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We have been under great speculation when the US FEDERAL system declared $600 billion dollars buyout of bonds spread over a series of months. We speculated and the end result of the speculation was this that the World indices across the nation propelled up and soared to some new heights.

The most debatable topic was that will the $600 billion dollars buyout of bonds will really increase the momentum of the Fly wheel of the US economic growth. Well before drawing any further speculative dreamland’s, I would like to bring you some invisible facts regarding the current position of the Wall Street companies and how the latest moves are unrealistic.

Beds made out of Cash.

The US companies are having a huge margin of cash piles under their belts. The total cash piles of the total US companies stood now at $1.6trillion.I hope many of my readers eyes might have taken curious movements. Yes the US companies are having a raw cash pile of $1.6trillion dollars. Whatever money has come from the stimulus packages and other areas, out of whatever have been used to save the bailout companies are now sitting on that stimulus package with cash pile of 1.6trillion dollars. This figure itself conveys that less amount of money have been deployed in to manufacturing and other areas which ultimately will bring the growth of the US GDP. But companies are reluctant to invest and take risk in doing investments in US economy. A half of the 1.6 trillion dollars can bring the GDP growth of US by 1%.

Companies have piled up this cash only to save under the crisis situation which is being expected by the US companies to hit their economy any time soon. They have saved the funds to face the uncertain times just like 2008 recession phase .It clearly indicates that whatever the US market ACTOR’S represents their economy to the world the real picture is very much dark with no signs of any light into it.

Banks & Circulation of Money.

Moreover the US banking system is also following the same footprints of US companies. According to the US banking guidelines they are supposed to keep a margin of 9% in cash reserves. That margin have propelled up now to 12%-13%.This simply reveals that US banks are reluctant to take risk and damage again with toxic assets on their balance sheet. They are more inclined in maintaining their clean faces to the Dow Jones and doing investments in emerging economies. So even if US Federal system comes with another round of trillion dollars they money will only be kept in safe lockers.

What the US Federal system has forgotten is that CIRCULATION OF MONEY within the US economy. The Fed can print or buy bonds to inject liquidity in the system but it will only get absorbed by a certain class of the economy. US Fed and its government policies have failed bitterly to inject faith and trust among its economy thorough its policies and structures. What US Fed and economic policies want to do is that BORROWS AND INVESTS, BORROW AND CONSUME. Main reason for this theme is that consumer spending, accounts for about 70% of gross domestic product.

US policies have forgotten to put a note in their policies regarding the behavioral change among its citizens. This $600 billion buyout of bonds will only reduce the attraction towards the safe investment avenues and will force to take risky assets as the best choice. This will spook another risk of another major crisis in which it might be difficult to save with another trillion of dollar.

Why FED did not raise voice Then?

US have been pressing hard that China and other major currencies are putting pressure on dollar and hence US economy is unable to come out of the recession. Can the US Fed explain why and How the Dow Jones climbed to 11000 marks when the economy, manufacturing and consumption is struggling to make a living. I hope the US Fed and its policies want the entire world to stop its own production and buy only from ‘MADE IN AMERICA’. If US cost living have gone up what it has to do with India and China. What happened when US made trillion of funds each year taking advantage of the offshore business and cheap labor cost? Why at that point of time US did not raise the voice saying that the currencies of the emerging economies were undervalued and needs appreciation.

When American companies opened up shops in China and made trillion dollars via export incentives in china along with the low cost of labor of China why at that point of time the US polices did not raise the voice against currency. Mr.William Crinche an economist said that if China currency were made to appreciate by 20% then that will result to reduction of trade surplus of China by 170-250 billion dollars whereas of US it will get reduced by a meager number of 20 to 60 billion dollars. So well clear who will gain the most in the tussles.

India and China were always on the ladder of US exploitation of resources. The US has responded negatively to geopolitical change and the idea of polycentricism. America’s ideas about its own exceptional status and the universality of its values are expressed prominently in dealings with other states. The fruits of these are being now on the table of US.

Fall of the rates.

US lowered its Banking interest rates to fight WAR. Funding of the war was the main motive of lowering the rates. If we look at the below historical rate chart we will find that till 1988 to 1991 the rate was healthy. But after that when the Kuwait war started in 1992 we can figure out the changes. Again we find the growth of rates in 2000 just before the Dotcom bubble burst out. After that it only plummeted. If we make a quick look at the pattern of interest rates lower we find the clear position of what have forced the dollar valued higher against other currencies. In the other way other currencies dollar have forced other currencies to be undervalued.

Let’s look at the history of Fed Funds ratesv since 1981. We will leave out the punitively-high rates of the early 80s. Let’s begin in the late 1980s when rates were somewhat “normal”.

-February 1988 (peak of rate cycle) Fed Funds 9.75%

-February 1991 (approximately half way point) 6.25%

-September 1992 bottom of rate same rate cycle) 3.00%

Here is the next cycle:

-May 2000 (peak of rate cycle) 6.00%.

-June 2003 (bottom of cycle (1.00%). Stayed at 1.00% until June 2004.

US have been complaining about unhealthy trade practices made by china into US economy. US exports to China have been 38% where as US export to other countries dropped by 8%.US at one point of time have exported everything they created and now the country have lost its own position.

Who is favored to whom?

In the US, the current private sector debt-to-GDP level is in excess of 170%- pretty much the same level as the start of the crisis. On the other side of the story the US economy is have started attracting Venture capitalist and investments from other corners. We find that around $18.8billion have been invested in 2016 deals across US economy till now. If we look at the profit margins of the US companies we find a staggering growth of 35% in total. This reveals that business is happening but the real pick up which US policy makers want will take considerable amount of time.

One must understand that unemployment will not get reduced alike the Dow Jones climbed to 11000 marks within a year of the recession. When US opened up the gates for China at WTO, US acclaimed China as the most FAVORED DESTINATION. After the gates were opened up 5.5million people of US got the bonus of unemployment. After recession it is growing at an average rate of 95000 jobs each month.

Now my readers can make the meaning very clear why US market China s the most favored Destination in 2001.They exported everything they created in their own homeland as result later on US companies moved out and opened up shops in China. Skilled manpower is another reason for the loss of Job.

As globalization have opened up more skilled labors are available at cheap rates across the world. Then why the US companies who are currently under severe pressure of cost margin will deploy high paid man power force. The proof of the pudding is that according to Boston Consultancy group US have fallen from the rankings if Innovative products and India have climbed up. Moreover those innovative products of India are 80% cheap as compared to US.Us have lost the skill of labor which it enjoyed in the late 1970 and 80’s.The quality have fallen and also the price have gone up due to Borrowed living and Borrowed Consumption.

The last Weapon.

The last weapon which will be used after US fails to raise US economy by this QE2 is called as TRADE PROTECTION. Don’t worry if that happens since India and China under their respective 12th Plan are focusing their shifts from Export to domestic consumption and growth. There might be jitters in the beginning but growth lies a long way domestically. I know what my readers are murmuring in their minds. US will not be able to apply TRADE PROTECTION.I agree but when some one wants to grow at any cost God Help them. India and China did not build in a day. But US want to build it in day


Indraneel Sen Gupta

Financial, Economic Writer and Research Analyst.

Author Bio

God has been kind and the people with whom I had the journey of my career over the last 19 years have been great fortune to have as my best friends standing today in this journey. Expertise in global macroeconomic analysis, financial advisory, product development, and business strategy, I bring View Full Profile

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June 2024