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India has wealth-building consumers rather than export riches. In today’s market, it’s a good thing.

By George Wehrfritz and Jason Overdorf | NEWSWEEK

Oct 22, 2007 Issue

 

By many measures, the economic picture in Asia looks pretty good. Despite subprime-induced global recession worries, stock markets from Hong Kong to Mumbai hang at dizzying heights and today’s growth rates are faster than they’ve been in a decade. Of course, this prompts the question of whether the region is headed for a big fall—there’s no avoiding the fact that cash-strapped American shoppers still undergird all the major economies. With one exception: India. As a credit crunch unfolds in the world’s financial centers, the country of 1.1 billion is arguably Asia’s most sheltered economy. The reason: “India is the only economy in Asia driven primarily by domestic demand,” says Christopher Wood, chief strategist of the Hong Kong-based brokerage CLSA.

In short, India’s weaknesses have become its strengths. The country’s oft-lamented inability to challenge the Chinese manufacturing juggernaut means that today’s growth isn’t as tied to ever-increasing toy, apparel and electronics exports. The relatively high cost of borrowing in India is one reason its roads and bridges are so bad, but that looks almost like a plus compared with China’s near-zero interest rates and widespread overinvestment. And India’s vibrant service sector is more insulated against a global slump than Chinese manufacturing. Services historically fare better in down markets, because of their lack of inventory issues.

Not that India set out to become recession-proof. While China’s boom was planned from the center and executed by state companies, India’s welled up from the private entrepreneurial and business classes, set loose by market reforms in the early ’90s. Unlike China, India never forced consumers to funnel their savings to state export industries. The result is more flexibility and more balance, with India’s GDP growth running at a 9 percent pace in 2007 for the third year running, sustained mainly by domestic consumption and a burgeoning middle class.

Already, India’s domestic market is larger than South Korea’s, at about $370 billion. By 2025, concludes a recent study by the McKinsey Global Institute, its consumer class will swell tenfold from today’s tally of 50 million, making it the fifth largest market on the planet. This year India’s per capita income will break through the $1,000 threshold on its way to tripling by the late 2020s. “India’s lower level of investment relative to GDP has meant that consumption has played a bigger role in its growth story,” says the McKinsey study. “Consumption in India is closer, proportionally, to developed countries such as Japan and the United States than it is to China.”

China’s spending on construction of roads, factories, condos and other infrastructure is approaching 50 percent of GDP, compared with India’s healthier 32 percent. China’s trade surplus is also roughly twice India’s in percentage terms and, in 2006, China took in $63 billion in foreign direct investment to sustain its manufacturing boom, whereas India grew slightly slower but needed just $16 billion from abroad to do it. The net effect is that India’s economy will feel less pain should the global economy weaken. “India’s exposure to the global trade cycle is one of the lowest in the region,” concluded a Morgan Stanley report to clients, issued in mid-September, “and therefore the impact of slower foreign trade [on India's economy] is likely to be one of the lowest.”

Policymakers deserve some credit. Reserve Bank of India has kept the economy on a lean burn, setting interest rates in the 6 percent range, which is low enough not to stymie economic activity but high enough to discourage profligate investments. Elsewhere in Asia, ultralow rates—be they 2 percent mortgages in Hong Kong or near-zero loans from China’s state banks—have driven overinvestment in both real estate and industry. And whereas India’s passbook savings rates of 3 to 4 percent encourages household savings, negative returns in China have driven money into the only high-yield option available to average households: speculative stock and real-estate plays. Because India’s boom has not been driven by dirt-cheap money, analysts argue, it is therefore more resilient to global credit tightening.

Recent forecasts back up the picture of Indian economic resiliency. One from Citibank in September analyzed the likely impact of a U.S. recession on Asia’s two giants. The bank estimated that its 2008 GDP growth forecast for China would fall from the 11 percent level to 8.5 percent, whereas India’s would dip about half that amount, from 9.4 to 8.1 percent. A new study by the Organization for Economic Co-operation and Development concluded that, by further liberalizing its labor markets, India could push its sustainable growth rate above 10 percent by 2011. Pai Panandikar, president of the the RPG Foundation, a prominent economic think tank in Mumbai, wrote last week that a U.S. recession would hit goods exporters hardest, while driving American companies to cut costs with further use of Indian software and technology services. “It is possible that the growth of merchandise exports may dip, but the [demand for] service climb,” he argues.

