4 Tuesday, January 25, 2011 ‘Another cycle of crisis in ...€¦ · Globalisation of mar-kets,...
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4 DT Tuesday, January 25, 2011 In the second part of the interview, Med Jones dis- cusses the global recession visiting again even as the world economies are recov- ering, the lessons the gov- ernments and investors should learn. Excerpts: Q. Is it true that a second and much bigger cycle of economic crisis is looming large again, even as global economies are recovering? A. The short answer is yes. I spoke about that in 2007. I am concerned about the US, the UK and the EU in general, a crisis in Spain would constitute a greater challenge for EU policy makers because the Spanish economy makes up 12 per cent of euro-area GDP, which is close to double of Greece, Ireland and Portugal combined. In addition to debt and inflation, EU still has chal- lenges with ageing and lower population growth. The ongoing costs of sup- porting an ageing popula- tion and the law of dimin- ishing returns will cause more burdens on the EU. There is a real risk that by the time the US econo- my recovers from this financial crisis, they will enter another crisis driven by the much less publicised social security, medicaid and medicare debt and the burden of ageing baby boomers along with unmanageable national debt, large consumer debt and a real risk for a curren- cy crisis. All policies remaining the same, there are two pos- sible scenarios, either another sharp correction (crisis) with quick recovery or a prolonged stagnation similar to Japan's lost decade. The bailout and the misallocated stimulus funds, the continued deficit spending, and the balloon- ing of the real uncalculat- ed debt-to-GDP ratio of about 700 per cent as opposed to the official debt number of 90 per cent, and that is not count- ing the individual states' debt, the increased direct and indirect taxes to fund bad economic and busi- ness policies could pose the greatest risk to the US economy. The current GDP recov- ery is driven primarily by debt-funded spending rather than private sector productivity improve- ments and exports. The problem is that Government spending is more than 40 per cent of US GDP, so when the gov- ernment spending slows down and they will slow down to try to balance the budget, the private sector and the economy will be impacted significantly. Unfortunately, what hits the US economy will impact the world and we could experience another crisis. Countries that have high Debt-to-GDP ratios and fol- low the same US economic policies will be hurt the most. Japan and some EU countries in particular Italy, Spain, Portugal, Greece, Ireland, Latvia and other countries will feel the most pain. In Latin America, Mexico and Central America, countries are more vulnerable due to their strong dependency on US economy. Add to that the long-term demographic trend, over the next 50 years; the US labour force is projected to grow at a slow- er rate. As a result, there are concerns about future growth of the U.S. economy. Despite the ageing of the baby-boomers, the U.S. labour force is in a better position than most coun- tries in Europe and East Asia, which are facing shrinking workforces in coming decades. Japan, for example, is projected to see a 6 per cent drop in its labour force by 2020. But it is not all bad news. On the upside, the factors that are in favour of the US economy include the pri- vate sector innovations bringing export revenues, attracting foreign investments to undervalued assets, lack of governance and transparen- cy in emerging markets makes US a safer invest- ment destination. One of the main reasons the US has been able to pre- vent the currency and the economy from collapsing, despite the latest wars, bad economic policies and mas- sive currency printing, is because the dollar is the de- facto standard for interna- tional trade and the largest international currency reserve. Luckily this time, not many international politi- cians have the will to push hard for alternative interna- tional trade and reserve currency. The US is run- ning on the goodwill of the previous decades, once the dollar is replaced with a basket of international currencies, the US econo- my could crash, especially if the government does not stop its debt spending or go back to healthy pro- duction-based growth and investments. What scares is the rising level of stress and distrust in the relationships between US and other countries. Luckily the glob- alisation of the economic activities and trade made all us invested in each other, so we are unlikely to see drastic decisions that