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We live in unusual times. Since 2008, Central bankers of the developed world are ruling the world and affecting lives, more than elected leaders. They have pursued a policy of pumping money into the system, in a bid (unsuccessful) to boost economic growth and create jobs.
This insane printing of money has led to unsustainably high debt levels for countries. Japan’s debt/gdp ratio is at 229%, US at 104%, Italy at 132% and so on. In comparison, India at 67% is healthier, thanks in large measure to the sensible policies of RBI Governor, Rajan in not succumbing to corporate pressure to bail them out repeatedly.
What is the end game of this insane pump priming?
The Central bankers hope that their economies revive, generate more tax revenues and thus enable them to pare down the debt.
This is not happening.
Ageing population
So most countries continue printing money. Japan approved a further $ 73b. stimulus package last week. Its aging population belies hope for faster economic growth. How will the Government repay?
The short answer: confiscation of private wealth.
Even as it cleared a $ 73b. stimulus package, its Government managed public pension fund declared a loss of $ 51b., the largest ever. QE has lowered interest rates to such an extent that pension funds cannot meet their obligations.
A US pension fund with 400,000 members applied, seeking to cut entitlements by 70% to stave off bankruptcy. It was denied, on the ground that 70% was not enough! So the lifetime savings of the 400,000 members have been confiscated in part.
Cyprus, a contagion?
Cyprus, whose Debt/GDP ratio is 176% confiscated large bank deposits. Overnight, depositors lost 40% of their deposit! This can happen in other countries as well.
Indian PSU banks, says S&P, would need fresh capital of Rs 2.5 lac crores. Banks need more capital because earlier loans are not being repaid. The steel industry in India, for example, owes Rs 3 lac crores to banks. Due largely to dumping of excess Chinese steel, the sector is sick.
The confiscation also happens due to ingenuity of crooks who are encouraged by the apathy of officials and the slowness of the judicial system. SEBI has now gone after 567 ponzi schemes after continuous voicing of protest by investors. Strangely, the NSEL Ponzi scheme, one of the biggest, is not amongst the 567. Why? The FMC is now within SEBI purview and is its responsibility, and FTIL, the parent of NSEL, is a listed entity.
GST Bill
In India, the GST Bill passed, 16 years after it was first mooted. The stock market barely reacted to its passing. Though a lot of details have to be ironed out to make it successful, the Bill should reduce the complexity of indirect taxation and would obviate the corruption-breeding entry taxes.
On the flip side, it is bizarre that the Road Ministry wants Uber/Ola etc to charge by the antediluvian meter instead of the modern GPS system. They should read about how Didi Chuxing, the Chinese Uber, created 1 million jobs, which absorbed the 1 million people fired from Chinese coal & steel mills.
Investors should be aware of the folly of QE and the dangers it poses.
(The writer is IndiaHead, EuroMoneyConferences)
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