What comes next in the resilient India story? Ironically, it could be a manufacturing boom akin to China’s in the 1990s. India’s huge domestic market, ultralow average wages and potential as an export platform to the Middle East, Africa, and Europe are attracting interest like never before, as manufacturers seek to limit their vulnerability to future political or economics changes in China. A handful of foreign carmakers such as Ford, General Motors, Hyundai and Suzuki have already opened plants, aiming to service customers abroad, as well as India’s own large and rapidly growing domestic market for small cars. Lucrative Korean electronics and white-goods ventures already dominate the local market. In a new survey of more than 300 global manufacturing companies released last week, European consultancy Capgemini found “very keen interest” in India as a manufacturing base, says Roy Lenders, the report’s author, who predicts that “India could challenge China as the manufacturing center of the world in the next three to five years.” Such a shift would soak up millions of surplus rural workers, thereby widening the country’s already formidable consumer base. “Thinking of China as a benchmark for successful development is still very strong in India,” says Shankar Acharya, an economist with the Indian Council for Research on International Economic Relations. China has been growing much faster than India, for much longer. But the eventual lesson of this period of global uncertainty may be that India should just build on its own strengths, not worry about China’s.

URL: http://www.newsweek.com/id/43340

http://www.financialsense.com/fsu/editorials/schiff/2007/1012.html

by Peter Schiff
Euro Pacific Capital
October 12, 2007

The vast majority of economists are currently hailing the freefall of the dollar as a windfall for American business. While some domestic manufacturers may enjoy some initial benefits from a weaker dollar, they will ultimately suffer many adverse consequences as well. More importantly, the dollar’s demise is a disaster for American consumers.

A cheaper dollar helps domestic manufacturers because it makes local costs, such as wages and rents, decline in relation to the costs borne by international competitors. While this is true, it also means that American workers and landlords see a corresponding decline in the real values of their pay and rent. Given that such declines negatively impact living standards, such developments hardly seem worth celebrating.

Too often overlooked however is how the weakening dollar also works to increase costs for domestic manufacturers. A falling dollar raises the costs of raw materials, such as oil and metals, while simultaneously decreasing the relative costs that foreign competitors pay for the same supplies.

But it is not just raw materials prices that rise. Perhaps even more important will be the prices of foreign-made components that are used in American factories. In fact, many American “manufacturers” are really nothing more than assemblers of imported components. For example, take a domestic golf club company that supposedly manufactures clubs in the good old U.S.A. Such a company might import the heads from China, the shafts from Indonesia, and the grips from Mexico. The only thing the American company actually does is put the pieces together. So as the dollar loses value, the costs of importing all of the components will rise, making the finished product more expensive for Americans.

Another often overlooked cost of a weakening dollar is higher interest rates. Because a falling dollar diminishes the global appeal of dollar denominated debt, U.S. interest rates will inevitably rise, resulting in increasing capital costs for domestic manufacturers. Similarly, strengthening foreign currencies increases the appeal of non-dollar debt, reducing the capital costs paid by our foreign competitors.

Furthermore, as a weaker dollar forces up domestic consumer prices, American workers, suffering from declining real incomes, will ultimately press their employers for more generous pay raises. Rising nominal wages will eventually undermine the competitive gains associated with lower real wages that initially resulted from the falling dollar. Similarly, landlords will look to raise rents to make up for the falling purchasing power of their rental income.

Lastly, as rising interest rates and consumer prices combine to exacerbate the severity of the coming recession, federal tax receipts will inevitably decline causing the budget deficit to swell anew. A populist Congress will likely seek to impose even higher taxes on those businesses profiting during the hard times. So any advantages U.S. manufacturers might get from cheaper dollars may be lost to higher taxes.

The bottom line is that true competitiveness comes from sound money, high savings, low taxes, minimal government regulation, hard work, and the entrepreneurial spirit. Laying the hopes of America’s industrial salvation on currency devaluation will only backfire, leaving American manufacturers even less competitive in the future than they are today.

October 1, 2007 | From theTrumpet.com

The world’s financial system came precariously close to seizing up these past couple months.

In fact, as far as some big banks and financial institutions were concerned, for a moment in time, the system was in a full-blown cardiac arrest. Liquidity, the flow of money—the lifeblood of today’s economic structure—came uncomfortably close to clotting up.

Defibrillators sizzling and money flowing, central banks around the world acted in concert to jump-start financial markets, slashing lending rates and injecting a half trillion in dollar steroids into the economic pulmonary system.

But contrary to what the big media outlets may have reported, it is actually inconsequential whether or not central bankers succeeded in temporarily stabilizing markets.

Irrevocable damage to America’s economic system has taken place.

