time.

Imagine what will happen if your pension is 5000 Rs per month and one kg of tomato costs 6000 Rs. Thing is pretty dangerous and proper awareness has to be created in the society. BEWARE...BEWARE...BEWARE... the way our govt is handling the economy it is not at all an impossible near future scenario for India.

Now let me not beat the root. Simple common sense will tell us that we will have to be more productive in the first place and then gradually or say proportionately increase the money supply and ensure that productive and contributing people receive lion's share of that money to buy those goods produced.

Okay now that you have some idea about good and bad effects of printing and adding new rupees into the economy we will look into the areas where the govt spends and check up whether it is productive or inefficient and are our children going to be citizens of a super power India or a super Zimbabwe India.

Let me mark this induction of newly born rupees into the economy by way of govt spending as OPPORTUNITY A and before reserving it for discussion at a later stage I will give you a hint of what is inefficient deficit spending and how it relates to price increases of all the essentials.

Have you ever been to a govt office. If not then just hop into a govt office, sit and watch (or) just write “is 1+1=2” and ask for clarification. You may enjoy the real horror by watching how many table this paper moves and how many officers go through this paper and within a record time of six or seven months you may get an answer like this “your query seems to be correct. But this office holds no responsibility for the assumption made”. To get this answer I need not say that you should be the luckiest person in the world for not paying any bribery.

Stop. Don't laugh. I am writing this with a bleeding heart. The govt could have very well done that job with a single officer and got it done within a minute efficiently. Yet it has placed almost 10 officers with some 20 assistants, 40 clerks, humpty number of peons, drivers, etc, etc,.with so many mind boggling procedures and never ending paper work in place just to justify its blunder or pretending to have created so much employment.

A majority of these employees are personally good people like you and me. They too have big dreams to achieve something great. Only thing is opportunities here are not enough for everybody to succeed. I personally don't have anything against them. After all who will refuse a job offer so secure, highly rewarded and no accountability at all. It is the system's fault. There is absolutely no value added in the economy by making humpty number of people do a single person's job. yet they are given hike in the sixth pay comission.

Since that pay recommendation is backdated they will receive a huge sum in lumpsum as arreors from those rupees,newly printed to balance deficit spending, and they will start competing with the rest of us for an apartment, which you and I were dreaming all our life to buy.

But for these people's new buying power the demand for that apartment would have been far lesser and the price would not have risen so dramatically. They have easy money in hand and whatever the desperate higher offer you make for that apartment they can throw one rupee more than you and thus the increase in price. This argument holds good for all other essentials.

The salary expenditure is only a miniscule part of govt's inefficient deficit spending. There are lots of areas where our govt is committing criminal blunders. Yeah ofcourse "criminal blunders" is too high an unparliamentary word . But I don't find any other word suitable to explain the enormity of the govt's recklessness. We shall look into them at a later stage in this article.

The other innovative way our govt has found in the past decade, to somehow put that newly created rupee into your pocket, is building up forex reserves with other fiat currencies (dollar, pound, euro dubakkurs). Ah this topic! When I wrote for the first time about the topic “tcs salary cut layoff and the future wage hikes” in Feb. 08. I received tons and tons of abusive email. Suddenly too many people even started researching about my birth. Such a sensitive topic. I will explain this topic in part 2 of this article.

Disclaimer: I am not an economist by profession nor a professional writer. I am a simple small scale industrialist as well as a farmer. I am only trying to explain what I understood in economics as simply as possible. I need not be completely right or completely wrong in whatever I write. I recommend you to think over this on your own and of course I welcome your views so as to improve our understanding of the economy and raising a consensus as to what can be done to transform our nation from a third world country to a super power India.

TCS SALARY CUT LAYOFF AND THE FUTURE WAGE HIKES

2008-02-23T13:34:00.009+05:30

BANKRUPT USA AND STUPID ASIAN CENTRAL BANKS

(PATIENTLY READ THESE THREE PARAGRAPHS FIRST)

Joe Smith of USA started the day early having set his alarm clock (MADE IN JAPAN) for 6 a.m. While his coffeepot (MADE IN CHINA) was perking, he shaved with his electric razor (MADE IN HONG KONG). He put on a dress shirt (MADE IN SRI LANKA), designer jeans (MADE IN SINGAPORE) and tennis shoes (MADE IN KOREA).
After cooking his breakfast in his new electric skillet (MADE IN INDIA) he sat down with his calculator (MADE IN MEXICO) to see how much he could spend today. After setting his watch (MADE IN TAIWAN) to the radio (MADE IN INDIA) he got in his car (MADE IN GERMANY) and continued his search for a good paying AMERICAN JOB.
At the end of yet another discouraging and fruitless day, Joe decided to relax for a while. He put on his sandals (MADE IN BRAZIL) poured himself a glass of wine (MADE IN FRANCE) and turned on his TV (MADE IN INDONESIA), and then wondered why he can't find a good paying job in.....AMERICA.....

