Tuesday, February 23, 2016

EVERY 100 YEARS PRICE CHANGES...MORE SWF TO REEDEM

If we look into the economic history and economic theories we find that when price of a product changes it correspondingly changes the economy of and industry and on a large scale economy of the country. Price changes leads to product changes which lead to change of an industry monopoly in the long term. Price is the most important factor for deciding the fate of an industry or economy. It leads to creation of unemployment and also creation of employment and other industrial growth.

 From wood to coal conversion lead to an significant change over in the wood cutting industry which lead to unemployment as they lacked skilled mining knowhow. Significant drop in investments in wood cutting industry, which lead to collapse of the ancillary industries like plant and machinery. Now after another 100 years or more we came up with oil which replaced the coal mining industry and its consumption. It true that it did not completely stop the coal mining and coal consumption industries but the golden era period of the coal industry collapsed in due course as the world economy and industries shifted into oil based consumption pattern. Just check that from coal based steam engine the entire railway industry across the globe got converted into Diesel or oil based railway system.

During this change over unemployment in mining industry, plant and machinery industry related to mining went for wild toss. The entire consumption industry significantly shredded off the coal based products and the future of plant and machinery also changed their consumption pattern from coal to oil. This lead to an significant drop of investments in coal industry and lead a stupendous rally of investments in oil production and oil related industries change over.

Now we are currently again after 100 years or more we are going through the phase of change form crude to alternative energy. But there is a difference between the history and the current times.  Currently oil is not being replaced with any immediate industry but it is being found that the current economies have done a blunder in their investments within industries within their economies.

There are two economic thoughts which strike my minds. The current scenario speaks very clearly those countries like Russia, Saudi Arabia, Oman, Bahrain and all those countries in crude production have not well diversified their investments which will keep their economies alive in times of collapse of their prime resources. It’s very practical that one fine morning the entire crude stored under the ground can get vanished with a simple earth quake. My 2nd economic thought is that like the previous economic history of product prices we did not witness massive sell of markets, collapsing like a pack of cards. Since birds of globalization were not flying across many countries like now. We are awaiting to witness massive sell of across various asset classes  in 2016 as these crude exporting countries have the liberty to support their countries fiscal and consumption demand by liquidating $7 trillion dollars of Sovereign Funds which they have built over the last 15 years. Sovereign wealth funds of oil-rich countries like Norway, Saudi Arabia, Russia and Qatar sold more than $213 billion worth of stocks in 2015, this number will grow further in 2016. Debt to GDP ratio and other social burden might increase in the next 20 years if we don’t think from now.

My research says that we will witness QE to come ahead to stop these liquidation since currency across the globe and asset class across the globe from bonds equities will be hammered further. Please don’t mingle this situation by calling Recession. It’s a liquidation phase of investments which have been built over the years, built for these crisis times.

Crude exporting countries needs to focus on alternative to crude export and hence I find more investments to flow into other industries. We don’t know that over the next 50 years the pattern of crude consumption might change like the history of wood and coal. Economic models and probably theory reflects that every 100 years the pattern of natural resource consumption changes. This change will be much faster under the current times as technology is speeding up the process of changes. The reason for saying all these is that under the current circumstances the affect of the low crude prices have impacted the social segment too. Likewise Saudi Arabia is cutting down its students

Hence it’s clear that under the current economic process and policies we will not be able to sustain our social costs in the long term. I find that the biggest debate for this century will be that will governments across the globe will bear the burden of social cost. We are not counting properly on the probabilities of risk and uncertainties and that’s the place where we are feeling the heat. We are all taking into account the economic research based on the short term trigger whereas the large picture is often being ignored by the capitalist minds. Well we are yet to witness massive outflows in sovereign wealth funds investments across asset class and there are more pains in the sidelines.

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