could result in a global eco- nomic disaster, any push and pull will be done gradually and hopefully diplomatically. So in the short term there is little risk of another cri- sis, but the US leadership should not forget that global competition is grow- ing. Manufacturing, servic- es, knowledge and innova- tion leadership gap is diminishing. In the long term the dol- lar will eventually be replaced as the internation- al trade and investment currency. If they do not fix the national economic problems in the short term, we will all face a bigger cri- sis in the mid and longer terms. I know this sounds gloomy but I do not sub- scribe to the Prophets of Doom who are predicting socioeconomic collapse. I'm just being realistic about the risks and chal- lenges, you asked me about the prospect of the crisis, but if you asked me about the prospects of recovery you will have a more upbeat answer. Make no mistake, US will recover, it is just the road to recovery is rocky with potential set- backs, and we have to pay for our mistakes like every- one else. Q. What progress have countries made in recover- ing from global crisis? Last year was of uneven global recovery. The good news is that global trade has recovered, and should continue to do so. The bad news is that the real estate, consumer credit problems, and sovereign debt in the world's largest economies have not been solved yet. About 22 countries, includ- ing several EU-member states requested IMF's help. As expected, technically, the recession has ended in US and we saw modest GDP growth, however in my opinion, real recovery is measured with the growth of employment. “ ” ‘I would hate to make music and people love me for some- thing that isn’t me.’ ALICIA KEYS, 1981 QUOTE OF THE DAY! Born on this day ” “ There is a real risk that by the time the US economy recovers from this financial crisis, they will enter another crisis driven by social security, medicaid and medicare debt, along with the burden of ageing baby boomers and unmanageable national debt. VL Srinivasan Chief Reporter ● International Institute of Management (IIM) President Med Jones. ‘Another cycle of crisis in the offing’
Transcript of 4 Tuesday, January 25, 2011 ‘Another cycle of crisis in ...€¦ · Globalisation of mar-kets,...
4 DTTuesday, January 25, 2011
In the second part of theinterview, Med Jones dis-cusses the global recessionvisiting again even as theworld economies are recov-ering, the lessons the gov-ernments and investorsshould learn. Excerpts:
QQ.. IIss iitt ttrruuee tthhaatt aa sseeccoonnddaanndd mmuucchh bbiiggggeerr ccyyccllee ooffeeccoonnoommiicc ccrriissiiss iiss lloooommiinnggllaarrggee aaggaaiinn,, eevveenn aass gglloobbaalleeccoonnoommiieess aarree rreeccoovveerriinngg??
A. The short answer isyes. I spoke about that in2007. I am concerned aboutthe US, the UK and the EUin general, a crisis in Spainwould constitute a greaterchallenge for EU policymakers because the Spanisheconomy makes up 12 percent of euro-area GDP,which is close to double ofGreece, Ireland andPortugal combined.
In addition to debt and
inflation, EU still has chal-lenges with ageing andlower population growth.The ongoing costs of sup-porting an ageing popula-tion and the law of dimin-ishing returns will causemore burdens on the EU.
There is a real risk thatby the time the US econo-my recovers from thisfinancial crisis, they willenter another crisis drivenby the much less publicisedsocial security, medicaidand medicare debt and theburden of ageing babyboomers along withunmanageable nationaldebt, large consumer debtand a real risk for a curren-cy crisis.
All policies remainingthe same, there are two pos-sible scenarios, eitheranother sharp correction(crisis) with quick recoveryor a prolonged stagnationsimilar to Japan's lostdecade. The bailout and themisallocated stimulusfunds, the continued deficitspending, and the balloon-ing of the real uncalculat-ed debt-to-GDP ratio ofabout 700 per cent asopposed to the officialdebt number of 90 percent, and that is not count-ing the individual states'debt, the increased directand indirect taxes to fundbad economic and busi-ness policies could posethe greatest risk to the USeconomy.
The current GDP recov-ery is driven primarily bydebt-funded spendingrather than private sectorproductivity improve-ments and exports. Theproblem is thatGovernment spending ismore than 40 per cent ofUS GDP, so when the gov-ernment spending slowsdown and they will slowdown to try to balance thebudget, the private sectorand the economy will beimpacted significantly.Unfortunately, what hitsthe US economy will impact the world andwe could experienceanother crisis.