SUMMARY

USA does not produce any real goods. They import every thing from Asian countries just by printing dollars or tbills which is effectively a promissory note that at some point in the future they will pay us that value of money back by exporting goods to us and buy back those dollars. The accrued debts of USA as of Feb. 08 are nearing 10 trillion dollars (i.e. 10,000,000,000,000 dollars). There is no way USA can produce so much of goods to pay off those debts. Yet our insane policy makers keep loaning to USA.

Majority of Exports and imports of all world countries are transacted in American dollars. If a country’s exports are more than imports then that country will have a trade surplus and naturally the currency of the trade surplus country will appreciate against the dollar. (Eg. If we require 100 dollars to pay for our imports and we have 200 dollars from exports, then the situation of the exporters who would like to exchange dollars for rupees will be “dollar vangaliyo dollar” Narpathu roobai dollar muppathu roobaikku and so on). This is basic economics as the supply goes up demand goes down. When demand goes down price automatically goes down.

Come to the case of USA. As everybody knows USA has been importing more than what they were exporting, for decades together. Then how come their currency is having more value than our Asian currencies or simply put how is the US dollar defying the law of gravity. What is going on in the world markets? We shall see how India alike other Asian countries is contributing in keeping the dollar value up.

Let us take the case of 2007 where we had dollar surplus despite our trade deficit due to NRI contributions and FDI inflows. The excess inflow of dollars being around 120 billion of which RBI bought up around 100 billion dollars and added to our forex reserve thereby preventing wild devaluation of dollar.

From where did the money come to our RBI to purchase those dollars?

Never in the history of India did we have a surplus budget (Our central governments expenditures always exceeded the revenues collected by ways of taxes). We are already struggling to meet the huge funds required to improve our much needed infrastructure. Then from where did RBI get those rupees to buy the excess dollars the exporters are bringing in. Simple. We have a technology called printing press at Nasik. Upon instructions from our Govt it can print as many rupees as the RBI wants.

The printing presses start creating the rupees required to buy those excess dollars from the market at the expense of paper and ink only. This is called M3 supply. (M3 supply =legally genuine but morally govt approved and printed kalla nottu). Now the RBI buys those excess dollars in the market with the newly printed rupees. Then it loans those dollars back to USA by purchasing treasury bills (similar to a fixed deposit) of USA so that America can spend that money again.

In one way our govt is right in doing it because if it doesn’t do this then our stupid Asian competitors whose central banks are also doing the same idiotic thing will become more competitive than us and since dollar is the widely accepted currency for trade with other countries as well, all our exports will be in jeopardy. Our domestic manufacturing industries will not be able to compete with cheap imports.

So easy? and after all a good cause. Then why don’t they keep on doing it forever. How silly they allowed the rupee to appreciate by 15 percent last year. The real reason why they could not keep on printing new rupees and exchange dollars forever is INFLATION.

INFLATION?. what the heck is it ?.

you are not getting it.

Okay we will analyze it in two scenarios

Imagine a first scenario where all companies in India stop producing real goods and start doing software jobs to USA and rest of the world and let us assume that all companies run successfully.

Then in order to keep the value of dollar up our stupid reserve bank must keep on purchasing those incoming dollars by printing money out of thin air as if there is no tomorrow and truck loads of newly printed money ( Govt approved kalla nottu) will be chasing the very few goods produced. The end result being hyperinflation. The proof of this is soaring prices in real estate markets, gold, crude oil etc etc.

Alternatively imagine a second scenario where Muhammad bin thuglak comes back alive and somehow becomes the prime minister of India and some crazy guy like say lallu becomes his finance minister and they find an innovative way to eradicate poverty from India by legally printing and supplying 10,000 rupees per month per family in India. Then will anybody do farming, will anybody sit in streets and sell vegetables, will anybody do the laundry work, will a barber work in a saloon. All essential common man services will come to a grinding halt. Again there will be too much money chasing too few goods causing hyper inflation.

