Here are a few questions that I posed in my post earlier. These are a part of the Global Outlook for 2011, some of the most important questions staring us in the face right now....from Euro to Gold, Currency wars to US recovery. Enjoy the ride...
- Is Euro zone going to fall apart? Will Euro cease to exist as a currency?
Tough one to start with....the troubles in EU seem never-ending...its like the "Hydra of Lerna" (from Greek mythology)...a deadly serpent which had nine heads, and each time one head was cut-off, two more came up. Only this time, it all first started with Iceland instead of Greece. [Remember the good 'ol joke about Iceland's capital? It was arguably around 4 Euros !]
The troubles have since passed through Greece and Ireland, and looks set to suck-in Portugal, Italy and Spain sometime soon. And don't forget, its not that Iceland, Greece and Ireland are out of troubled waters just because they got handed over some nice bail-outs.
Unlike the US, since EU is woven with the same currency with different political leaderships, the more Euros that are printed and given out, the more the purchasing power of the other EU nations reduces (as it devalues their currency as well). People in countries that are better off, like Germany and France, don't like this Robin-hood story being played on them...(I think rightly so). But what choice do they have? If they don't bail-out these guys, their banks are going to take a big hit on the Iceland / Greek / Ireland bonds they hold...which is going to put them into trouble...creating a contagion effect.
Moreover, as per recent reports, German leadership, under pressure from the vote-bank, is getting tougher on such bail-outs. Reduced bail-outs with severe austerity-imposing conditions will not make things any better for the troubled countries.
So from the looks of it, EU has tough choices, and it'll have to do a tight-rope walk between keeping its vote-bank happy and letting the Euro go down. My guess is, it'll continue making and imposing tough choices on near-default nations, who'll have to abide by the rules, and manage their civil unrest internally. May be, just may be, to teach others a lesson, one of the countries just might be let out of the EU, possibly the worst & smallest one, which will also help shoring up Euro value and giving a moral boost to the general EU public.
Accordingly, Euro should continue to do badly, but abandoning Euro altogether is probably not an option. Euro should sustain for some more time.
The troubles have since passed through Greece and Ireland, and looks set to suck-in Portugal, Italy and Spain sometime soon. And don't forget, its not that Iceland, Greece and Ireland are out of troubled waters just because they got handed over some nice bail-outs.
Unlike the US, since EU is woven with the same currency with different political leaderships, the more Euros that are printed and given out, the more the purchasing power of the other EU nations reduces (as it devalues their currency as well). People in countries that are better off, like Germany and France, don't like this Robin-hood story being played on them...(I think rightly so). But what choice do they have? If they don't bail-out these guys, their banks are going to take a big hit on the Iceland / Greek / Ireland bonds they hold...which is going to put them into trouble...creating a contagion effect.
Moreover, as per recent reports, German leadership, under pressure from the vote-bank, is getting tougher on such bail-outs. Reduced bail-outs with severe austerity-imposing conditions will not make things any better for the troubled countries.
So from the looks of it, EU has tough choices, and it'll have to do a tight-rope walk between keeping its vote-bank happy and letting the Euro go down. My guess is, it'll continue making and imposing tough choices on near-default nations, who'll have to abide by the rules, and manage their civil unrest internally. May be, just may be, to teach others a lesson, one of the countries just might be let out of the EU, possibly the worst & smallest one, which will also help shoring up Euro value and giving a moral boost to the general EU public.
Accordingly, Euro should continue to do badly, but abandoning Euro altogether is probably not an option. Euro should sustain for some more time.
- Which countries in Euro-zone are getting into trouble next? Will anyone default?
Taking over from the previous question, Portugal, Italy and Spain should be next in line, possibly in that order. But to default either the country has to choose it or or they have to be made to default. My guess is, and its really just a guess, that probably Portugal should default, although i cant say due to which of the 2 reasons above...and probably Germany and France may even force Portugal out of the EU.
Again, like I said above, not doing it with Portugal will further emphasize the fact that individual country's leaderships are willing to sacrifice their people's financial health for the overall health of the EU...which not many people will like. Also, while Portugal is big, its not as big a problem as Italy / Spain...so letting it default will probably just cause tropical storms in the financial sectors and not a Default Tsunami. Such an action will also prove to people that their leadership cares first about them and then the general good of people who've spent & speculated mindlessly in the boom times.
Again, like I said above, not doing it with Portugal will further emphasize the fact that individual country's leaderships are willing to sacrifice their people's financial health for the overall health of the EU...which not many people will like. Also, while Portugal is big, its not as big a problem as Italy / Spain...so letting it default will probably just cause tropical storms in the financial sectors and not a Default Tsunami. Such an action will also prove to people that their leadership cares first about them and then the general good of people who've spent & speculated mindlessly in the boom times.
- How will the currency war be played out between US and China?
Include Euro here and what we get is a thriller of a race... to the bottom ! Let's try and understand what's happening here...as global demand for almost everything goes down, countries increasingly prefer a weaker domestic currency (e.g. 54 INR / USD is weaker than 45 INR / USD; 8 CNY / USD is weaker than 6.6 CNY / USD...and so on). This helps the countries compensate the lack of demand / growth with increased export value. Therefore, with say, 15% weaker currency, even a drop of 10% in exports will result in net realizations of +5% for the country.