Countries that have high
Debt-to-GDP ratios and fol-low the same US economicpolicies will be hurt themost. Japan and some EUcountries in particular Italy,Spain, Portugal, Greece,Ireland, Latvia and othercountries will feel the mostpain. In Latin America,Mexico and CentralAmerica, countries are
more vulnerable due totheir strong dependency onUS economy. Add to thatthe long-term demographictrend, over the next 50
years; the US labour force isprojected to grow at a slow-er rate. As a result, there areconcerns about futuregrowth of the U.S. economy.Despite the ageing of thebaby-boomers, the U.S.labour force is in a betterposition than most coun-tries in Europe and EastAsia, which are facing
shrinking workforces incoming decades. Japan, forexample, is projected to seea 6 per cent drop in itslabour force by 2020.
But it is not all bad news.On the upside, the factorsthat are in favour of the USeconomy include the pri-vate sector innovationsbringing export revenues,attracting foreign investments to undervaluedassets, lack of governance and transparen-cy in emerging marketsmakes US a safer invest-ment destination.
One of the main reasonsthe US has been able to pre-vent the currency and theeconomy from collapsing,despite the latest wars, badeconomic policies and mas-sive currency printing, isbecause the dollar is the de-facto standard for interna-tional trade and the largestinternational currencyreserve.
Luckily this time, notmany international politi-cians have the will to pushhard for alternative interna-tional trade and reservecurrency. The US is run-ning on the goodwill of theprevious decades, once thedollar is replaced with abasket of international currencies, the US econo-my could crash, especiallyif the government does not stop its debt spendingor go back to healthy pro-duction-based growth andinvestments.
What scares is the risinglevel of stress and distrustin the relationshipsbetween US and othercountries. Luckily the glob-alisation of the economic
activities and trade madeall us invested in eachother, so we are unlikely tosee drastic decisions thatcould result in a global eco-
nomic disaster, any pushand pull will be done gradually and hopefullydiplomatically.
So in the short term thereis little risk of another cri-sis, but the US leadershipshould not forget that global competition is grow-ing. Manufacturing, servic-es, knowledge and innova-tion leadership gap isdiminishing.
In the long term the dol-lar will eventually bereplaced as the internation-al trade and investmentcurrency. If they do not fixthe national economicproblems in the short term,we will all face a bigger cri-sis in the mid and longerterms.
I know this soundsgloomy but I do not sub-scribe to the Prophets ofDoom who are predictingsocioeconomic collapse.I'm just being realisticabout the risks and chal-lenges, you asked me aboutthe prospect of the crisis,but if you asked me aboutthe prospects of recoveryyou will have a moreupbeat answer. Make nomistake, US will recover, itis just the road to recoveryis rocky with potential set-backs, and we have to payfor our mistakes like every-one else.
QQ.. WWhhaatt pprrooggrreessss hhaavveeccoouunnttrriieess mmaaddee iinn rreeccoovveerr--iinngg ffrroomm gglloobbaall ccrriissiiss??
Last year was of unevenglobal recovery. The goodnews is that global tradehas recovered, and shouldcontinue to do so. The badnews is that the real estate,consumer credit problems,and sovereign debt in theworld's largest economieshave not been solved yet.About 22 countries, includ-ing several EU-memberstates requested IMF'shelp.
As expected, technically,the recession has ended inUS and we saw modestGDP growth, however inmy opinion, real recoveryis measured with thegrowth of employment.
“”
‘I would hate to makemusic and peoplelove me for some-thing that isn’t me.’
ALICIA KEYS, 1981
QUOTEOF THE DAY!
Born on thisday
”“There is a real risk that by the time the US economyrecovers from this financial crisis, they will enteranother crisis driven by social security, medicaid andmedicare debt, along with the burden of ageing babyboomers and unmanageable national debt.
VL SrinivasanChief Reporter
� International Institute of Management (IIM) President Med Jones.
‘Another cycle ofcrisis in the offing’
5NEWS Tuesday, January 25, 2011
The good news is thatrate of unemployment hasslowed down significant-ly, but it’s a long way torecover to the previouslevels before the crisis.My concern is that thisgrowth was fuelled mainlyby government debtspending, bailouts, bank-ing accounting manipula-tions and massive moneyprinting.
