Deep-Insight

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A lot has been written and said about Tibet protests happening round the globe; be that the Olympic torch run or the Lhasa crackdown Sino-Tibet issue is everywhere.

The rigor with which protests have been happening globally has surprised most of us, one can’t help but suspect that these demonstrations have been planned well in advance and protestors were just waiting for Olympics for publicity. Hosting Olympics is a very honorable responsibility and Chinese government saw this as an opportunity to show the world that they are on their way up the ladder of world hierarchy. So these protests have become a source of severe embarrassment for the government. Spreading awareness won’t get tibetians anything except sour relations with Chinese government. Gone are the days when west had the power to send shockwaves down Asian economies just by imposing sanctions. Today china is such an important part of international trade that no country can afford to act more than just registering their discomfort. Tibet should have used this opportunity for strengthening it’s ties with China by a string show of unity. These protests are a step in just the opposite direction.

Pro Tibet Agenda mentions in bold letters that Tibet just wants autonomy over their region, they do not desire independence. Let’s look back into the past and see what happened when this sort of autonomy is given; well last time this happened USSR one of the two most powerful nations on earth broke into 15 independent countries. Demand for autonomy reflects hunger for power and here I am not pointing fingers at Dalai Lama but at the people and organizations involved in violent protests. Isn’t China governing rest of country well, by the current looks of it they are doing a very good job of it. As for the partisan policies that might be part of China’s way of keeping things under control. If Tibet had stopped these protests Chinese policies would have changed too as the target of government is development of China and any partisan policy increases the number of people who will drag the development down.

One other issue that has been raised is influx of huge number of Han Chinese into the region.

Is this even objectionable?

This is like people from New York are not allowed to settle in Los Angeles. Tibet officially accepts that it is a part of China and being citizens of the same country Han Chinese have equal rights to that land as tibetians. This sort of agenda is just fuelling the differences between the two communities in the region, which won’t help the matters at all.
Another point raised by the protestors is that China is trying to curb their culture and way of life. First of all it should be made clear in what form is China suppressing Tibet’s culture.

Has Chinese government imposed a dress code? Has the government banned their methods of worship, destroyed religious buildings, censored any religious organization? The answer to all these questions is NO. Well then how is Chinese government suppressing their culture, these are after all very popular techniques used for cultural dominance around the world.

What is being called as cultural suppression are in-fact China’s effort to develop the region. Tibet has an agricultural economy and being in an arid region (Receive low rainfall) that is not a very profitable activity. Tibet is relatively backward when compared to rest of China hence the government is trying to build infrastructure to speed up things in the region. These development activities like Qinghai-Tibet railway line are opposed even though the result of such development will not only increase Tibet’s exposure and accessibility but also bring in valuable tourism revenue to the region.

It is time for the protestors to rethink and realize that they stand to gain more by extending a hand of friendship rather than beating their heads against “The Great Wall“.

K.V.S.

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Mighty US juggernaut has slowed down and is facing really rough waters after a very long time. After the oil crisis of 70s this is the first time when US economy is facing such a serious problem. Current generation of Americans is not used to having recession, all the previous downturns in their memory were short lived and shallow. Their economy was able to recover simply due to sheer size of consumer spending in USA. But this time round it is different, this time the slowdown directly affects the amount of cash available with the very same consumers whose colossal spending bailed US economy out during the earlier crisis.

US consumers who account for more than 50% of US GDP have been affected directly by the following four factors

I. Credit Crunch

II. Housing Bust

III. Higher Food and Fuel prices (High inflation rates)

IV. Weakening labor markets

Food and fuel both are necessary for human existence and even much more in America where average food intake is several times the world average and SUVs guzzle gallons of fuel and so consequentially US citizens are facing a proportionate effect of the world wide high prices of food and oil. Weakening labor markets with US unemployment figures at 5.1% and climbing, are making the situation tougher to handle. Credit crunch and the crash in reality sector have left consumers with almost no assets against which to borrow. All this will not go away in a week or a month, it is now a fact that US is in recession and now authorities must concentrate their efforts not on covering up and manipulating figures but on planning and executing a recovery for US economy.