And because the world’s largest economies are so closely intertwined, the effects will not be limited to the United States. Confidence in the world’s financial system—a system based on the dollar as the reserve currency—is failing, not because of a liquidity crunch, a popping housing bubble, or the myriad of other commonly spouted economic causes, but because of broken faith. The result will be a new world financial order—one without America at the head.

Here is what happened and why you need to know about it.

The world’s economic system is built on trust. Money is no longer backed with tangible assets. The only thing giving that Jackson in your wallet purchasing power is the perception that it will be able to buy a similar batch of goods tomorrow as it can today. But here is the catch. There is no standard that determines what a dollar is worth—ultimately it’s all relative. Its value could disappear overnight.

The same is true for every currency, whether yen, ruble or peso. Each is backed by confidence—confidence that the government will act responsibly, confidence that the government will honestly pay its debts (not just print more money), and confidence that the currency will remain a store of wealth.

When that confidence is broken, faith-based economic systems go into meltdown. Investors and international banks flee, currency values plummet, inflation runs rampant and economies are destroyed.

In August, when fallout from America’s popping housing bubble began to hit the market, trust in America cracked—and with it, so too did confidence in the global economic system.

Hamid Varzi, writing for the International Herald Tribune, summarized world opinion this way: “The U.S. economy, once the envy of the world, is now viewed across the globe with suspicion” (August 17).

He continued: “The ongoing subprime mortgage crisis … presages far deeper problems in a U.S. economy that is beginning to resemble a giant smoke-and-mirrors Ponzi scheme. And this has not been lost on the rest of the world.”

Trust in America is quickly disappearing. Why? Because America single-handedly brought the international financial system virtually to its knees by foisting off fraud-ridden subprime debt on an unsuspecting world, which resulted in the ensuing credit crunch.

America will not escape unscathed. You can’t cheat the very people you rely upon to lend you money without a backlash.

Here is how American greed ripped off the rest of the world.

In 2000, America faced a recession. But rather than letting the economy rebalance, the Federal Reserve decided to slash interest rates to artificially stimulate the economy—even though it knew that doing so would probably create even bigger problems later.

Consequently, mortgage rates in America plummeted and, suddenly, millions more Americans could buy homes. House prices skyrocketed: tripling and quadrupling in many areas. The bubble fed on itself as prospective homeowners, often acting more like speculators, rushed to buy homes as quickly as possible to capitalize on further price appreciation.

As home values rose, fewer people could afford traditional loans. To keep their profits growing, banks and lenders began offering easy-to-get subprime mortgages—mortgages to borrowers normally considered too risky due to credit history, income status and other factors.

Oftentimes these loans were adjustable-rate, or had initial teaser rates that would ratchet up later. Often the loans were given without any applicant background checks at all. As long as a borrower could write his own name and yearly income (regardless of whether or not it was true), he could get a loan.

And everyone was happy. Record house prices fueled a building boom and jobs were created. Borrowers were glad because they got huge loans and could purchase homes that were rising in value. Real-estate agents were pleased because the bigger the house sold, the bigger their profit. Lenders and loan brokers were cheerful too because they each got their cut of the action.

But there was just one problem: The whole boom was based on artificially low interest rates. What would happen when interest rates rose, homes stopped appreciating and borrowers had more difficulty making payments?

American banks, understanding the risk involved in holding so many chancy (and possibly largely overvalued) subprime mortgages on their own books, decided to get rid of them. But who would want to buy all the risky mortgages? Certainly not Americans who were already maxed out on subprime debt. The answer was foreigners.

But here was the catch. To make the sales profitable, the risky mortgages had to be marketed as a “safe” investment.

So American banks sliced and bundled their subprime mortgages together into packages. Using complex computer models, and by geographically and otherwise diversifying the bundled mortgages, American banks convinced world-renowned and trusted American investment-rating agencies like Moody’s and Standard & Poor’s to give the mortgage securities higher valuations than regular subprimes would typically rate.

Later it became public knowledge that these same ratings agencies, which foreign investors were relying on for impartial advice, were being paid by the very banks and lenders that were bundling and selling the subprime mortgages—a huge conflict of interest that produced some terribly misleading data for foreign investors.

It has also emerged, at least in Moody’s case, that the agency knew for years that the mortgages securities they rated as safe were more than 10 times as risky as other similarly rated bonds (Daily Reckoning, September 3).

But at the time, even the banks were happy. They could merrily issue subprime mortgages (and still collect all their fees) because they were able to both quickly remove the mortgages from their books and get top dollar for them, thanks to the high ratings. And foreign investors (as well as domestic investors) confidently purchased these supposedly safe mortgage investments.

That is, until interest rates started to rise—and subprime borrowers began defaulting in droves.

