Monday, November 5, 2012

Black Tswanami 3

Continuing from my earlier post.
  1. When the China crisis does hit, there will be a big crash in commodity prices
  2. Companies will begin putting their expansion plans on hold
  3. Money should flee the US's irrationally low interest rate papers and demand a higher interest rate
  4. Money has no reason to go to Japan
  5. Where will it go? - Gold is a good option and so are other currencies - but they are not liquid enough
  6. In essence, I believe that in our next crisis, money will be confused as to where to turn to...
I am by no means 'smart' in this field of futurism but I do see that there is a fundamental issue in our global currency system.
10 years from now, we will require a new or altered currency mechanism.

But tell me, what does the owner of a small business think of when things go berserk? He asks himself if his earned money is safe or not - and not so much about how much money will be made next year. "

Well, this is what I wrote not too long ago.
I want to take another jab at it


Recently, my friend bought a Made in PRC home movie projector for INR 4500 which is about USD 80; it had all sorts of input and output slots and it worked well. There was also a remote included; think of it... sometimes, a new remote can cost INR 1000 easy. Anyway, he said that there is something awesome about China that allows it to make such cheap stuff... I decided not to challenge him. 
The problem with selling at a loss, and with the government subsidising a company's costs is that it creates a fiscal burden and it ruins capital utility.
Forecasting is useless, but it is fun. If bad things might happen, it is smart to think of potential issues.
  1. Starting with China, there will be a global slowdown
  2. Luckily, this means that the demand for many consumables will go down
  3. This will be unfortunate for many companies, but will be good for oil importers and other commodity importers
  4. Then again, it will be bad for certain end consumers as clothes at Walmart might become a little more expensive from China
  5. All of this indicates that there will be a reorganisation of production centres
  6. What will the net effect of a China slowdown be on global prices?
  7. Furthermore, there is a housing bubble/ boom? in Australia and in Canada right now
  8. Sitting in India, I can see that companies are not euphoric, but rather, mildly optimistic.
  9. In the US, I see a big divide between the partially employed/ unemployed and the gainfully employed, with the former still clinging on to a certain standard of living
  10. In Europe, I see that some countries need to suffer simply because they dont have the finances to leave as pleasant a life (materially) as they do now
When I write this, I think of what the owner of a company in Ludhiana might be worried about - he might say that if there is a slowdown, he will cut back and try harder; he may lose money for a year but he may believe that the future will allow him to readjust his inventory/ working capital and serve his customers at appropriate prices. 

History says that crashes usually follow euphoria - I'm not talking about the stock market here. But since there is no euphoria anywhere right now, what could happen? I can foresee a US 1970s style slow business cycle. 
Hence, I believe that things are not going to become all that bad unless there is a global superstorm or a new war.

This is about the vast amount of 'moneys' which have been created by the Fed's Quantitative Easing policies... I recently read 4 wonderful lectures by Bernanke given to students at George Washington University; these reserves act as a way of reducing long-term borrowing rates such that businesses can be stimulated. Bernanke admits that the trouble will be withdrawing the liquidity when the time comes, but for that he outlined 3 fundamental ways in which the reserves can be withdrawn. I believe that when the time comes, Bernanke or his successor will be able to remove this potential inflationary bomb - thing is, people believe that all these reserves will find their way into the system whereas the Fed keeps going on and on about how tackling inflation is one of its primary duties. So, for all those disbelievers, the US will pull itself out of this mess; China will suffer from the excesses which have been created.

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