Monday, October 6, 2014

FINANCIAL CRISIS & CURRENCY WAR -2016-2020...AWAITED

Another Financial Crisis is in the wings. Within 2016-2020 we will witness one of the historic Financial Crisis in the coming days as burgling QE and Fiscal deficit followed with weak inflation. When QE came into the streets during 2008 every economy thought that this will spook inflation and will get the consumers back into the streets with the attitude of borrowed living. But it failed but also damaged the scope of further QE. We have now come to the end of QE as US is withdrawing but how much effective it would be withdraw is a trillion dollar thought. The biggest blow would come when the ammunition of QE will come to an end.  All the QE across the globe has suppressed long-term interest rates in order to get businesses to refinance debt and invest consumers to refinance debt and buy houses, and the government to refinance debt and spend.  Well assets classes reacted well to the same and the Big Giants of the Global market made billions again but now the time of loosing is about to begin.
The below picture depicts the story of the Journey of US FED QE and its inflows.


Remember that Emerging market countries are among the most exposed to a reduction or reversal of financial flows given that they were the recipients of large amounts of capital inflows during the quantitative easing period. India has been one of the prominent receivers of the same and also I find that the current government and its strategies by Honorable Prime Minister Narendra Modi is well researched. His invitation for investments is to the NRI’s and to the corporate to start developing their manufacturing base in India. We are not asking for inflow of capital through stock market or through the FII’s route. In the same note RBI governor is also cautious in its interest rates policies since if their si global crisis of liquidity in the system then interest rates reduction would act as the correct medicine during that time. Reducing interest rates now would create bubbles and more NPA. Reversal in the inflows would create ripple effects and on all asset classes. Well Asset prices has swelled as current liabilities of the countries of QE has increased hence much of the QE went into investments and safe guard the current liabilities payments.

The below picture is related to the inflow of capital of QE into emerging economies.


Pumping of money into the system has become one of the best mechanisms to face the problems of declining economic growth. After China and US stimulus packages now the turns has arrived for the European economy to pump steroids of QE into the system. ECB unveiled details of its purchases of assets-backed securities and covered bonds, scheduled to commence from mid-October. The biggest question among all these is that how long the QE and Rising Debt would keep the world economy alive.  Global QE from China to US has lead Share prices  tripled since the March 2009 low, as measured by the S&P 500 index, and are now richly valued.
 Inflow into Asia pacific from US QE


Now how the Financial Crisis would begin and why QE will be coming to end.
 Every economy has lowered its interest rates and kept it at Zero over prolonged phase of time and the same is expected to be continued over the next year also. But did this Zero interest was able to bring inflation back into the economies. Well we all know it failed and the same would continue. The two prime reasons behind the same is
  • Rising age brackets of the population which gives threats for borrowed living
  • Substantial decline in savings rates -inflation-adjusted wealth of America’s median household – half of households are above and half are below – plunged 36% from 2003 to 2013. 

 Citizens of these countries are skeptical regarding how much the government would be able to pay the retirements and other social payments and secondly if in the future the government withdraws any of the policies then where they will get their retirement resources etc. This has pushed the back the appetite of borrowed living consumption. The current inflation levels are indicating that we are all living in the time of 1950-70.
The bulging liabilities of US is going to be biggest threat and also is the biggest rationales behind skeptical citizens outlook of US.


Currently in US economy its being well found that over the next 10 years or less than that interest cost would be more compared to other cost. Social Security, Medicare, and Medicaid now command nearly two-thirds of the national budget and rising. With a gaining population this crisis would become more larger and the same would create more problem for the world economy to frame policies. QE failed to improvise the fisical deficit condition of economies. The biggets proof is the below chart which shows the failure:


I find that within the next 10 years emerging economies would find shifting of funds and production capacities in their economies from developed economies as devaluation of currency and low cost of production would be the trigger. India is going to be one of the key benefit er of the same.  

The reason behind Withdraw of QE

All asset classes’ prices have increased from real estate to equities creating new heights. Pumping of funds into the system has propelled the valuation and investments but zero benefits came to the economies. From China to US all asset classes of these economies have created new historic highs.
The GDP growth chart mentioned below depicts clearly the affect of QE on the economies. Hence it has been proved that capitalist and investments of US top giants have gained double where the economy is struggling. If we make a quick look we find that the G-20 itself is growing at an almost respectable 3%, but when you look at the developed world’s portion of that statistic, the picture gets much worse. The European Union grew at 0.1% last year and is barely on target to beat that this year. The euro area is flat to down. The United Kingdom and the United States are at 1.7% and 2.2% respectively
Since January 2009, the Fed has purchased about $900 billion of mortgage-backed securities, $90 billion of agency securities, and $1.17 trillion of Treasury securities, for a total of about $2.2 trillion. This represents about 28% of the outstanding amount of these securities, a huge amount.

Currency War?

The next level of game which will be played by the world leaders of these QE countries is to play with the currency. They will try their bets to devalue the currency and Japan is clearly in the process of weakening their currency. ECB head Mario Draghi is committed to weakening the euro. The reigning economic philosophy has it that weakening your currency will boost exports and thus growth. And Europe desperately needs growth. This is the best ammunition to get growth within the economy and increase exports which leads growth for the industry but this would impact trade practices and would destroy the emerging economies true potentiality. The world economy would face tremendous increase in trade practices violations. India has taken the right step by asking the NRI community to come back to India  and explode opportunities here since the developed economies are going to face one of the toughest days. Low cost of production economies are being searched now and the competition would increase further.

The biggest collapse would come once the entire ocean of QE will dry up and then intricate investments across the globe would squeeze the liquidity and all asset classes would start the biggest fall. Over 90 percent of Japanese banks have increased loans and investment in riskier assets in the past year.
 Emerging economies growth is also going to take a hit and hence the world economy would enter into another round of recession by 2016-20.The above rationales are enough to prove the theory that reversal of capital and insufficient macro –economic growth are going to be biggest bubble. The debt market will be rattled and the currency will turn out to be the highest volatile precut every in the history of financial products in the coming days.


2 comments:

CMA Santosh Pant

Inderneal wonderful article and good anticipation with the supporting data.

Juan A.

What do you think will be USA behaviour with the dollar?

Will USA try to devaluate its currency?

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