Few Days back the federal head declared that interest rates will remain zero for a longer time and there are least chances of any hike in the coming few quarters. Speculators and world stock market jumped and rejoiced this declaration as good as ‘Celebration of Christmas’.
Cheap money supply will remain for some more time giving more opportunity to invest in emerging market and increase the assets prices. But among all these we forgot to accentuate that US fiscal deficit is rising which is not a burden for US economy but will be shared equally among other economies. Now a thought line will emerge among my readers that how that happens to affect.
If we look at the past journey of the US fiscal position we find that:
A real miracle happened in the fiscal deficit. Moreover we also find the US consumers were running the life on the wheels of borrowed money. American households splurged $110 billion of borrowed money where most of the debt coming through the sub-prime route.
The below chart shows the rising US debt.
Consumer house holding was next to negligible. If we make a quick look at the US consumer savings we find:
Savings were not in the dictionary of the US consumers. This also resulted to high borrowings and finally the Sub prime crisis won the match.
What we find in the future is that US will face hard times to generate revenue for itself.
So speculators and world stock markets are playing their game but not for a longer time and will have to face something more than a night mare.
The real journey of the world stock market begins once the interest rates get rising. As US fed is behaving in a cool way to the world economy but in real terms its is sitting on a active volcano of rising debts followed, with no corporate growth with less investments in capital extensive sectors.
Spending of stimulus and zero interest rates are happening but not much for the desired purpose.
Every one is busy in making money at the cost of cheap money.
Authored by: Indranil Sen Gupta, Research Analyst