MARKET PERSPECTIVE

By J Mulraj

July 30- Aug 4

Poor governance drives nations under

In the year 64 AD, Emperor Niro was alleged to have fiddled as Rome burned. In modern times, President Biden may be accused of twiddling his thumbs, as America burns. He has reverted America’s status, from being energy independent, to once again becoming energy dependent, on OPEC +, after signing an executive order to stop the leasing of federal land for fracking. It was fracking that had made America energy independent.

He went on a self-destructive rampage by publicly calling Saudi Arabia a pariah state, and vowing to stop arms sales to it, to make them held responsible for the murder of Jamal Khashoggi, a Saudi born American journalist. This tirade backfired. Mohammed Bin Salman, the Saudi crown prince, refused Biden’s request to boost oil output, to lower fuel prices before the mid term elections, he also started selling oil in Chinese yuan, instead of the US $, a blow to US $ hegemony.

Biden then poured money, through stimulus cheques (stymmies) during Covid. His administration brought interest rates down to zero. The aim was to encourage consumption, which accounts for 70% of US GDP, and stimulate investment. This contrasted with Covid lockdowns, which curtailed production, hence the need for investing in expansion. It resulted in the easy money going into asset classes like stocks, bonds, crypto currencies, all of which shot up. The failure to start the interest rates raising cycle early, on the misguided belief that inflation was “transitory” paved the way for a sharper rise in rates, up 5% in a year.

This rise in interest rates creates a debt servicing problem. On a US debt of $32 trillion, whenever it’s renewed, it would add over a trillion dollars to the interest bill. Perhaps even more, after one credit rating agency downgraded US rating.

Last week rating agency Fitch lowered the credit rating of USA from AAA, the highest, to AA+. Neither Moody’s nor S&P has lowered US rating, as yet, though S&P did, in 2011. The impact was felt in India, where the BSE listed stocks lost Rs 3.5 trillion in value. Over the longer term, a lowering of rating makes it harder, and more expensive, for USA to raise debt.

Biden was not the only musically inclined leader. Xi Jinping of China might be imagined playing the Yangqin near the Palace Museum. The overdose of debt financing is also manifested itself in China, despite Xi’s attempts to hide the debt monster. Provinces in China raised debt by through LGFVs (Local Government Financing Vehicles), whose borrowing was not reflected in the national debt figures.  It amounts to an estimated $9 trillion! The bonds issued by LGFVs were subscribed to by rural banks, insurance companies and other Government owned entities, the brunt of which will be felt by rural citizens. A study shows that half of the cities cannot service their debt.

Olaf Schulz, of Germany, can be described as playing the accordion as the Bundestag burned. Following Biden’s lead, Schulz stopped buying Russian gas, delivered cheaply through the two Nordstream pipelines. It was Russian oil and gas which supplied cheap energy to Germany, enabling it to become Europe’s economic powerhouse. No more. It’s manufacturing units are searching alternate locations to shift to, including BASF, the largest chemicals manufacturer. Germany is in a recession.

Modi, too, has been ignoring the cries for help, failing to punish perpetrators of frauds through Ponzi schemes and playing the sitar even as Jantar Mantar burns. The tragedy of the situation was brought out last week when cops in Kerala detained cops from neighboring Karnataka. The latter had gone to Kerala to apprehend scamsters in a cheating case. The Kerala police alleged that the Karnataka cops, instead of arresting the culprits, extorted them and set them free. It is highly probable that in all cases of frauds in which victims have not got justice, a similar pay for play scenario may have been enacted. Nothing has been done. Hopes of the victims that PM Modi’s insistence on good governance would help them get justice, are belied.

All debts, whether sovereign, or corporate or household, are basically rolled over on maturity, in a trance induced passing-the-explosive-debt-parcel game. One wonders whether with the world’s largest economies facing huge financial stress, such roll over of maturing debt will be possible. And if one were to add to the debt the approximate value of the derivative market, of a quadrillion dollars (1000 trillion) the trance would be driven by fentanyl.

Last week the BSE Sensex closed down 449 points to end at 65721.

July GST tax collections were Rs 1.6 trillion, up 11%. The FM should evaluate the value in bringing down rates else the risk is of killing the goose laying the golden eggs.

India May see a rise in its credit rating. That would attract more foreign funds and provide fodder to the bull. However, PM Modi must spend time on addressing the travails of victims of Ponzi schemes. If cops get away with extortion from perpetrators of fraud, Modi’s promise to eradicate corruption will be completely exposed as untrue. He must take action to firm up investigative agencies. He must ensure that assets seized by the enforcement agencies are sold, and victims are recompensed. He must ensure that the judicial backlog of 50 m. cases is speedily brought down. He must ensure that democracy is indeed, as it ought to be, by the people, for the people and of the people. And NOT, as it seems to be, by/for/of the polity.

Picture Source: https://www.instagram.com/p/CTNP2Vxs0zv/?utm_source=ig_web_copy_link

Comments may be sent to jmulraj@asiaconverge.com