USA is borrowing and enjoying, all those goods we Asians toil and produce, due to the stupidity of our Asian central banks in maintaining such a huge exchange rate differential. In USA average salary in software industry is 6000 dollars. At today’s exchange rate it is equivalent to 2.5 lakhs rupees per month. With those 6000 dollars he can enjoy 2.5 lakhs rupees worth of Asian products and have a very high standard of living. The American govt will print dollars and give it to us for all the imported items he bought in the market which means that some day we can also purchase goods from USA with those dollars. But what real goods do they produce? Nothing because they have off shored almost their entire manufacturing capacity to china, India and all Asian countries. Tomorrow if all Asian countries try to buy some real goods from USA with those dollars they will come to know how big a cheat and bankrupt USA is. Russia is cleverly buying gold from USA by using dollars that is why price of gold is soaring from 250 dollars to 925 dollars within a year.

Our Indian software industry is also making abuse of this exchange rate differential. They say in America you pay 2.5 lakhs per month for a techie okay we will do it for one lakh. You have a cost saving of 60 percent and they pretend that they are very fair even though they are aware that the exchange rate differential maintained due to the M3 money supply will create disparity in the Indian working class.

Now they have one lakh in revenue for a person of which they don’t mind giving 50k or 60k as salary. They attract best engineers to do the very basic testing and coding works which they could have very well done with science graduates for a meager 5k to 10k per month. They are not bothered about distorting the balance for the rest of the Asian manufacturing industries who are unable to pay such hectic salaries. The top management of every software company is aware of the exchange rate differentials. They simply don’t bother because RBI is always there to print rupees and exchange for dollars. Further if techies salaries go down then the top management Walla’s salaries must also go down. This is not acceptable to them. They create an illusion that testing and coding are so brain storming and there is a talent crunch in India. They covertly encourage attrition by not even insisting on relieving letters which is a violation of basic ethics and justify wage hikes.

The disparity in salaries these govt approved and printed kalla nottus (rupees handed over to software companies for exchange of dollars) have created is so huge that a bank manager with around 20 years of experience and working 12 hrs a day for 6 days a week and terrible responsibility draws only 60 percent of the salary a tester (leave the programmer) with two years experience and probably spending half of the time in bench draws.

Now it is high time realism is starting to kick in. Gone are those days of illusion that testing, coding are super brainee jobs. They are very similar to assembly line jobs in a factory and don’t deserve such hectic pay. News of software companies hiring science graduates are popping up in every nook and corner. Hope you remember software and other exporters screaming for RBI to intervene when rupee appreciated 15 percent last year. This is because their kalla nottus were creating huge inflation and the RBI decided to stop exchanging govt approved and printed kalla nottus to dollars for a while and the inflation promptly came down from 6.5 percent to less than 3 percent.

At some point in the future if the Asian central banks realize inflation is getting out of control due to their stupid practice and stop buying dollars thereby allowing their currencies to appreciate then all bets are off. Lots of salary cuts and termination news, just like what Tcs and IBM did in the end of Jan 08, will start popping up.

The economy of USA is in no good shape either. Just to keep their economy afloat or worse just to pay the interest of their debts they need to borrow around three billion dollars every day from the rest of the world. Day by day bad news is pouring in. There is no field without a mention of huge layoffs in USA from the beginning of 2008. Layoffs announced in thousands now will be in lakhs by year end and then in millions if not crores by mid 2009. Being an economy where two third of GDP is consumer spending, if unemployment goes up then consumption goes down in turn collapsing the businesses and their offshorings.

Take the case of a boxer who is infected by HIV. Every thing looks great with him. You cannot know that he is affected by a killer disease unless and until symptoms of the disease starts showing up.

USA is very similar to the HIV infected boxer and now for the symptoms part of goliath’s (USA economy) death.

1) World Bank and IMF have already warned that dollar might collapse any day due to their unsustainable debt.

2) Subprime related problems are hitting the headlines.

3) All banks in USA are writing down (Decent American version of saying “lost the money”) billions and billions of dollars.

4)World’s largest bond insurers Ambac and Mbia are already downgraded from AAA to AA Grade which will in turn erode away huge part of capital from the world’s largest American banks pushing the largest consumer economy (As Americans themselves feel proud to admit) into far far worser situation than a mild recession which is called depression.

5) Investment banks like Goldman sachs, Lehman bros will become a thing of past by this year end. Further USA can opt only for one of the two options. Either let thousands of commercial banks collapse and save the value of their dollar or print dollars like mad, save their banks and let the dollar crash in international markets.

6)The first option to let thousands of banks collapse is morally good so that they can start from scratch and after a few years or a decade at the most they have a chance to recover that super power status. But they will not opt for that option. They will not accept graceful death by a single gunshot. Instead they will try to resist a death by thousand cuts. Their stupidity will be so high that they will believe that they can print any number of trillions of dollars at will and save all their banks while the world will keep on buying their dollars forever. If and should they choose that printing option then by mid 2009 to mid 2010 the world will lose faith in US dollar once and for all.