The price of suchrecovery will have to bepaid in the coming yearsand with interest.Economies that had weakfundamentals with highbudget, trade and invest-ment deficits and highdebt to GDP ratio willcontinue to struggle. Thelist includes US, Italy,Spain, Ireland, Iceland,Latvia, Dubai and others.
On the other hand,China, India, Australia,Brazil, and the GCCweathered the stormmuch better than US andEurope. The question for2011 is how resilient is therecovery?
In general, I believe it ispositive, but not withoutpolicy risks, that remainsto be seen. There aremore deflation risks inEurope and US and moreinflation risks in emergingeconomies. In general, Isee the world economygrowing from US$62tn in2010 to US$64tn in 2011.
However the distribu-tion of that growth willremain uneven; theemerging economies,which represent about 30per cent of the globalGDP, will contribute 75per cent of that growth.Oil exporting countries,China, India and most ofAsian countries are set toexperience strong domes-tic demand in 2011, drivenby private consumptionand infrastructure spend-ing. I'm more optimisticabout eastern economiesand less optimistic aboutthe West.
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For the political leader-ship, the main lessons are:
Lack of regulation is asbad as over-regulation.Although I believe thatGovernments should notregulate free marketchoices, I believe they
should regulate to protectinvestors against conflictof interest and negligenceby investment bankersand advisors.
Short-term policy ori-entation to solving prob-lems or growing the econ-omy can have adverseeffects in the long termwith a huge price to pay.
Never forget the funda-mentals, countries thatquit producing real prod-ucts, spend more thanthey produce, ignoreeducation, burden theirmiddle class with highertaxes, and continue toimport millions fromother countries that arewilling to work harder forless, bail out failed busi-nesses and reward badbehaviour instead ofinvesting in good busi-nesses, will eventuallylose their leadership andwealth.
Countries that allowforeign lobbies, specialinterest groups andextreme nationalist move-ments to dominate theirforeign policies will endup creating more enemiesand wasting their valuableresources in defendingtheir own security.
The global economiclandscape is not like itwas after World War II, atthat time, the US had noreal competition inrebuilding war-destroyedcountries, with the newglobal knowledge andglobal competition, if youtake your eye over theeconomic ball someoneelse will pick it up.
Globalisation of mar-kets, competition, part-nerships and risk manage-ment should carry farmore weight in thedesigning of strategicnational developmentplans.
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For the investors, thelessons are:
Be careful what adviceyou buy, even if it is forfree, my advice included. Iwas in Geneva in 2009giving a keynote speech toa group of the wealthiestfamilies in the worldalong with their topinvestment advisors andbankers and many of themlost money not because
they could not foreseethe crisis but because theyinvested with fraudulentinvestment schemes likeBernard Madoff.Economists and financialanalysts are not much bet-ter, most of them are aca-demic professors or quan-titative analysts, with lit-tle or no real-life businessexperience, and very fewhave strong knowledge ofthe business drivers andqualitative forces thatdrive investment andoperational decisions.
Investment by imitationis not an investment strate-gy. So do not invest in anasset just because everyoneelse is doing so or becausethe largest investment bankhas invested in it.
Informed investors canmake money in any envi-ronment including reces-sions. More millionaireswere made during thegreat depression in the USthan any other time andmore millionaires will bemade globally because ofthis crisis than everbefore. In my opinion, themarkets now are full ofundervalued assets thatcan make you rich; thetrick is to know how topick them.
Educate yourself beforeyou invest, if you knowsomething that othersdon't, you will make a lotof money.
I always tell my clients,success in the investmentworld is all about deci-sion-making. If you are aninvestor or a CEO, do notinvest in an asset, a proj-ect or a product line, ifyou are not sure that theinformation is completeand accurate.
Making the right invest-ment decision requires adetailed set of informa-tion about macro andmicroeconomics condi-tions, markets, sectors,industries, companies,qualitative and quantita-tive analysis, fundamentaland technical analysis,behavioural finance andrisk management. Theability to distinguishbetween valid and invalidassumptions, more impor-tant vs. less importantinformation, and to con-trol the emotions of fearand greed during the upsand downs of markets iskey to the success of theinvestor.
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