Wednesday, August 15, 2018

Low savings rate …Borrowed Consumption Driven GDP Growth

We read everywhere that when macroeconomic data related consumption picks up we find Christmas type of celebration happening and hence the market concludes that economic growth is picking up. The market reads this data with huge confidence that people and economy are all in safety zones and the long-term prosperity of the economy is intact and the boom phase of the consumption should be taken for granted and this leads to expansion of business and trade. Consumption of borrowed capital is the old economic theory which leads to death in the long term. Reducing savings and taking up more debt has been one of the prime things which have been ruling across the globe. Savings the word might be heard or read less nowadays since consumption is all about economic growth despite a nation’s savings coming down to zero.

Keynesians economics principles were that consumption was the mother of sustainable economic growth but unfortunately we have burnt our fingers in 2008 with leveraged death. Inequality has been ignored at all aspect and we are paying the cost for the same. Over-leveraged export, dumping of goods and widening inequality have been a theme for the past decade. Now with the doors of globalization getting closed leads to a huge problem for this leveraged death.  Exporting countries particularly the ones who are dumping goods are now focusing on domestic consumption market but unfortunately, that market is also over-leveraged and the statistical data of savings rates speaks enough for the same where consumption growth is expected to be limited. The other side of the coin is inequality where proper penetration of the latest technology or even financial growth related seeds has not been planted. That data speaks about the inequality.  The data of both the low savings rates followed with Inequality levels. Interpretation of the Inequality data is that 1 means complete inequality.  
In my research I didn’t go into countrywide debt to GDP since in that data will not give a picture of the true savings rates country wise. The reason being that every country has da ifferent process of calculating there GDP to savings. For example, prior to the financial crisis, households’ “perceived wealth” increased due to inflated real estate values – the inflated values of their homes added to their perception that they were, in fact, wealthy – and the (perceived) need for savings shrank. 

The domestic consumption is not enough to support these economies since they are having low savings rates and high level of debt. The only grew are which one gets is the bridging the inequality and designing the products and pricing accordingly. Loan growth is being taken as a symbol of strong economic growth and disbursement of credit.

Household savings plays a vital role when the economic slowdown hits the road. The economy gets a major boost up when the household savings of a country is stable and strong enough to wither any slowdown. Low savings creates burden indirectly on the government where they have to bailout many segments of the society. Common people have no other option but to lookout for govt support and hence society gets into massive inequality.

We often hear that many countries corporate are sitting on cash levels and they are not investing. Well the reason being that cash is king in these economic volatile rides and hence we cannot take a plunge. Consumption based GDP growth has lead to an devastation where any dip in any economic growth will be detrimental to the economy itself due to poor savings rate. Loan based economic growth cannot be sustainable. China might be working on the same lines but that is not going to get the growth sustainable. All the QE are now getting winded up followed with interest rates being increased.  

The zero interest rates days are now over and hence the payback cost of the borrowed capital is now being felt across the global market.  Consumers who have enjoyed zero interest rate regimes are now finding the situation to be difficult and this burden will amplify.  Debt is now a serious problem for the economy as well for the consumers.  The only solution to the global economy would be fa ocus and a strategy polices to bridge the inequality gaps and move ahead accordingly.

Sunday, August 12, 2018


Chinese tune is going to spook slowdown and Turkey has just begun the music.  When easy money becomes a burden financial contagion spills over. Borrowed living or consumption as an individual and as a country is always costly and comes up always with a bailout.  Turkey ongoing chaos would lead to a massive problem for Europe and other countries.  According to Data from the Bank of International, Settlements indicate that Italy has $17 billion of the loan, France has $38.4 billion, UK has $19.2 billion, Germany has $17.1 billion and Spain has $82 billion and the top eurozone banks have combined total assets of more than 20 trillion euros. Much of these exposures are also lira in the balance sheets of local subsidiaries and the currency depreciation is spooking contagion effect on the repayment schedule in the long term. Several European financial institutions, including Spain’s BBVA, Italy’s UniCredit and France’s BNP Paribas, have significant operations in Turkey.   

According to  BIS cross-border figures also show that Japanese banks are owed $14 billion, U.K. lenders $19.2 billion and the United States about $18 billion. Turkey blames US for this carnage of Liar since they imposed Tariff on Turkey exports. Well when an economic growth is not balanced and not stable then any damage to the traditional economic policies would spook plunge for an economy.