Even though sky is looking gloomy but there is a silver lining on the horizon, if this crisis had taken place say 15 years ago not only US economy but world economy would have gone into a long downward cycle. Now dynamics have changed and most of the analysts predict that even though growth rate around the globe would be reduced but it won’t be very significant. Thanks to changed market dynamics and the rise of Chinese and Indian economies the world continues to surge ahead. With it’s help US economy can recover, global demand is still up and will continue to rise due to frantic pace of growth and development taking place in developing countries. US dollar has fallen in the last year against all major currencies; this can serve as an opportunity for exporters to grab the opportunity and reclaim those rising trade deficits. Instead of depending on domestic demand US should concentrate on international demand and thereafter rebuild the momentum for domestic markets.

I’d like to say that Feds have handled the situation considerably well with timely rate cuts and stopping the chain reaction from the fall of Bear Stains but these are the people who allowed markets to get this far. So they need to be careful in not overdoing things during recovery, interest rates have been reduced greatly and now rising inflation may pose problems to cash and credit-less consumers. A quick recovery is possible but only if things are handled just the right way.

K.V.S.

Politics:

1. Inflation Woes for Indian Government: Rising inflation brings more than economic trouble for congress as Left and UNPA allies join BJP in public protests around the country. This can result in harsh moves by the govt to curb inflation and possibly slowing down growth.
2. Clinton on Test: $109 million in income, will the super bucks distance Hillary from her voters in the coming primaries or not that is for all to see.
3. Olympic torch draws protests in London: Despite throwing it’s full weight Chinese govt. is unable to suppress the Tibet issue which seems to be gaining popularity and support all round the world.

Economics:

1. Raining Hard: Torrential rains in India seems to have adversely affected the crops. The region is already suffering from food shortage and high inflation rates. This might spill water on government’s plan to gain popularity by giving loan waivers.
2. Microsoft gives Yahoo! an ultimatum: Microsoft Board has sited that if the deal does not takes place within three weeks then It’ll mount a hostile bid and will go directly to it’s shareholders and that too with a considerably lower price tag.

Reality Bites, that’s what Indian economy is experiencing right now, after a dream run since 1991 introduction of LPG (Liberalization, Privatization and Globalization) policy India has enjoyed a fairytale run. It even managed to bypass the Asian Crisis in 1997 and was largely insulated from the dot com bubble burst of 2000. However after a run of 17 beautiful years India has tasted sour for the first time.

Opening up of its markets has integrated India with the world economy and it no longer enjoys the insulation it found so handy during the earlier crisis. Ongoing US recession which has triggered a global financial situation resulting in revision of growth rates across the globe and India is no exception. 9% growth rates are no longer expected this year as a direct consequence of this. On top of this the only hope, domestic consumption has been affected by the high inflation rates. Concentrating on domestic markets might have helped economy out not only by compensating for decrease in US demand but also providing depth to our markets. Now inflation is at a three year high of 7% and the bad news is that this time it is not demand driven instead it is due to supply side constraints. Normally this would result in increased production but coming on the back of a major financial crisis the companies are not too eager to add capacity so quickly, thus resulting in higher inflation. Besides that the anti inflationary measures taken on monetary policy side will hamper growth further by reducing liquidity.

With elections on the horizon the government is leaving no leaf unturned reducing duties, cutting tariffs, imposing export duties and bans, government is on war footing to handle this crisis. The difficult part about supply side driven inflation is that this monetary problem can’t be controlled effectively with the monetary policy. There might be talks about raising the CRR (Cash Reserve Ratio) by RBI, but the thing is raising CRR will suck liquidity out of the system which won’t help checking the rising inflation. The reason behind the rising rates is not too much money with people but the low supply of the essential goods like staple food grains, edible oil and fuel prices is the reason behind the rising inflation. This is major cause of concern as this is affecting “aaam aadmi” (the common man) and poor people who find their daily needs getting costlier day by day.

