Decade of BOOOOM

One thing that the media in general does good is to celebrate anniversaries. The 10th anniversary of the 2008 financial crisis is no exception. Continuous coverage of what happened then and how it was all solved. CNBC basically did a reality show with so called saviors. They called in Henry Paulson, Tim Geithner and Ben Bernanke to give them a pat themselves, each other and how they understood the gravity of the problem and provided the right cure to the ailing economy. They faithfully paid respect to their respective spouses and made some biblical references - which made them look credible than what they actually are. In reality instead of solving a smaller crisis with real medicine, they sowed the seed for a bigger crisis and what they essentially did - was to take the economy back to its artificial highs.

Arguably the bigger culprit of the three was Ben "helicopter" Bernanke. The future would judge him as that one person who would take a nasty hit for his decision to bring the fed funds rate to zero percent and then additionally coming up with monetary experiments like QE. Actually what he did was the easiest of all - print some money and mask the problem instead of solving it. Janet Ellen was never able to raise the interest rate to pre-crisis level even after 8 years since the crisis. The current Fed chairman has raised it significantly but is still low at 2%. He may never be able to raise it the 4.5% that Ben brought it down from. So bottom line - The troubles Ben Bernanke created would never be solved until a bigger crisis hits. Instead of solving the smaller crisis - he blew up the scale of the crisis exponentially and let someone else in-charge to handle that.

Bring down the interest rate was the easiest thing. You don't have to be really smart person to do that. It is a universal truth that you lower the "cost" of money - the business is going to boom. The business would boom so long as the interest rates remains low. Interest rates have been low for 10 years. Even with the 2% now - it is still historic low. Raising interest rate is the hardest part. Usually the interest rates rise because the inflation is rising or to cool the economy from over-heating. With 10-years of low interest rates - the boom is everywhere. In the first decade of the 21st century the boom period were confined to dotcom (3% range) and then to housing (1%). However after the 2008 financial crisis - the boom is no longer confined to specific industries but in multiple industries. Forbes magazine recently called it the "Everything boom". We definitely know the tech-savvy Nasdaq is in 8000 range (5000 range in year 2000 caused the dotcom crash) is most likely in bubble. The housing prices getting back to well above the prices during the housing boom is probably in a bubble too.

Probably the newest bubble in the bond market is the biggest of all and would put the very government that had the authority to fix the last crisis, putting everything in jeopardy. Bond market would include student-load debt, auto-loan debt and credit card debt - all historically high in trillions.

The interest rate on the 10-yr US treasury is around the 2.96 mark now. With the fed going to raise interest in the last week of September - it is almost certain to hit 3% and probably going north after it. Just for an example, let's say you buy the 10-yr bond today for $100,000. The US treasury guarantees you an coupon payment of $3000 dollars every year. At the end of the 10-year term, you get your $100,000 back. With the government's its own CPI number stating that the year-over-year inflation is 2.6%, it is hard to understand why would anyone buy the 10-year bond that yield just 3%. On top of that - you pay tax on your capital gains on the $3000 earned in interest. The CPI is probably on an upward journey. So your coupon rate is not going to change. The inflation rate could rise to 4 or 5 percent or more during this 10-year term. Because of rising interest rates, the principal amount of $100,000 is going to fall in value in the ten-year period. It makes absolutely no financial sense to buy the US bond market whatsoever. There is never going to be shortages of US treasury that is coming to the market in the years to come - as the government is running and will continue to run trillion-dollar deficit budget. The Fed has promised Quantitative tightening - where it will sell the bonds it accumulated in the last 10 years. Bottom line there is going to be a sea of bonds coming to the market. Who is buying it now - Only the person who wants to lose money would buy the 10-year paper. If not - the buyer is propping up the bond market to favor the US treasury.

Ben Bernanke was referred to "Helicopter" Ben for his reference of throwing money from a helicopter to the economy. He is going to be identified as this person - who took the economy in a helicopter to the sky easily with QE and 0% interest rates - but never knew how to land it safely. There by - crashing the helicopter vis-a-vis the entire US economy. (He ejected with a parachute though)

After the financial crisis in September of 2008, Initially George Bush and then Obama - convinced the rest of the world that the crisis was universal and there needs to be coordinated effort from all Central Banks across the world to respond with easy money policy. This month, Subba Rao, the former RBI governor from 2008 to 2012 rightly pointed out that artificial prop up post-crisis, is the primary reason for the Inflation caused in run to the general elections which Congress lost miserably and the NPA problems which Indian banks, particularly public sector banks are facing now. Just as the hot water in the shower - the heat is not when you move the knob to red. It is usually after sometime - there is a lag effect.

The crisis in Turkey - is also distinctly similar. The Central Bank of turkey has raised interest rate to a whopping 24% today. When they try to analyze the reason for its current economic state - they pinpoint to the good old times - when the economy was booming. It is also almost always - unprecedented booms in country's lead to unprecedented corrections. If there isn't a correction - rulers of the country should only blame themselves.

The US market is in so big bubble, the investors are contemplating a scenario where there is never going to be a bear market. It is all going to be rosy from now on. With the longest bull market in history, it cannot be blamed on them - their memory has faded.
It is clear example of misallocation of resources at the time of boom. In that scale the boom in the western world is bigger and longest. The bust is where people realize what all went horribly wrong in the boom. That day will eventually hit the western world soon - and that would make the 2008 financial crisis look like a walk in the park - which Hank, Tim and Ben are now taking credit for solving.

