financial tsunami..!

Its sure that the world will not see another "great depression of the 1930s". The massive stimulus package implemented by the different countries at the right time has been able to lift this world from this financial mess. Its estimated that the world will witness GDP growth rate of about 3% in 2010. The stock markets have risen almost 50% since march 2009 in anticipation of economic recovery. However, the recovery is going to be weak for a year . There will not be sufficient reduction in the unemployment till 2011.

Moreover,this flood of cash has overliquified the system. i.e there is excess liquidity in the system,which if not managed properly can give rise to another economic crisis in the future. Already, there is talk of impending inflation in many developing countries. The world leaders will have to devise a right strategy to close the tap ,i.e tightening of the state expenditure once the world economy gets on track.

However, it must be ensured that there is no premature removal of stimulus package as it may prolong the recovery process. However, the countries which are running huge fiscal deficit must get their house in order at the appropriate time so as to avoid getting caught in another crisis in an attempt to mitigate the impact of this tsunami.

decline of a civilization...!

The Indian civilization has been under decline for about 1000 years. No wonder we have been under foreign rule for 700 years until 1947 when we managed to regain our independence. Initially we failed to face the challenge from foreign muslim invaders who who took advantage of persistent disunity among our countrymen and ruled us till 1757. Therefter we had to face the music under the British rule. There was belief in those times that Indians lack the capabilities to rule themselves.

Its the same country which had given birth to scientists like Aryabhatt, Brahma Gupta, Varahamihir who made significant discoveries in the field of science, mathematics, astronomy etc. A sense of reasoning used to dominate public debate rather than following old dogmas. Our country used to account for 25% of the world's GDP. We had strong trading relations with Europe, gulf countries and china. We were the pioneers in number of industries in that era.

But as time passed ,we lost our sense of reasoning ,became attached to superstitions. People fought with each other on petty issues like caste and language. The process of decay accentuted with the resulting poverty as it corroded our moral system as people resorted to all sorts of ways to meet their basic needs. The present state needs no explanation.

Lets hope that we regain our former position and rise above the humiliating mess of archaic systems which we have created for ourselves.

Pricing of risk.!!

Inappropriate pricing of risk is the mother of all financial crisis and its true in this recession too.Its one of the fundamental question that has been haunting the field of finance for last few decades. This topic is one of the cornerstone in the field of finance and much of the work done in this field is far from satisfactory. The traditional Capital asset pricing theorem is full of assumptions and is too simplistic to mirror a real world. Anyway, the real world is not linear as this model assumes risk return- behaviour to be a linear one.

The assumption that most of the risk in real life situations can be depicted by normal curve fails under many cases. A small difference in the real risk faced by an asset class than that shown by normal curve gets coupled with risk faced by another interacting asset class and it leads to a multiplier effect. Thus the overall risk faced by an economy can be enormous due to this multiplier effect and it leads to financial crisis when the system is stretched beyond the risk tolerance limits. This happens in the case of asset bubbles when prices increase significantly that real market valuation faces huge uncertainty.

It distorts market as it encourages speculation thus building up of upward spiral of prices which are unsustainable as they are not suported by real wealth. This huge uncertainty results in high risk to an economy as an asset bubble affects other asset classes through the financial markets. Finally the bust follows as market discovers real value of an asset and in the process a large share of investor wealth gets eroded. Thus we need an effective model which can help us to price the risk element in the financial world with required accuracy levels.A lot of work needs to be done in this field to upgrade our risk management models and replace them with better ones.

Out of recession.!!

Finally, the world appears to be getting out of the recession. Officially, France,Germany and Japan have got out of the recession as they have recorded growth in the last quarter. The pace of contraction in the US has slowed down and its expected to be just 0.5 % in present quarter with the resumption of the growth story from the next quarter. It appears that that the massive stimulus package of countries like US , china and japan has worked to save this world from another great depression. The crisis had even affected emerging economies like India, China etc .

The world has felt the aftershocks of massive finacial upheaval in the US primarily due to the integration of the world financial markets. It needs to be seen as an opportunity to revaluate our business practices .we can have a world financial stability forum which needs to advise governments about the emerging macroeconomic risks. The lessons learnt from the great depression of the 1930s has helped to lessen the impact of this crisis. This crisis has made us realize the perils of improper risk management and unending human greed. It is hoped that we dont repeat these mistakes and follow sustainable business practices for economic development.

changing power equations..!

The recent G8+G5 summit in Italy has raised doubts regarding the relevance of G8 as a body to look after the technoeconomic interests of the world. Most of the countries of G8 are marked by stagnant economies,rising deficts and ageing populations. On the other hand we have contries like India,China,Russia,Brazil etc which are still growing at a brisk pace even in this financial turmoil. These countries have young populations who can power economic growth for atleast next few decades. China and India represent close to one third of the world's population and they have huge untapped domestic markets which are being eagerly sought by western companies.

The world has realised that it cannnot fight the major problems confronting humanity without the help of these new emerging countries , be it climate change or restoring world's financial health.

India and China are no longer seen as regional powers as they have started flexing their muscles in international arenas as in the case of voting rights at IMF or Doha trade deal. It calls for the reform of major international institutions like UN security council,IMF, etc to realise the legitimate aspirations of these emerging economies. We find that it is a transition phase which will lead to a multipolar world in the next few decades.

decline of dollar.!

The days of hegemony of dollar seems to be numbered. The currency has lost its value against the major currencies of the world in the recent past. We appear to be heading to an era in which an international reserve currency would replace the dollar. Some major economies of the world like China ,Russia have already expressed there reservations against dollar and its prolonged mismanagement by the US authorities.

The US seems to be enjoying its leisure on borrowed money as most of foreign exchange surpluses of countries like india and china have been parked in the US treasury bonds at interest rates of 2-3%. These funds then in turn help the US to manage its trade deficit and thus providing resources to the government for funding its wars and in some way fuelling the private consumption story.

But the recent quantitative easing in the US have cast doubts about the credibility of dollar resulting in the loss of the investor's faith. The US seems to have found a way to get rid of its foreign debt by debasing the real value of dollar which has made countries like china quite jittery. Such events have contributed to the viewpoint that time has come to evolve a global currency which can replace dollar in due course of time.

The futile act of prediction

Mankind has  been the most intelligent creation of nature but it does mean that we start assuming the supernatural powers of God and start predicting things. We have been able to develop fairly advance  forcasting models through our achievements in science and technology but they are still limited by our limited rationality i.e whether we have really been able to decipher the laws of nature or it might be that our theories are only able to explain some observable phenomena without coming up with the ultimate truth. We find most of them correct as they fit with our limited rationality and in some cases we force ourselves to such hitherto sacrosanct principles.

                                     In late 2007,Goldman Sachs had made a prediction that crude oil is going to touch $200 per barrel and now its currently trading at $50  per barrel. The intention is not to doubt their econometrics model but its high time they realise that systemic problems with their model and stop behaving like God about predicting future events. In early 2008, one reputed organization had made a prediction that rupee is going to appreciate to the level of 35Rs /$ by the end of 2008. Now,its currently trading at 50 Rs /$.  IMF is itself not sure how many times its going to release growth forcasts for different parts of the world with its figures appearing to be some random numbers generated from its model.

                                  We must relise that this is not a linear world where future outcomes can be predicted by the summation of different incremental inputs. We live in a world where there are possiblly infinite number of factors with the magnitude of  effect of each factor depending upon the outcomes of some other input. It does not mean that we should not  have some estimate of likely events which may happen in future but the business of predicting future is highly dangerous . It distorts market by encouraging speculation and in some cases may lead to undue euphoria or pessimism.