Indian Government is ready to go any length to correct this situation as rising costs may erode all the good work done by this government in last 4 years and that too just before elections. Duty cuts and export tariffs have already been brought in action next few weeks may see a rise in CRR rates and govt using special powers to control prices and states checking hoarding under the commodities act. Coming few months are going to be very crucial as government walks a tight edged rope balancing growth and inflation control.

K.V.S.

In response to “China and the TAR”

Everybody seems to be criticizing China for the methods it applies to curb the protests but in doing that author of the above article has simply assumed that China’s claim over Tibet is unjustified.

Lets go over the reason, the main reason which is that Tibetans have an altogether different culture and were forcefully brought under Chinese control and Tibet should be as such made an independent country. Is that really so…. If I am not incorrect then Tibetans and Chinese can both trace back their history to Mongol tribes, over the time periods national boundaries have changed as different dynasties came and went, does this makes Tibet an altogether different nation ?

Now we shall look at a neighboring country, India; Culture, language, traditions seem to change every 10 miles in this country, when the British left this country every kingdom (there were hundreds !!!!!) was given an option to declare independence. If we apply author’s logic to India then India should have been at least 100 independent countries. A classic case in point is Jammu and Kashmir which today is anything but Independent with areas being occupied by India and Pakistan. These kings were coaxed, bullied and bamboozled into joining the Indian Union.

Now lets move over to the methods used by the Chinese, well one should not always believe what one hears on the news. Its hardly a secret that whole WEST is wary of China and won’t let any chance of embarrassing it. Although the methods might be a bit harsh but still a far cry from the mass killing reports which news channels seem to be showing as special reports every 2nd day. As my dear author has mentioned in the article that Chinese police is confiscating weapons everyday, this hardly gives credence to the peaceful protests which are shown on TV.

To everything there is a flip side and one must have a good look at both of them before making any judgments.

Indo China Series, 1^st Article: India will overtake China 1

This is the 2^nd article in the Indo China series; in this article we will continue the last article to discuss the advantages India has over China. When we studied the World Bank summary file on China we find that in the huge GDP of US$ 2644 Billion (2006) export of goods and services forms 40.1% of this GDP. This massive amount of over US$ 968 billion (2006) forms the 8% of net world exports with major importers being United States, European Union, Japan and Korea. Also Total imports of US$ 791 (2006) billion form 6% share of the world import, this suggests that Chinese economy is heavily relying on world trade to get those magical double digit growth rates. Although this does gives China the momentum but it also exposes it to the full wrath of ups and downs of the business cycles across the globe. Also it suggests that even though large portions of the country especially eastern parts remain backward instead of consuming the goods and services in their own markets Chinese are exporting them. India on the other hand has a GDP of about US$ 1000 billion but exports only US$ 120 billion a mere 1% of the world export and imports US$ 174 billion 1.41% of the world imports. The export import data has been taken from WTO Site. This over reliance on exports to boost the economy was one of the factors which led to the Asian Financial Crisis in the 90s. Although this method promises very fast track growth but it also carries the disadvantage of less depth in the domestic markets. So when the major importers face a downturn in their economy like American Financial Crisis then there would be a potential downturn in Chinese economy too. Indian economy concentrates more on domestic consumption rather than exports, underlying philosophy being if there is a competitive market within the country then why export the goods outside.

Also if we see the major importers from China we see superpowers like United States, European Union on the top and China has a huge trade gap with these two in its favor. That is it exports to these countries more and imports less from the same parties and hence has a favorable trade gap with them. This is not seen lightly by these countries as this creates a deficit in their own current account. So India comes out as an option to neutralize Chinese march on the world trade, these countries would like to cut or at least delay China’s rise to the top and promoting India which has almost the same if not more advantages over China.

