Monday, February 23, 2009

World in a Debt Trap.. Who would pay the bill

Almost every country today is in the need of debt. Now when every country wants debt only one thing happens.....

- Someone would end up printing money !!! and lots of it....

Fortunately or unfortunately that someone is going to be the rich nations of the world (rich atleast till now); US, UK and the Euro zone. Now let's say out of these three only Bernanke & company end up printing money. Now the question is would the US dollar really depreciate against Euro and pound. The answer is absolutely No!! and why is that... well let's have a look....

When a country takes debt it has to pay it back (not your fathers money, unless you want to be occupied or sanctioned) and how do you think Europe and UK are going to pay back the debt. You can only pay back debt by:

- Selling assets
-If your future cashflows are high enough to service the debt (in this case the high GDP growth) Such kind 

Assets with Europe!!! What a joke.... All the while Europe was rich because it looted assets from around the world and remember an old adage - Such kind of income doesn't last of eternity. So it's time that this wise saying come true. The party is over boys. Money taken from Papa is gone and you have nothing left but empty coffers.

Next we move to future growth. The dwindling & aging population (poor demographics) and add to it the mounting debt burden doesn't augurs well. So the future cash flows would be insufficient to service the debt.


- Many countries of Europe (including the rich ones) would become bankrupt.
- Euro as currency might fall apart
- Even to disliking of the countries, Europe and Uk like the US would end up printing lots of money.

Now lets come home. Even India's fiscal situation is bad and there are some predictions!!! (astrology) that because of this the long term interest rates would harden thus hampering future growth. Well that might happen but in my opinion the most likely scenario is this-

- The fiscal situation has gone awry because of reduced growth and increased government spending to revive it. The debt India will end up taking would be serviced by future growth and hence the Indian rupee would appreciate again. The appreciating currency vis-a-vis the currencies of the Western world would further reduce the debt burden and this would have a cascading effect leading us into a debt reducing and growth increasing cycle.

So in my opinion the ideal trade a few months down the road would be short dollar long Indian rupee and short Euro and long Indian rupee and even short Euro and long Dollar..... Till then as I always say let there be chaos before the pattern emerges..........

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