The increasing trend of US interest rates has increased the outflow of capital for the country.  Turkey’s loans in US dollars account for around 30% of GDP and in euro it could be as much as another 20%. Turkey’s non-financial companies’ foreign currency liabilities now exceed their foreign exchange assets by more than $200bn. In the next 12 months alone, private non-financial institutions must repay or roll over $66bn in foreign currency debt. Well, the numbers now seem to be larger than what has been perceived.  Turkey’s banks, meanwhile, face a figure of $76bn.  In all, private companies in Turkey sit on a pile of debt equivalent to about 40% of GDP and in the past year. 

Turkey has been running huge and growing current account deficits, reaching $ 7.1 billion by January 2018, while the rolling 12-month deficit rose to $ 51.6 billion one of the largest current account deficits in the world. It has inflation hovering above 10% and the govt is not inclined for pushing up the interest rates. Around $350bn in foreign debt is being held by Turkey banks which lead to a contagion call on various asset classes. One of the prime characteristics of Turkey is that it has low savings rates. Just below 21% live under the poverty line. GDP is mostly made up of consumer activity, at 60%, but government activity is 15% of the total. It has unemployment rate of 12% the overseas lending is too much to its banks.
  When an economy does not invest properly within its own economic inequality is has to face uncertain times when traditional economic theories start changing. The Tariff Imposition era is one such activity where traditional economic theories are bound to collapse and it pinpoints very clearly towards the historical political failures in terms of designing economic policies. Only export oriented economic growth is not suffice for a stable long term economic growth.
The country has inbuilt some problems but it has now started blaming US for its tariff impositions. Getting into the details further its being found that The top export destinations of Turkey are Germany ($16.2B), the United Kingdom ($15.2B), Italy($8.26B), the United States($7.69B) and Iraq ($7.63B). 

Highest Value Turkish Export Products
Below are the 20 highest value export products delivered to international customers in 2017. Shown within brackets is the change in value for each exported product year over year.
1.       Cars: US$11.8 billion (up 41.4% since 2016)
2.       Gold (unwrought): $6.6 billion (down -19.9%)
3.       Trucks: $4.8 billion (up 5.3%)
4.       Jewelry: $4.1 billion (up 9.9%)
5.       Automobile parts/accessories: $4.1 billion (up 6.4%)
6.       Processed petroleum oils: $3.7 billion (up 31.6%)
7.       T-shirts, vests (knit or crochet): $2.9 billion (down -1.8%)
8.       Iron or non-alloy steel bars, rods: $2.6 billion (down -2.9%)
9.       Women’s clothing (not knit or crochet): $2.5 billion (up 9.2%)
10.   Insulated wire/cable: $1.9 billion (up 8.9%)
11.   Carpets, other textile floor coverings: $1.8 billion (up 13.6%)
12.   Refrigerators, freezers: $1.8 billion (up 3.6%)
13.   Jerseys, pullovers (knit or crochet): $1.8 billion (up 10.7%)
14.   Piston engine parts: $1.7 billion (up 7.1%)
15.   Public-transport vehicles: $1.6 billion (up 7.8%)
16.   TV receivers/monitors/projectors: $1.5 billion (up 4.5%)
17.   Men’s suits, trousers (not knit or crochet): $1.4 billion (down -5.9%)
18.   Hot-rolled iron or non-alloy steel products: $1.4 billion (up 70.5%)
19.   Miscellaneous furniture: $1.3 billion (up 1.9%)
20.   Miscellaneous nuts: $1.3 billion (down -5.8%)

Among these product categories, hot-rolled iron or non-alloy steel products posted the greatest year-over-year increase in Turkish export sales with a 70.5% gain in value from $832.2 million in 2016 to $1.4 billion during 2017.In second place were exported cars which grew 41.4%.Turkish exports of processed petroleum oils also showed a respectable gain of 31.6%. Leading the decliners were exported gold, down -19.9%.

The carnage is beyond currency now as a global asset class will be redeemed by taking advantage of the currency volatility and this would spook a sudden liquidity or profit booking in portfolios across the market.

When economic policies are ruled over by a government and desired economic initiatives are not taken then that spooks a massive blow to the system. Recep Tayyip Erdo─čan who won the election during the campaign, he blamed external factors and their domestic collaborators for Turkey’s economic woes, which seemed to resonate with voters. They own the election blaming others and not focusing to improve domestically.  This is the place where economic disparity comes into play. When an economy does not focus on creating more job and keeps the economy alive on limited resources and constantly leverage the same then one day this type of collapse would happen. Borrowed living as an individual and as a country is always costly and comes up always with a bailout. 

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