Next we move over to the blood circulation system of the economy the banking sector, Chinese banking sector. Banks in China traditionally used to finance operations of SOEs (State Owned Enterprises) regardless of the amount of risk or profit involved. Over the years this has reduced but SOEs still accounted for over half the bank credit in 2000. This situation is made worse by the fact that there is less competition in the banking sector with 4 State Commercial Banks accounting for 86% of the assets of the banking sector. The Non Performing Loans at the end of 2001 were $213 billion or about 30% of the loans. This is widely believed to be near 50% if global definition of NPL (Non Performing Loans) is applied. India on the other hand has far greater amount of competition in the banking sector with a very complex financial infrastructure in place constituting not only of banks and insurance companies but also derivative market, equity market, a number of regulators etc. India had an NPL of 12% of total loans in 2001. So compared to China India is ahead by leaps and bounds in this area.

To finish off we should also consider that India’s reform process started at least 15 years after Chinese reforms so many of the big projects with long gestating period will soon start bearing results. In China’s case a few of these mega projects are already contributing to its double digit growth. Also India has the advantage of being a democracy, so if the government policy is not correct, if the advantage of economic growth is not reaching down to the common man then most probably the government will tumble when its term ends in 5 years. Whereas in China this is not the case and the government has to follow self corrective methods.

All these factors will help India in overtaking China in the economic race.

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Indo China Series, 1^st Article: India will overtake China 1

K.V.S.

Indo China Series Article 2: Why India Will Overtake China In The Economic Race 2

India and China are two names which no longer need any introduction throughout the world. Two countries earlier considered as the face of less developed and backward world are accelerating fast and overtaking many old champions in the economic race. As everyone knows the fact that both these economies are on the fast track and are poised to become the world leaders, so I won’t waste this article praising their growth rates. Instead we’ll probe into the question “which one will reach the top”. This series will span 3 articles.

In this part we consider the question “Why India will overtake China in the economic race?”

The first advantage India has is that it boasts of a very large English speaking population. English being commonly accepted international language makes communication a very comfortable experience. This large population has been amassed as the result of compulsory English education introduced in most of the education boards of India. Even those people who don’t speak much English can understand it to a certain extent, local languages have absorbed English words over the years of British rule. This gives Indians an edge in International Business dealings, Service sector industries, Tourism industry etc.

Next factor which is tilting the balance in India’s favor is demographics (a study of human population). There was a time when a large population was considered as a disadvantage for a country but now this has changed completely. Today large population not only means a larger working population but also a larger share of world markets. India and China both have 1 billion + populations and thus sport huge markets and working population. But there is a difference in the two cases. Let us see how

Chinese government had imposed strict population control by implementing “One Child Policy”. According to this policy if a couple has more than one child then the extra child will not be eligible for free state services like education. Thus having a second, third child is very costly in China. So in terms of labor force intake (birth rate) has dropped while the retirement age has not changed, this will result in a drop in the percentage of total population which contributes to the work force and hence the economic development. Graph shown above displays the data from “United Nations Economic and Social Survey 2007” reaffirms this theory that Chinese working population will eventually start decreasing as is the case with many European countries today. On the other hand India’s working population seems to be showing an increasing trend till at least 2040. Even today median age of Chinese population is 32.5 years (Year 2005) whereas India’s median age is 23.8 years and according to the UN survey this difference will keep on increasing.

So summarizing the above point China will face a situation when lesser number of workers would be available for a huge economy that is increased pressure on the work force, whereas India can continue to keep the costs low because of continued abundance in the labor force both in absolute numbers and the percentage composition. Apart from this Indian population would be younger compared to their Chinese counterparts and hence would provide base for larger consumer spending. It is understandable that a younger person will be a bigger and more dynamic spender for a longer duration of time.

Now over to the second aspect of changing demographic scene

Along with economic development some other changes also took place in China, improved healthcare services and better nutrition led to increase in life expectancy. However the improvements in China are considerably more effective and this gets reflected in their life expectancy of 73 years (year 2005) compared to India’s 64.7 years (year 2005). This has a flip side, as shown in the graph above (sourced from UN economic and social survey 2007) that the number of retired people in China is increasing at a higher rate than in India’s case. This trend will not only put extensive pressure on the pension and healthcare systems but it will also put pressure on the economy which would already be suffering from a decreased workforce. India here has another advantage that increasing working population and low growth rate of retiree population both factors give India an advantage over China

This brings us to the end of 1st part of this Indo - China series, Reader Comments are invited.

