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Point and Counter Point

Date : 28/07/2009

Author:  M.R. Raghu

This is truly an inflection point. On every major global economic issue, we have at least two divergent and yet convincing views reflecting the heights of confusion that stakeholders are doled in. We have encountered an unclear past but the current level of uncertainty is really historic in proportion. Let us review some of them:


The Metric                    


Counter Point

Global Economic growth

The economy has shown signs of bottoming out. The economy is “less bad” than a few months ago. The rate of decline is slowing. All these are requisite signs for the recession to end. Therefore , things can only get better from here.

While the rate of decline is slowing, but still most metrics continue to decline. Global trade and industrial output suffered the biggest decline post –WWII. Unemployment is very high and generally peaks after a considerable gap from recession.


The creation of huge deficit was necessary to protect us from slipping into a depression. While the level of deficit is unprecedented, it is for a good cause i.e., to trigger investment and employment. So why worry?

The national debt for US is expected to double from fiscal 2008 to fiscal 2018 where it will reach an astonishing 80% of GDP. Only two things can save the situation. A higher-than-expected economic growth or better cost management of government spending. It is realistically hard to be optimistic on both counts. This is a generational burden that will haunt us for a long time to come.


Don’t worry about inflation. Instead worry about deflation. There is huge excess manufacturing capacity and so is available labor. With high unemployment, demand-driven inflation will also be not there. Hence, forget about inflation and hope that we will not fall into Japan-like deflation.

What about the huge fiscal spending? Is that not inflationary at some point? The policymakers commitment to avoid a deflationary cycle will be so strong that it will trigger not modest but high levels of inflation. Also, don’t forget the national debt, the gamut of which should be paid only through printing press which is inflationary.

Housing Price

Lower prices and interest rates have dramatically increased housing affordability. The Housing Affordability Composite Index from Ned Davis Research is at an historic high of 175 compared to a low of 100 in 2006. The future supply will not be worsened as new construction has come to a virtual standstill. Bargain hunters have started buying foreclosed properties reducing the rate of decline.

Demand is coming only from short-term investors and not long-term owners. While rates are lower, lenders have tightened lending conditions and hence loans are harder to get. Inventory of unsold homes is still very high reflecting a fundamental imbalance between supply and demand. Unemployment is only getting worse. It is believed that waves of foreclosure are yet to come.


There is only one way for the dollar and that is down. The huge deficit will have to be financed through a combination of huge borrowings and printing money. The later will be inflationary and hence will eventually reduce the value of dollar. It could also be that dollar depreciation could cause the inflation (chicken and egg problem!!)

Don’t forget that US has not been able to self-finance its borrowing through domestic investment. Hence, nearly 51% of treasury debt is owned by foreigners, whose interest will not be served by a sudden dollar collapse. While they are talking about moving away from this, they are far away from walking the talk. Also, while fundamentally the dollar is hypothesized to weaken, there is no strong currency to take on this weakness. Euro is already weak, while Asia can take only limited amount of battering but not much. Hence, the question is “against what?”


If there is one thing that came out well of this crisis, it is the role of regulations and risk management. The effectiveness of policy regulation is increasing and will make financial world a better place to live in the future. So, welcome it.

Normally, regulation in reaction to a severe event like this crisis tend to be on the excessive side imposing enormous cost on the system. This will certainly be a drag on overall economic growth.


…and the list can go on and on. The nays and yeas are almost balanced in many cases making financial decision making a frustrating process. This is certainly not helping anyone to move anywhere.

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