Benefit from the financial crisis to the US political-economy
The present financial crisis, despite its portentous appearance, does have some hidden benefits to the US economy, or at least to the political managers of the US economy.
How is that?
Well, the two most important economic issues facing the US economy for the next generation or so are its enormous external debt, and its aging population.
The external debt of the US is estimated to be around $13 trillion, according to official statistics - http://www.ustreas.gov/tic/external-debt.shtml, and is growing at the rate of $665 billion annually.
And the first of the baby-boomers started retiring in 2008.
Now, although it is commonly understood these two factors will cause strain in the US economy, what usually does not figure high in public perception is the specific nature of the impact.
Take the aging population.
We know this will reduce the percentage of workers in the US. We can infer that this will increase the burden on the younger workers – because each of them will be supporting more people.
This means higher tax burden. This further means that workers will have to have a much higher productivity in order to pay the higher tax burden. However, there is a way to instantly raise productivity levels in the international market – devalue the currency.
The current crisis allows US to do just that.
Now, take the high external debt.
A higher inflation rate will reduce the claims on US property that these debts represent. In other words, a weaker currency reduces the amount of companies that say – the Chinese sovereign fund will be able to buy.
KEYNOTE SUMMARY:
A devalued dollar:
1. Increases the international competitiveness of the US industry – reducing the pressure on the pension system.
2. Reduces the claims of the debt the US owes to the rest of the world.
Showing posts with label devaluation. Show all posts
Showing posts with label devaluation. Show all posts
Thursday, 1 May 2008
Friday, 25 April 2008
First Post
This is the first post of the SINletter, which I begin with listing the trends whcih can create a winning company during a recession, to reflect the prevailing mood of the global economy. I hope you will find this more useful than the many media talking heads.
1. Global shortage of food grains: Global stocks of a number of important food items like wheat are at multi-decade lows. The problem is exacerbated by drought in some major agro-countries like Australia and Venezuela.
2. Decline of USD: Decline against major currencies is producing an advantage for companies which produce in the dollar zone and sell in other areas.
3. Retiring baby-boomers: As in the past, when consumption patterns by the baby-boomer generation set the pace for the US economy; so now, this generation will still set the pace – since it is simply the biggest and most affluent demographic. This will create demand for medi-care services and products, retirement lifestyle products and services (like retirement homes, RV homes, golf resorts, etc.), among other things.
4. High energy cost: High prices are prevalent not only in the hydrocarbon sector, but also in areas like wind, solar and especially nuclear power. This applies both to the cost of raw materials as well as the actual infrastructure costs.
5. Defense expenditure: The war in Iraq is likely to keep sales of defense companies up.
6. Rising commodity/raw material prices: Base cost of all commodities is likely to rise in the medium to long term, despite periodic dips. Coal, metals, soft goods, etc.
7. Olympics related expenditure: This is likely to directly impact revenues of sports and media companies and of consumer goods companies in general.
8. US elections: This is likely to impact the revenues of media companies in the US, especially those specializing in local advertisements. The effect is likely to remain until November.
9. High cost of borrowed capital: Companies which do not depend on debt, in other words, companies with high cash flows, are likely to do well in the recession. Companies which follow the franchise model for expansion are also likely to be safer.
10. Defensive/inferior goods: Companies producing goods and services for daily use will likely fare better. Example, waste management, water management, medical products and services, etc.
Over the next few weeks, I will identify some companies according to these principles, and will post their prospects on the SINletter.
1. Global shortage of food grains: Global stocks of a number of important food items like wheat are at multi-decade lows. The problem is exacerbated by drought in some major agro-countries like Australia and Venezuela.
2. Decline of USD: Decline against major currencies is producing an advantage for companies which produce in the dollar zone and sell in other areas.
3. Retiring baby-boomers: As in the past, when consumption patterns by the baby-boomer generation set the pace for the US economy; so now, this generation will still set the pace – since it is simply the biggest and most affluent demographic. This will create demand for medi-care services and products, retirement lifestyle products and services (like retirement homes, RV homes, golf resorts, etc.), among other things.
4. High energy cost: High prices are prevalent not only in the hydrocarbon sector, but also in areas like wind, solar and especially nuclear power. This applies both to the cost of raw materials as well as the actual infrastructure costs.
5. Defense expenditure: The war in Iraq is likely to keep sales of defense companies up.
6. Rising commodity/raw material prices: Base cost of all commodities is likely to rise in the medium to long term, despite periodic dips. Coal, metals, soft goods, etc.
7. Olympics related expenditure: This is likely to directly impact revenues of sports and media companies and of consumer goods companies in general.
8. US elections: This is likely to impact the revenues of media companies in the US, especially those specializing in local advertisements. The effect is likely to remain until November.
9. High cost of borrowed capital: Companies which do not depend on debt, in other words, companies with high cash flows, are likely to do well in the recession. Companies which follow the franchise model for expansion are also likely to be safer.
10. Defensive/inferior goods: Companies producing goods and services for daily use will likely fare better. Example, waste management, water management, medical products and services, etc.
Over the next few weeks, I will identify some companies according to these principles, and will post their prospects on the SINletter.
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