Indo China Series Article 2: Why India Will Overtake China In The Economic Race 2

K.V.S.

Everybody who has been following political news in Asia must be aware that there exists a theory that government might have played a role in Bhutto assassination. Now let us analyze the situation for a bit, does this not sound strange that all the videos, all the clues all lead to one conclusion that Musharraf did it. I am no supporter of President Musharraf’s rule in Pakistan but don’t you think that the man deserves some credit. He was Chief of Staff of Pakistan’s armed forces and no doubt he must have the ability to analyze tense situations measuring all the pros and cons. What I mean to say is wouldn’t musharraf have known should Bhutto die under his watch the blame would fall squarely on his shoulders. In my opinion if I was him I would have been busying myself in ensuring Bhutto’s security.

Yes, Musharraf must have feared losing power to Bhutto’s government but by (supposedly) assassinating Bhutto what has he gained. Increased pressure to restore democracy, a strong sympathy vote for Bhutto’s party, riots raging throughout Pakistan and to top that up he seem to have resolved the leadership issues which would have come into play if both Nawaz Sharif and Benazir Bhutto were to share power. So by supposedly assassinating Bhutto he has benefited opposition more than himself.

However this article does not eliminates government role in the assassination, just the fact that the support must have come from some lower levels rather than the top man himself. The coincidence factor in Bhutto’s assassination is too high and smells strongly of foul play. Assassins knew the route from where Bhutto was to make her exit, they knew exactly when Bhutto would be exposed, absence of mobile jammers …. The list goes on and on. Besides this now there are further doubts being cast over what caused her death the explosion or the bullets. All this would not have been possible without some sort of government cover-up. Perhaps answer to these questions would never be known but one thing I feel sure about is Mushharaf is going to have a tough time nonetheless.

Related links:

Bhutto Assassination Video Suggests Conspiracy : Rightpundits

Benazir Bhutto became the latest in line to loose her life to the chaos currently going on in Pakistan. Let’s see what Pakistan has seen in the last decade corrupt politicians, a failed proxy war, one ousted government, military rule, emergency and now assassination of one of the two main leaders of Pakistan making reestablishment of true democracy a very unattainable job. The current state of Pakistan is a government puppet judiciary, a highly unpopular president who is trying very hard to please USA for all the economic aid he is getting in return of his cooperation against terrorism and opposing him are not only the terrorist and religious extremists but also those demanding complete democracy. So General is in a corner where he has no other options but to continue what he is doing.

Now all those supporting “complete democracy” in Pakistan may not agree with this but Musharraf is the best hope Pakistan has got. Let us consider first what will happen if Musharraf agrees to transfer power to a fully democratic government then what. Democratic governments as we all know runs on a populist vote and who is going to vote in Pakistan, the very same extremist who have quite a following in Pakistan and have historically influenced Pakistan’s politicians, military and have tight knots with ISI. So there is that scenario which we should keep in mind while regarding situation in Pakistan. Ok, let’s say that the new government which is formed in Pakistan does not supports the extremist view and continues working alongside USA in the “War Against Terror”. What we’d be doing is to divide the power and decision making ability from one to many heads, which on the surface seems good because it provides balanced decisions taking into account everyone’s view. But considering the state currently in Pakistan that would be a move in wrong direction. Conditions are so chaotic right now, suicide attacks have become order of the day, there have been several attempts on the President’s life and now assassination of Benazir Bhutto former Prime Minister and a top leader of Pakistan.

A strong hand is what really is needed in Pakistan and this does not mean that this is not a permanent solution but a temporary measure until situation has subsided a bit. During this time many rights would be curtailed and misused in favor of the government but that is the cost which has to be paid. No government is an ideal one neither is this one but at least it is still working in the right direction. Musharraf may have misused the period of emergency to install a biased judiciary, round up his opposition but he is still working in cooperation in the war against terror. Repeated attempts at his life should be proof enough that whatever he is doing is working. In the long term he can’t rule for ever US leads the pro democracy movement around the world so as soon as conditions have stabilized it will put enough pressure on musharraf to transfer control from military back to the people of Pakistan.