As with all parties, the fun and games eventually end. Suddenly the world woke up to the fact that subprime mortgages were just that—subprime—regardless of what American ratings agencies and banks pretended. As the U.S. housing market slumped, suddenly nobody wanted any American mortgage securities anymore, let alone subprime ones.

Investors around the world tried to sell American mortgage securities, but by this time, the shoddy credit ratings had become public knowledge. American credit-rating agencies embarrassingly began to issue massive ratings downgrades, and foreign investors found that to even get any bidders on their American mortgage portfolios, they had to accept steeply marked-down prices.

Hedge funds and other investment vehicles began to seize up as people tried to pull their money out of any and all businesses associated with U.S. mortgages. Panic ensued.

As the credit crunch spread, it became evident that the “made in America” economic crisis was not contained. America’s trade partners would also take the hit for the moral breakdown in America, a breakdown that could have been avoided had greed not been such a big factor.

Banks and mortgage lenders across Europe and America began to fail.

German, French and British banks, as well as stock market investors around the world, got hit especially hard as the credit crunch and fears of new restrictive lending practices shook international bourses. Investors lost billions.

Things got so bad in Germany that the government had to step in to save two banks from failing. In France, bnp Paribas, one of the nation’s largest banks, had to suspend redemptions from three investment funds it managed.

In Britain, Northern Rock Plc., the nation’s fifth-largest lender, experienced an unprecedented bank run as customers lined up for hours to clamor for their money when it was revealed that it was having trouble accessing enough credit to continue normal operations. The Telegraph compared the scene to something out of Zimbabwe.

And the few big-name collapses experienced so far may be just the beginning.

You can be sure that billions in losses—all as a result of what amounts to a con—will not pass without a response. International backlash is growing.

“The entire world is growing in its disgust for having been defrauded,” says economic analyst Jim Willie. “French, British, German, Japanese and Chinese banks have been harmed from ingesting falsely labeled food items. What was sold as ‘AAA’ rated milk products was actually highly toxic acid ….”

For example, in a foreign-policy speech on August 27, French President Nicolas Sarkozy called for an enhanced global rule book to avoid financial crises—a rule book governing America. Sarkozy, who has vowed to “moralize financial capitalism,” said America’s crisis could recur if “the leaders of major countries” did not take “concerted action to foster transparency and regulation of international markets.”

Peter Bofinger, a member of the German government’s economic advisory board, agrees. “We need an international approach, and the United States needs to be part of it,” he said.

Dick Bryan, a professor of economics at the University of Sydney, says the world must respond as well. “[T]here is the need to challenge the sovereignty of national regulators—why should the rules of lending in the U.S. be left to U.S. regulators when the consequences go everywhere?” he said. In this globalized world, “a problem in one location is a problem everywhere.”

If and how long Washington can resist international pressure is unclear. So far the response from Washington is that it wants “no form of oversight.”

But a new global rule book may be the least of America’s worries.

While regulators in the U.S. have been unreceptive to international monitoring, Europe and Asia, unlike in years past, now have growing financial leverage up their sleeves.

What if foreigners stopped lending to the U.S.? Worse, what if they started dumping U.S. debt in the form of treasuries and bonds?

“America depends on the rest of the world to finance its debt,” Bofinger reminds us. If foreigners stopped buying America’s financial products, it would be a catastrophe.

Foreign willingness to purchase U.S. debt has kept interest rates low in America—thereby creating millions of jobs in real estate, home construction, remodeling and other associated industries. America has become so dependent on foreign money that if foreigners stop lending to America, the America you know today would not survive.

Even now, the foreign backlash is beginning to be felt. The U.S. dollar is dropping to lows never before experienced. In September, the dollar fell to the lowest it has ever been against the euro. Against the Canadian dollar it hit a 31-year low, making the two dollars almost equal in value.

So while U.S. officials continue to brag that all will work out just fine and that the credit crunch is contained, they are missing the bigger point: America cheated the very people it depends upon for loans. Now, foreigners are voting with their feet and are choosing to reduce investment in America. They are abandoning the dollar.

As Jim Willie warns, we “might be in the early stages of … a boycott of U.S.-dollar-based financial assets.”

But who can blame them?

Greed and corruption have been exposed for being endemic to so many levels within America’s economy. Who is to say that even U.S. government bonds more closely resemble subprime mortgages than their conventional reputation as a safe investment?

The world is approaching an end of an era. America’s moral collapse now lies exposed to all—a virtual death sentence to an economic system based on trust. Confidence lost, America’s reputation as a financial safe haven is being replaced with subprime status—and as foreigners have found out, subprime risks just aren’t worth it.

