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10
Aug
2011
It is not merely about ratings in the USA

The buzz is well taken by the global financial & equity markets and the outcome is as expected. World Financial and Capital markets are witnessing distress whereby the U.S. debt rating by S&P becomes current trigger of market correction or reaction.

 

Let me start from the name that is well taken and written in the markets these days. He is Hyman Minsky [1919–1996], the economist of 1970s. His thought or hypothesis that “Economic stability leads instability” is getting her place in today’s global economic outlook.

 

I shall discuss borrower’s part of Minsky’s theory in short to bring my point quickly.  Actually Minsky pointed out three types of borrowers i.e. 1- Hedge Borrower: the one who can pay all his debt payments from his potential cash flows. 2- Speculative Borrower: the one who can pay his interest payments and constantly roll his principal debt to repay his original loan. 3- Ponzi Borrower: the one who can not pay his interest payments and the original loan rather anticipating an increase in his asset value to refinance his debt.

 

Now you would be thinking that why I am talking about the perspective of individual borrowers when the crisis is well tagged with U.S. government or U.S. Public Debt. But in my view Consumer or Household debt & individual economic behavior are the key part of this overall myth of U.S. debt problems.

 

Actually the theory of Hyman Minsky is pointing the figure towards behavioral attributes of finance whereby when the boom kicks the markets household brings their financial decisions out of their actually working capabilities. They add debt to their household unit’s portfolios and debt servicing place as one of the prominent expense of their budgets. This goes well until disposable income and asset prices gets consistent increase.

 

But as of excessive buying of assets the supply of assets gets encouraged by the produces. This causes producers ignoring the real structure of actual demand and they oversupply that ends in decline in prices in secondary markets. Even the other attributes of economy can not sustain to brisk for long as it is the natural phenomena. This is where the markets that work rationally take corrections and those who work bubbles books crises.

 

I now like to divert from this myth of U.S. stability to instability syndrome and mortgage to financial crises of 2008 and talk over debt issue of United States of America.

 

S&P AA+ is actually not an issue. We also need to ignore whether France deserve this rating more than U.S.A. or not. Let us talk about the true context. The true context is that the will & ability of U.S. policy makers is not very clear to address the debt and public spending issue. Even they have short of decisions whereby they have tried giving 0% interest benchmark to encourage economic activity. Politics above economy is another issue anyways. 

 

Yes the problem is about U.S. public debt that is tending towards US$ 15 trillions or 100% of GDP of the country. Yes the problem is about sizzling budget deficit of United States of America that shall logically become debt. But the biggest problem exists in the roots of American economy’s structure and behaviors whereby the household debt servicing incorporate about 15% of disposable income of households. This hits the consumption in economy and lack of consumption hit production and companies. This is how economies come in slow or no growth regime. End of the day it pools in low tax revenues available for the government addressing increase spending.

 

Obama administration is more interested to look at the overview of all this whereby the basic fundamentals are totally ignored. Unemployment, job cuts, labor deprivation and social unrest is actually killing the cause of economic growth. They have been booking debts rather than relaxing their cost or spending structure to provide development room.

 

The source of revenues for the government is taxation and taxation is directly correlated to the increase in the income of households & companies. Ratings & risk can increase the discount rates but what is discount rate all about when you have no cash inflows to value your worth? Slow growth and lower attention towards potential economic opportunities are still standing as big questions to answer. Even the question is not well understood by U.S. policy makers in her true context.

 

Per hour rate for skilled labor in U.S.A. is going below US$ 20 and the labor of class is migrating to emerging economies. The households are loosing their jobs and the total Consumer or Household Debt of U.S.A. is standing at US$ 2.5 trillion.

 

The policy makers are merely addressing US$ 14.3 trillion public debt and they are blank to estimate the contingent liabilities of the government & measures to enhance household disposable income. The amount that government owes to pension and welfare funds excludes this $ 14.3 trillion.    

 

I came across the tally that 43% of American families spend more than they earn each year. I heard that 74% of U.S. youth is ineligible to join Army as of their drug addiction, character, under qualification etc. In my view the main reason of U.S. economic crises is their intellectual and management deficit being a nation that they were very good at couple of decades before.

The time when the policy makers have to plan to invest over intellect, education and healthcare of the nation U.S. policy makers are so ignorant to work showoff measures. They are the policy makers of the country who spend about 5% of their GDP on wars and their own intellectual caliber is far lesser than their ancestors.

It is really surprising that U.S.A. is unable to see the potential in BIO FUELS that can provide fuel at US$ 1 per gallon. Their policy makers that are known as the leaders of the world can not bring a plan to develop alternative energy that can revive their economy and cultivate employment. Even Oil extraction is another area that can be worked. They are even so ineligible to work unemployed labor by starting infrastructure projects. Bottom line is that they are in ignorance of the fundamentals that ask to work policies that allows people to have income and their increase.

United States of America has been leading the world as of their technology, innovations and services but their downfall is the courtesy of being in the sense of super power. They are paying the cost of creating the society that work for capitalists and households become so addict of over spending in attraction of marketing campaigns of products.

The objective of writing all above is to advocate the point that the problem is not about what U.S.A. economy is doing today. The problem is about the absence of confidence over U.S. policy makers and their human capital that they can work anything to change this state of chaos.


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Mr. Omer

Mr. Omer [1982 born] started  his professional career as a commercial / investment banker after achieving Gold Medal in Finance at master level from University of Karachi in 2006.

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