However if Pakistan hosts election there are two scenarios, one there would be a power struggle between the prime minister and president, two the government would act in accordance with the President and in effect serve the purpose of a rubber stamp. What the future holds that we do not know but the whole world will watch as the drama unfolds at Islamabad.

Related Links

The Feudal Ms Bhutto -The India Uncut Blog

This article is one of many articles on American financial crisis on the web, although it’s not much different except for the fact that I like most of the people am a layman. Well if I am then how have I written this article ? I researched internet and discussed the matter with people who are good at this … and this article is a sum of how they made me understand the matter.

0. What is the crisis ?

The first question one asks is what is an economic crisis ? Well an economy is the system through which whatever is produced by various companies is distributed to people who buy these goods and services (Insurance and banking do not produce goods they provide services instead) from their salaries or profits. Now when all these parameters namely production, distribution and consumption grow together in tandem then economy is said to be in good health. As a consequence people’s salary increases which leads them into buying more goods which in turn boosts profit of big and small companies and tiny businesses. However if any of these move in the wrong direction or move too fast or too slow as compared to other parameters a crisis happens.

Now over to what is happening right now in US economy, most repeated line on the news now days is that subprime mortgages have crashed which is causing all this slowdown. Lets take a detour to understand subprime mortgages

• All financial companies take money from one source (investors, saving accounts etc) and invest it out into other sources like giving money out on loans, buy shares or bonds with it. In the process they earn more money than they have to return to their own source and this is their profit.
• Anybody who wants to take a loan, borrow money say to buy a house they need credit ratings, these ratings tell the banks as to asses how much risk do they take while giving loan to that person. A person with a better credit rating is more likely to succesfully return the loan amount than a peron with a bad credit rating. According to these ratings the rate of interest (the additional amount of money along with loan to be returned) is set. Higher rating is equivalent to a low rate of interest and higher chances of getting the loan sanctioned.
• Now these big financial companies came up with an idea so as to lend money to those people who did not have proper credit ratings (e.g. People with bad loan repayment records). This category of loans was called subprime loan, this according to wikipedia is the practice of giving loan to people who did not qualify for best market intrest rates because of their bad credit ratings. SO what these companies did was they said that we’ll give you money and we’ll overlook the fact that you haven’t paid your loans in the past and in exchange of this you people will pay us higher rate of interest to us. This resulted in huge amount of profits for the finance companies, as now they were not only doing more business (of giving loans) but they were doing it at higher profits too (higher interest rates).
• This arrangement worked for several years because the assets (things people bought with the loaned money e.g. houses) were increasing in prices so even if someone was unable to pay high intrest loans the company always had the asset (in our example the house) as security (in case of non payment they can easily sell the house). In the meantime other companies also got involved in this practice.
• The finance companies issued bonds for subprime loans in the market, these bonds offered higher returns (Income) to people. So many people and other companies (even european banks) bought these bonds and invested huge amount of money in these bonds. Insurance companies too got involved in insuring these loans as this resulted in increased business for them.

Now what has happened is that the rates in housing markets have crashed and this has caused a major problem for the finance companies. As they had given loans to people who were unreliable and risky to give the loan to and hence they are unable to repay loans but unlike earlier the companies can’t depend on the assets which in many of the cases are houses (a house is found to be the biggest contributor to an average American’s net worth). Now the price of these houses is decreasing instead of increasing so even if these companies sell these houses they won’t be able to get back their money or the interest due to them. This in turn is causing a rise in claims from insurance companies which share part of the risk and hence part of the losses if they occur. So both finance and insurance companies are suffering huge losses and as a direct consequence they are not able to return money to the bond holders (Subprime loan related bonds) and these happen to be companies from other sectors and even other banks which did not directly indulge so much in subprime markets. So the bond prices are going down resulting in a loss for all the parties involved.
All this would be covered in detail in the later sections.