So, to prop up their fledgling economies, all countries are trying hard to push their currencies down. China, under pressure from various groups and markets, has let their currency appreciate from nearly 8.3 CNY / USD to current levels of 6.62 CNY / USD...a strengthening of almost 25% ! And the US is still crying hoarse about Chinese currency's undervaluation...! Now, this is not to say whether Chinese currency is fairly valued or not, the point is, the amount of strength Chinese currency shows from here, that much growth is required in Chinese exports just to keep the value of exports same...and where is that growth going to come from? US, UK, EU, India, SE Asia, Australia? All have the same problem and are trying hard to keep their currencies weaker and fulfill all their domestic demand internally by putting more import restrictions in place.
My take on this is, its going to end up in favor of China ! Despite all its problems of unemployment, housing starts, foreclosures, states approaching bankruptcies and what have you, US is still the safest bet amongst the likes of Euro, Renminbi and Yen, can keep pumping in money to keep a semblance of sanity longer than most believe, and still amounts for a massive pie in the global consumption.Many states are nearing bankruptcies, but can pull along from an year's perspective.
China, on the other hand, is already struggling with inflation and poor domestic consumption growth at the same time...(consider reading my earlier post on Inflation in China and India). It has massive infrastructure just lying around waiting to be used, strengthening currency is further eroding wafer-thin margins from export oriented manufacturing units - further limiting the worker's pay rises. Although China is making amends to avoid a crash, in terms of diversifying into Gold, asking its trading partners to use CNY as base currency for trading, buying out debt from EU zone to help stabilize Euro, and investing big-time in agriculture to address the supply side issues in agriculture, my feeling is, its too small an effort too late in the day.
Also, given the expectations that demand from Japan is not going to be very encouraging, (consider my earlier post on Understanding China and Japan), commodities and manufacturing dependent China is far less likely to be able to avoid a crash...which might help it in at least one way - it'll weaken its currency quite a bit. Such currency crisis at global levels have occurred before but this time around the difference is restrained geo-political efforts in containing it. Almost everyone is so deep in crap, that fending for themselves is top priority now. There is no consensus on who to trust and which side to stand on. In times of global crisis, like these, USD will appear a fairly decent haven, especially when compared to CNY, Eur and Yen.
So, to prop up their fledgling economies, all countries are trying hard to push their currencies down. China, under pressure from various groups and markets, has let their currency appreciate from nearly 8.3 CNY / USD to current levels of 6.62 CNY / USD...a strengthening of almost 25% ! And the US is still crying hoarse about Chinese currency's undervaluation...! Now, this is not to say whether Chinese currency is fairly valued or not, the point is, the amount of strength Chinese currency shows from here, that much growth is required in Chinese exports just to keep the value of exports same...and where is that growth going to come from? US, UK, EU, India, SE Asia, Australia? All have the same problem and are trying hard to keep their currencies weaker and fulfill all their domestic demand internally by putting more import restrictions in place.
My take on this is, its going to end up in favor of China ! Despite all its problems of unemployment, housing starts, foreclosures, states approaching bankruptcies and what have you, US is still the safest bet amongst the likes of Euro, Renminbi and Yen, can keep pumping in money to keep a semblance of sanity longer than most believe, and still amounts for a massive pie in the global consumption.Many states are nearing bankruptcies, but can pull along from an year's perspective.
China, on the other hand, is already struggling with inflation and poor domestic consumption growth at the same time...(consider reading my earlier post on Inflation in China and India). It has massive infrastructure just lying around waiting to be used, strengthening currency is further eroding wafer-thin margins from export oriented manufacturing units - further limiting the worker's pay rises. Although China is making amends to avoid a crash, in terms of diversifying into Gold, asking its trading partners to use CNY as base currency for trading, buying out debt from EU zone to help stabilize Euro, and investing big-time in agriculture to address the supply side issues in agriculture, my feeling is, its too small an effort too late in the day.
Also, given the expectations that demand from Japan is not going to be very encouraging, (consider my earlier post on Understanding China and Japan), commodities and manufacturing dependent China is far less likely to be able to avoid a crash...which might help it in at least one way - it'll weaken its currency quite a bit. Such currency crisis at global levels have occurred before but this time around the difference is restrained geo-political efforts in containing it. Almost everyone is so deep in crap, that fending for themselves is top priority now. There is no consensus on who to trust and which side to stand on. In times of global crisis, like these, USD will appear a fairly decent haven, especially when compared to CNY, Eur and Yen.
- Will the US Economy recover?
Fairly unlikely but considering the uncertain scenarios elsewhere in Japan, China, EU, Australia and SE Asia, I think it should do just OK this year...or rather "muddle through". US states will continue to have problems clearing their pension bills, the unemployment is really difficult to come down, the foreclosures are likely to maintain pace, and Fed is likely to give-in to a QE III if need be, to keep the rotting machinery lubricated for some more time. So its not that the problems in US are going to get solved any time soon, but I look at this as a Titanic sinking, due to its massive size, it'll take time sinking.
- Are Gold and Silver the new proxies for currencies? Will countries start dealing in Gold and shun dollar completely?
While gold is widely accepted as a good alternative to any currency, world is not likely to move freely (stealthily, maybe) to a gold standard. This is primarily because large economies like Japan, China, EU countries, hold humongous amounts of US bonds...so if they show clear interest towards dealing in Gold, US Bond prices are going to crash...and so will the M2M value of all central banks' holdings. So right now, countries are stealthily diversifying their holdings into gold and other currencies (e.g. China, instead of buying gold from markets, which will be widely known and reported, is quietly buying gold mines worldwide, and marking down their potential reserves).
However, this is a shift that will continue to take place, albeit slowly - like IMF has started accepting payments in Gold. So instead of seeing a massive move towards Gold as a reserve currency, we're fairly likely to see subtle shifts, which will also help in keeping the Gold prices up and rising for the year to come.
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