The house of cards

Screen Shot 2016 12 05 at 4 08 18 PMWith unemployment below half of what it was at the peak of the great recession, and the American economy growing slowly but steadily since the Great Recession, most people feel that a repeat of the Great Depression of the 1930’s has been avoided.

The Great Depression had some key elements that were in danger of happening again in the Great Recession. The stock market crash of October 1929 and that October 2008 had similar effects on the American economy. Stage two of the great depression was the collapse of the banks, and the Federal Reserve’s drastic Quantitative Easing (QE) strategy averted a bank crash in 2009/10.

The collapse of the banks in 1933 contributed directly to the third stage, a massive loss of purchasing power, as consumers lost their savings and their jobs.

But the slow recovery from the Great Recession is in part caused by businesses that have cut back on investment. The reason: they’re scared that the crises has not been averted. Why?

The value of businesses on the World’s stock exchanges are the an estimate of their future earnings calculated as a lump sum today. With all the variables, it’s a complex calculation. At the heart of the calculation is the expected return rate (discount rate), and that is key figure that QE has changed downwards. That has increased the value of stocks worldwide.

Using a simple example of a $100 annuity forever: at a 10% return rate is worth $1,000. At 5% it’s worth $2,000.

The world’s stock market values are at historical highs relative to earnings, confirming that the discount rate has been lowered. But when the discount rate increases again, those values will drop. So care needs to be taken in dealing with factors that will affect the return rate.

The people with their fingers on that button are the decision makers at the Federal Reserve.

That’s if they’re still there. Donald Trump has set his sights on the Federal Reserve.

The fourth step of the Great Depression was the Smoot-Hawley Tariff of 1930. That act’s tariffs decimated international trade, and precipitated reciprocal barriers from America’s trading partners, causing further damage to the economy. Trump intends repeating that mistake.

And the fifth factor, the devastating drought of 1930, is the last step that Trump is trying to repeat, albeit with limited control. His refusal to support the Paris accord is a credible attempt to affect weather change for the worse.

It was the depression, not America, that was great in the 1930. Trump seems determined to repeat the mistakes and tip the house of cards.

And the people who will suffer most, as in the Great Depression, will be the poor.

More at:
Did the Smoot-Hawley Tariff Cause the Great Depression?
Fed-bashing Trump has chance to remake central bank
Top Five Causes of the Great Depression
Trump transition memo: Trade reform begins Day 1
Unemployment Rates by President, 1948-2016

Getting team India to win again

At the start of the 16th century India had 25% of the World’s GDP. So did China. By 1820 China’s share was 33%, but for India the decline had already begun, and it held 16%. By 1973, the low point, India produced 3% of global GDP. Then as the economy almost collapsed in 1991, it introduced a series of sound economic reforms, so that after that it’s economic growth sometimes reached double digits. And then it stopped.

The bureaucracy, corruption, cronyism, nepotism, poor infrastructure, energy shortages, poverty, population, and lack of openness to foreign competition are legion. India’s government has recently concluded it’s most unproductive session of parliament since independence. The phenomenal growth was the surprise, not that it stopped. And that offers the solutions.

India’s has some world leading companies. The resurgence of Landrover and Jaguar is being inspired by leadership from their new Indian holding company. Providing remote capable outsourced services in tele centers and software development are both Indian inventions, and for a long time India has led1.

But the country failed to respond to the inevitable competition that the collapse of the developed wold’s economy brought. The Philippines is competing strongly for the tele center business. High unemployment in the developed countries, especially among the young, has brought much of the outsourced IT work back home.

India has the potential for sustained high economic growth, provided it can tap it’s world beating demographic dividend, it’s youth.

To do that it must address the issues with conviction.

This series of articles will suggest how that can be done.

More at:
Getting team India to win again – poverty
Getting team India to win again – infrastructure
Getting team India to win again – The 1991 financial crisis
Getting team India to win again – fiscal consolidation
Getting team India to win again – the plan
The firm that builds India
On a hiding to something
The screen revolution
Ratan Tata’s legacy
From pupil to master
Goodwill Hunting
Rape and murder in Delhi
How India got its funk
Report of the Committee on Unorganised Sector Statistics
Losing its magic
Will India Be The First BRIC Fallen Angel?
The democracy bottleneck
Stopping the spiral
A walk on the wild side
Once in a lifetime
Walk the line
Why Everyone Is Freaking Out About India
5 Reasons India’s GDP Growth Is Heading To A 10-Year Low
Express or stopping?
India raises duty on gold imports as demand surges
What’s The Matter With India?
Asian Development Outlook
When giants slow down
A billion brains
What a waste
Harnessing human computation
World Development Report 2013
The future is black
The Kudankulam conundrum
Now finish the job
Everlasting light
An uphill walk
A Delhi particular
The road from perdition
Foreign policy
No frills
Parsnips unbuttered
Aim higher
The Global Competitiveness Report
A tale of two villages
Cash, with strings
A million rupees now
A rotten state
Throwing the rascals out
Evasive action
Zapping mosquitoes, and corruption
In search of a dream
Money where your mouth is
Farewell to Incredible India
Can India become a great power?
Lenders of the last resort
The capitalist manifesto
India PM Manmohan Singh: Pakistan ‘attack dastardly’
Unfinished journey
Show your hand
Mischief Minister
Hugging him close
Fragile hope
On the prowl
Power shifts
The candidate
The degeneration game
An illiberal turn
Another country
Memento Modi
Concrete jungles
India Transport Sector
Halfway to paradise
Ideas coming down the track
Know your own strength
2CN or not 2CN?
Poor Economics Abhijit V. Banerjee and Esther Duflo
Lessons from Palanpur
Where Do The World’s Poor Live?
Where will the world’s poor live?
The Future of Global Poverty in a Multi-Speed World
How Long Will It Take to Lift One Billion People Out of Poverty?
Poverty, geography and the double dilemma
Not always with us
Render unto Padmanabhaswamy
Growing, and neglected
The good of small things
Bloodshed and futility
Out of the trees
India’s identity revolution
Water for all
Allo, allo

  1. World Development Report 2013 pg20 []