Even if America somehow manages to keep delaying the entry into the inevitable depression from mid 2008 to 2025 or still further, there is still terrorizing news.

“THE ULTIMATE AMERICAN DOLLAR COLLAPSE”.

Due to the huge risk involved in the erosion of the value of their forex reserves every nation wants to get rid of the devaluing dollar. The only thing preventing them from doing it is the fear of the central bankers that like stock market crash if any one Asian central banker suddenly tries to sell off their dollar holdings, then everybody will panic and try to dispose off their dollar holdings and the depreciation of the dollar would be so fast that within one electronic trading hour the value of the dollar might change like this

Prior to Dollar sell off 1 dollar = 40 Rs
After Dollar sell off 1 Rs = 4000 dollars.

(This is no exaggeration. I would like to challenge any sane person to prove me wrong).

For a country like India it would mean that all those two hundred billions (20,000 crores) of dollars or so bought by our RBI as forex reserve would become worthless within a matter of minutes. Similar is the case for Chinese (1,40,000 crore dollars), Japanese (1,00,000 crore dollars), Gulf countries (3,50,000 crore dollars) and all other Asian central bankers.

Yes of course nobody wants the value of their dollar holdings to go down. No sane person will try to sell off their dollar holdings suddenly. But the situation is alarming. Every Asian central banker is watching his counterpart with nervousness if whether he would start the sell off. Nobody wants to start this but once started nobody wants to be the last in getting out of dollars for the more later they get out the more worthless their dollar holdings becomes. This is what our reserve bank governor, Indian finance minister and prime minister mean when they say that global uncertainties are looming.

So techies who dream of 17 percent wage hike every year till we match American wages, please be aware of the reality and be prepared for the changes that might suddenly turn up. Bear in mind that your profession might be very similar to a cinema heroine’s career. However beautiful she maybe, the most talented actress, okay. Few years down the line when new beauties turn up the tendency would be to avoid the old heroine.

Similarly when new talents are available in the due course of time and rupee appreciates further the company may treat you like a liability or replace you with a cheap fresher. The recent news of TCS planning to debut freshers onsite is a classic example of what is in stake for the future. Don’t get carried away by current illusions. Start saving now and avoid getting into huge EMI loans. If you are a male get married soon because right now girls both from your field and other fields prefer you only. They are not aware of the risks involved. This situation may not last long. When USA goes down you will end up jobless and will become the least preferred. Act fast.

Especially brides who will not even consider grooms from other fields

Idhae linelayae mapillai parungappa,

Padhinanjayiram sambalathai vaichukkittu enna perusa sadhichuda mudiyum,

Akka veetukarar softwarela ambathayiram vangurar enakku pathayirathula mapillai partha naalaiku Yivarum avarum onna parkum pothu Yivar manasu evvalavu sangadapadum

And all those dubakkurs

If you are still going to be adamant “MAY GOD BLESS YOU”.

STILL NOT CONVINCED? OR YOU ARE IN ONE OF THE FOLLOWING CONCLUSIONS.

1) SOME NON IT JEALOUS FELLOW BLABBERING?

2) USA IS A SUPER POWER. ALL COUNTRIES ARE DECADES BEHIND THEM. THERE IS NO CHANCE OF USA FAILING.

3) I HAVE BEEN TO USA. IT IS THE RICHEST COUNTRY IN THE WORLD. I WILL NEVER BELIEVE THIS ARTICLE.

4) EVEN YESTERDAY I SPOKE TO MY BROTHER IN CHICAGO. HE SAID ALL THESE THINGS ARE RUBBISH AND JUST FEAR MONGERING.

Ha ha ha

REMEMBER LAST YEAR WHEN RUPEE APPRECIATED BY 15 PERCENT THE EXCESS INFLOW WHICH THE RBI DID NOT BUY WAS ONLY AROUND 20 BILLION (2000 CRORE) DOLLARS AND AMERICA HAS A BUDGET AND TRADE DEFICIT OF 1500 BILLIONS EVERY YEAR WHICH MEANS LOTS AND LOTS OF DOLLARS WILL BE POURING INTO ASIA.

NOW ENJOY THESE TWO LINKS AND FEEL THE CHILL SHOCK WAVES FLOWING DOWN YOUR SPINE.

http://www.youtube.com/watch?v=3RhnHo3RDfg
http://www.youtube.com/watch?v=jmeHiFZUWtE

This link is added one and half years after I posted this article.

http://economictimes.indiatimes.com/news/international-business/UN-calls-for-new-reserve-currency-to-end-dollar-privilege/articleshow/5094057.cms