1. Brief Time-Line of the crisis

Click Here for a larger image. This is just a brief time line and many events might have been skipped but the purpose of this was just to give an idea of how things have been taking place and as this article is not meant for experts so I think that readers will excuse me if some of the finer details have been missed.

2. Causes

After the dot com bubble burst in late 2000 and 2001 beginning many companies went into huge loss, as the share prices fell and companies faced huge amount of asset reduction American economy faced a slowdown. Feds (Govt. Authority which sets the interest rates in banking sector) aggressively lowered federal fund interest rates from 6.5% to 1% in 2004, lowest since 1958. Now it is widely considered that this was excessive cut and it should not have continued beyond 2002 - 03.

Excessively low rate of interest resulted in a housing boom thus causing a surge in demand of houses. This in turn caused the price of houses to rise and everybody started investing their savings in housing market.

With ever rising house prices lending institutions relaxed their lending rules as the housing collateral behind the loans was gaining in value, so these banks had increased security in case of non repayment of loans. Mortgage banks and other lenders began to accommodate subprime borrowers with dubious credit by extending mortgage loans to homebuyers who would not have qualified in other times.

With the demand for mortgage loans increasing, large banks resorted to some inventive financing of their own in order to economize their capital. They began repackaging loans and slicing them into some exotic new types of securities, and in so doing, shifted their lending risk to the buyers of such securities. Thus came into being a new class of securities-often rated AAA by credit rating agencies - that money market funds, insurance companies, pension funds and other investors could purchase.

3. Current Situation

Now Feds are again decreasing the interest rates so as to stop the collapse in lending markets. Biggies of financial world are booking huge losses and some of them like New Century Financial, American Home Mortgage, Countrywide Financial Corporations face bankruptcy or have narrowly avoided it. You might not have heard about these companies but the probability is that they probably own or have dealings with your own bank.

Oil prices are almost at an all time high and this is going to hurt common Americans hard. During all the earlier financial crisis when US economy faced performance issues oil prices fell too. But this time they are holding constant, as a result while Americans will have less to spend gasoline prices (and in turn transport prices of goods) will hold high hence they’ll have to pay more for the same goods. The main reason behind this is that now rising economies from developing world like China and India are driving oil consumption and hence OPEC (Oil Producing and Exporting Countries) is not afraid of any immediate significant recession in demand.

US companies face losses and falling demands result is that they would have to cut down on costs which may result in lesser employment and more outsourcing.

4. Future Scenario

Now lets see what can happen in future?

The immediate consequence of this mortgage crisis seems to be an inevitable credit crunch. This will result in formation of new credit guidelines which will deny hundreds of thousands of Americans the opportunity to own their homes. This overreaction to the ongoing crises will deepen the pit into which US economy seems to be falling. Availability of credit is like a lubricant to the engine of economy, and as it becomes difficult to acquire economy will face a further slowdown.

Besides this high oil prices are going to hit average American hard in the wallet, this will cause gasoline prices to increase and hence every industry associated with it (like transport) will have increased cost which again would be passed to the consumer, the average American.

Now over to rest of the world, earlier whenever America sneezed world economy used to catch a cold. Meaning that in the past whenever US economy even began to show symptoms of slowdown world economy would begin sliding on a downward slope. Now the situation has changed developing countries like China and India are still gaining momentum with one clocking double digit growth and the other nearing the same. European zone being closely integrated with US economy has felt shocks but they seem to be much milder there in Europe than in United States. Besides that world economy is not that much dependant on US anymore, US share of world imports has fallen from 25% ion 2000-01 to under 19% now, so world economy will face slowdown but now it has the ability to compensate for some part of the problem.

5. Conclusion

Best hope lies with the very fact that world economy will not fall into the slowdown process (atleast not to the extent it did earlier) and here lies the best way out of this crises. US can now depend on rest of the world specially the developing countries leading the growth race to eventually bring it out of slowdown. As these markets wont be facing a slowdown so demand for products in these markets will rise. If US industries take advantage of falling dollar value backed by carefully framed policies and target these markets they might trigger another cycle of robust growth for US economy.