Doing lip service has never solved any problem . No wonder 2009 G20 meet held in London is ineffective on the same count . While Mr brown looked confident in his dealing Mr Obama appeared very unsure .
No i am not to pass a judgment on economic acumen of these leader . I simply don’t have that much of immunity . But the declaration @ the end of G20 meet is something to be analyzed in detail . For it contains the actions that were not done in order to solve the current crisis .
The G20 solution for world economy looked like this .
1> Increase of few hundred billion dollars in IMFs kitty as SDR .
2> Establishing greater transparency in tax heavens , name and shame them .
3> Global coordinated stimulus .
Wel that’s the crux of it in layman’s language . This is supposed to solve the current crisis .
But what crisis are we facing in reality ?
Is it sub prime ? wel yes and now . In reality sub prime loan isn’t what this recession is all about .Sub prime is first of the symptoms of the things that went wrong .
The real crisis that we are staring at is that of unregulated derivatives and complete lack of maturity .
You would have heard the word over leverage and toxic asset many time in recent past .Simply put toxic asset is one which has no value or chances of recovery of the loan in foreseeable future .Loans were simply given to people at weak criteria . Loan that were given at low rates on the name of socialistic themes like house for all . That was the first fundamental mistake .The real mistake was to make pieces of such loan and sell derivatives of them to other bank . And the next layer of mistake came from the institutions that insured the loan .
Look the mess now . Its like same mistake multiplied 3 times . Taking such a repeat and excessive positions on small money can be simplified and called as over leverage . That is what the CDO and CDS all about . By some estimates this amounts to from 16 trillion to 600 trillion .
The number by both counts is horrifying .
But more horrifying is the fact that its the same money circulated many times . That makes the problem complicated to solve financially .
While the crisis began like this there is complete denial in the leadership of this issue . Bail out after bail outs are give to banks to clean up the loans . Where as in reality such loan cant be cleaned up in such a straight fwd way . This said we head for the next crisis which is of confidence . Since all of the lender knows the other one is tied in loan none is leading money to each other and the bail outs end up only in balance sheets . The real economy is still suffering .
let me ask U one simple question : What happens to a person who has drunk too much wine .The answer is simple either he digests it which is a long and painful process . Or he vomits it all which is a shocking and painful process . Wel there is one more option which is giving him medicines that partly make him digest the wine and partly throw it out of his body .
This third solution might hold the key to present problem but that’s a very rational decision . Rational and bold [ and mostly un popular ] decision takes visionary leadership to execute it .
So in realistic term our economy patient has 2 choices . Eat it or vomit it .In financial terms vomit ting will map to series of mergers , restructuring and bankruptcies .
Where as digesting the toxin means that the world settles all these loans in hard money . Of course prevailing wisdom in today’s world doesn’t suggest that we are going to save and earn so much money just to clear the mess we created . The mindsets aren’t so patient and mature .
So whats gonna happen in reality is that Governments , in particular US keeps on printing money at regular intervals so that the debt is cleared . Call this as quantitative easing . Another variation of this can be that of devaluing the currency so that overnight the money doubles and the debt figures looks too small and easy to manage .
Both case are result of smart and dishonest policy and both result in playing with the very definition of money and value . Just enough to clear the debt .
The G20 was the summit who was to solve this issue . SDRs which are essentially another name of bundle of few currencies like USD and EURO and all doesn’t server the purpose .Arresting tax heavens cant solve the problem though it might arrest it in future 🙂 [ assuming ppl are dumb to use same tactic again for deception ..lol ] .
What does that mean to ppl like us , actually noting . The G20 just created a feel good and postponed the day of reckoning . Remember the huge losses , debts and lack of money flow is still missing . In effect the issue is unaddressed .
I wonder if US and allies can convince G20 + for simultaneous quantitative easing . I wonder if non USD countries will gather the gutz to ask for new currencies .
Till such a thing happens we will keep on revisiting the same toxic assets which are now renamed as legacy assets , again and again , with increasing frequency .
The lay off are hitting India now , soon the salary cuts will follow .
Ignore the rise in stock markets in April . Ignore the profit that citi can report . Ignore the dip in gold prices [ it will shine in time of crisis] . The problem is still there , large and worsening .
Caution : More pain ahead …..