By JR Nyquist

http://www.financialsense.com/stormwatch/geo/pastanalysis/2007/1004.html

Is the United States going to bomb Iran in an effort to prevent the Iranians from acquiring nuclear weapons? The weakness of the current administration, the unpopularity of an American preemptive strike in Europe and the Middle East, are among the factors arguing against such an event. Those who’ve shouted loudest about American imperialism and the wickedness of the current administration have nonetheless circulated rumors and scenarios in which an American strike appears imminent. We see the rumors of October 2006 repeated, with new details. Former CIA operatives mumble incoherently about attack plans, French journalists have the inside skinny, and Dick Cheney now plays the Prince of Darkness. The old tired script, with coffee stains and rewritten dialogue, is pushed forward once again. But will a U.S. attack on Iran finally materialize?

The United States is clearly making war preparations against Iran. Does this mean the Bush administration is going to attack? Not necessarily. Building a credible threat is a good negotiating strategy. Unfortunately negotiations have failed. The Iranians aren’t budging, and the smart analyst with his finger on the Islamist pulse can say without fear of contradiction that Iran isn’t giving up its nuclear ambition. The Iranian leaders are determined to make nuclear weapons. They are determined to become a nuclear threat. Europe and America cannot talk them out of it.

Add to this the fact that George Bush has become a very weak president, a very unpopular leader, and his standing around the globe is lower than it is at home. While people in many countries still admire the United States or like Americans they can be heard to say how much they hate President Bush. In the Middle East, the Iraq adventure has upset important allies like Turkey and Saudi Arabia. European allies have also expressed annoyance. The Iraq invasion introduced fresh problems to a region already flush with problem. Adding yet another straw to the camel’s back, a war with Iran would further extend the turmoil. It may not be understood, as yet, the extent to which such a widening may burst open Asia itself. This has to do with the more sinister strategies of China and Russia.

Given the weakness of the Bush presidency, and the many factors constraining the administration from an attack on Iran, the Israelis may take up the cudgel and launch their own preemptive attack. Less capable of doing a thorough job, the Israelis can nonetheless cause serious damage to Iran’s nuclear infrastructure. This is the more likely scenario as time advances and negotiations prove futile. The best Iranian strategy, in this event, would be to launch immediate strikes against U.S. ships at sea and ground forces in Iraq. By retaliating against U.S. targets the Iranians would naturally bring Israel and the United States together, on the same side, in a series of connected military engagements. The Israelis and the Americans would be seen as operating together in a nefarious plot against the Islamic Nation. This could have a powerful and electrifying effect on the entire region.

If anti-American sentiment were ignited in this fashion, if the Islamic imagination were sufficiently stirred by mixing Israeli with American forces on the same side against the same Islamic country, key states like Egypt and Saudi Arabia might not remain reliable allies. A further destabilization of the region could be expected. The Iranians might also attempt to close the Strait of Hormuz through which 40 percent of the West’s oil flows. As Iran’s supreme leader, Seyyed Ali Khamenei has stated: “If the Americans make a wrong move toward Iran, the shipment of energy will definitely face danger, and the Americans would not be able to protect energy supply in the region.”

With all the rumors of war with Iran, the question may not boil down to any specific U.S. intent to launch a preemptive strike. A war can break out without any U.S. action. The Iranians could initiate an action on their own account. The Israelis may launch a strike as they have threatened to do so in the past. The consequences are essentially the same for the United States either way. A wider war would begin and U.S. forces would remain fixed in the Middle East.

How is this outcome to be avoided?

Conflict between two different ways of life, between two civilizations, may be inevitable if we accept the notion that Iran represents the Islamic Civilization and America represents Western Civilization. The Iranians argue the case that their civilization deserves the advantage of nuclear weaponry. Why should the West have a veto power over Iranian armaments? The Americans, British, French and Israelis fear a nuclear Iran because they fear the radical nature of Islamic religious thinking. It is evident, at first blush, that neither side can admit the other’s argument. The Iranians cannot accept that their religious makes them unfit for holding nuclear weapons. At the same time, the West (especially Israel) fears a nuclear-armed Iran.

Is the West arrogant for seeking to withhold nuclear technology from the Iranians? In the final analysis what matters is the fact of impending conflict. In this matter, even if the Americans are paralyzed and unable to attack Iran, the Israelis look back to Hitler and the Holocaust and see no choice. They must launch a strike against Iran’s nuclear facilities. The logic of the Israeli side must be obvious to everyone. Therefore, a serious military and economic crisis must follow.

We should not expect a peaceful solution.