There are some talks that - when the next crisis happens, the US government would continue to the prop up the stock market by buying stocks. For the record - Japan is already buying corporate bonds and stocks. If that happens on America - it will go on to be the day, USA disassociated itself from market economy because it is just broke. It would be no different from fascist or socialism where governments control companies and industries. To overcome a crisis - they will do whatever they can to mitigate the crisis in short-term. Stimulus checks and Quantitative easing in western capitalistic society were very unexpected until they happened. But I really doubt, if it will all work. Would they buy Apple or buy Amazon? Why not Blue Apron? Probably they will buy the Dow or may be Russel 2k only. Those would be desperate times.

I talk to people who started their working career post 2008 and are unaware of the nature of recessions. They keep asking me - how does a slowdown or a crisis look like. As has been always, financial crisis is like a beautiful women. It is very hard to describe to others on how it looks like. But when it comes, pretty much everyone recognize it.

Trade deficits and why it matters

Recently was shopping in one of the famous retail stores in California. There were these group of teens. The conversation was to this effect. Why should all the products in the store have to come from China? Why isn’t there anything that is made in the USA. Immediate came the reply from one of his friend that - it is child labour. I wondered what a stereotyped answer it was. It was a typical answer for a classic youngster growing up in the western countries. That is what the media and the thought process do it to you. America has an enormous trade deficit with the rest of the world - It is to its advantage whatsoever. Rather than a bad thing for the western world - in fact they should be thanking China and other Asian economies for sending them goods all through the year. It is a result of hard labour from their part. The western countries readily consume its fruits.

As said by one famous economist - America gives a bad name to capitalism while China gives good name to communism. Whatever may be the underlying economic principle of a country in operation - whether its capitalism, communism, fascism, monarchism, feudalism - everything revolves around one big parameter - there is a significant portion of the society that is "very productive". Usually in theory all systems work. Everything tries to achieve the maximum productive nature of the society. None of them are designed for failures. But the way it is preached and practiced (over a period of time) is what makes it fail. If communism can fail in Russia - capitalism can fail in western world , provided the spirit of the ideology is not followed. Communism did not fail Russia - the way it was practised made it fail.

There is an enormous trade deficit the western countries in general, and USA in particular have against developing Asian and some European economies. It is the difference between the import and export a nation has. More import than exports would increase the trade deficits. It adversely affects the long-term prospective nature of the country. It is not logical for a high importing country to be successful economically for a long time. The current US President Trump - acknowledges this anomaly unlike his predecessors. However the way to solve it by introducing tariffs is probably not the right way. USA has a trade deficit of $800 billion dollars a year. It is roughly a quarter of its annual budget. 

The way it all started - nations don't export for the sake of exporting. They export more of what they have and import of what, they don't have enough. That is the primary principle of exports. Ideally the export is not to send goods to other countries without the local economy not utilizing it but instead it is the surplus resource generated by the "productive" population - that is privileged to send it over to other nations that need it - so that we can import those we don't have or insufficient nature of it. Every exports results in a monetary advantage. No one would send products to a consumer without being paid for it. Unfortunately the payment made are usually the "new money". It is just like any other private sector employment. Employers hire workers for what they can "export" out of their daily work - so that at the end of the pay cycle they "import" salary. Exports has to be higher than the import for a productive employer/employee relation and hence productive employment. Any distortion in the set-up leads to a break-up of this relationship. The same principle applies to nations. It cannot be different.

The last couple of decades has seen clear malfunction in the trade deficit patterns of the world. The consuming nation like the western world - keeps consuming for ever. The exporting nations do the hard work for the rich nations. Because countries like the USA don't have anything much to offer to the world as goods and services - the exporting nation is unable to import sufficient amount of goods. There by resulting in the accumulation of reserves by the exporting nation. Even though USA spearheads in certain areas like internet and other technologies - the exports of that is not enough w.r.t the imports of other products resulting in trade deficits every year. On the other side - exporting nations have trade surplus. This accumulated reserves - usually called the forex reserves keep going higher and higher. This money is often visualized to be for the "rainy day" - when money flows outwards of poor & exporting  countries. But in fact - they end up owning more reserves than they actually need. With this reserves fast accumulating and sitting idle in the coffers of the exporting nation - is swindled back as investment money - again to those same nations that don't export enough. Recently we have seen trends where sale of critical pieces are being blocked in the US for fear of run over by foreign governments. Countries like China, which has enormous savings and very high forex reserves of multi-trillions would easily buy-out star companies like google, Microsoft with a fraction of the money. The US would definitely wouldn't like that to happen and put regulation so that they absolute take overs don't happen. In one sense - it might make sense, but it is a bad deal for those nations which has consumed less - and saved/exported enough over may years. They are not able to import enough nor make smart investments.

Going back to the child labour being in question - If it is true - the western countries and all exporting countries from China should feel them so privileged that Chinese children are doing them this great service, while their children are having cushy life with video games and recreation being bulk of the day-to-day activity. Let us not under estimate the hard work of the people who make products that the world needs. There shouldn't be any complains until we give export to serve these hard working kids. Savings come from hard work and under-consumption. Every investment made with the savings - are someone's hard-earned money. Taking advantage of that is both economically and morally bad. So instead of younger generation in the US blaming countries like China for their trade-deficit - they have to think about how to reverse that change. Having a truly free market capitalistic society would be the answer to it. Unfortunately western countries are not that anymore.