Perspectives on the global economic meltdown- (Nov 28 2010)

[Theo_Fidel]

This was usually the style of the WP reporters based in New Delhi

+1.

The thing is these super sarcastic types don't understand the modern Indian economy. Their mindless frustration shows. It is being built by and for Indian's with all the character included. I have to admit frustration at some of the craziness, but it seems we will do it our way or not at all.

Foreign investment is not what will make us rich. That boat has long sunk. Mr Dhume needs to move to London permanently.

[Neshant]

go through a few research reports from good analysts

Lots of analysts were giving buy recommendations right upto the collapse in 2007. You should listen a whole lot less to these jokers and more to what's going on in the real economy. This assumes you are part of the real economy and not paper shuffling on wall street or employed by the government - in which case none of what i say will make any sense.

The headline numbers which you hear are very misleading. Among the college educated, the unemployment rate went from 2% at the peak to around 4-5% at the bottom.

Unemployment statistics like inflation statistics are put out by govt/federal reserve and are all fake. No sane person believes the 0% CPI inflation numbers any more than the claim that companies have started hiring. People falling off welfare are not counted as unemployed and neither are those who stopped looking for a job. There's also a growing army of under-employed or semi-employed people all of whom are counted as employed. The number of people on food stamps tells the rest of the story. This is *inspite* of TRILLIONS in borrowing/printing and spending by the US govt.

There isn't a single productive industry that has emerged since the year 2000 that can create well paid and non-scam related jobs on a large scale. House flipping & financial jobs were not real jobs with the latter being a scam. Similarly, jobs created by money printing, running up debt and stock market rigging cannot be considered real/productive jobs. These jobs exist on account of looting/canabalising a productive segment of the economy and damaging the country's long term finances with heavy borrowing for short term gain.

It is that high school educated American who is in trouble. The export of the manufacturing base to China meant that those relatively well paying manufacturing jobs were no longer there. The construction boom helped hide that problem but once that went away, the wounds are there for all to see.

Its a heck of a lot more than high school and it isn't just manufacturing either.

Most of the consumer discretionary spending comes from upper income Americans and they are doing fine. It shows up in the earnings of the consumer discretionary sector. Whole Foods reported blow out earnings, selling organic stuff at 2-3x the price of normal non-organic stuff. Walmart on the other hand is still struggling because the buying power of their client base has eroded..

Maybe guys working on wall street/banks and in govt jobs are doing fine. They live off the back of the productive economy so they are doing allright. This will come to an abrupt end as the borrowing & spending ends and the productive economy is too weak to be taxed to pay for their lifestyle.

There is an inherent beauty in QE. The USD will continue to be the one-eye king of the major currencies since there is no alternative.

You may think people around the world are going to work and lend their money to the US indefinately with
the promise of being paid back in worthless money or get defaulted on. But I assure you that game will end and end soon. All it takes is one spike of the interest rate and that will be it.

Also note that the valuation of paper money and hard money (gold) is cyclical.

Its not cylical. Its based on circumstance. And right now the circumstances don't look good to me. It seems to me that US is headed on a path for financial disaster leading to either default or hyperinflation.

QE is the American way of telling the world to revalue the USD to help make the US more competitive and reverse the outflow of jobs.

The only thing its telling the world is there's a collapse in the standard of living of Americans coming soon. Nobody counterfeits and destroys their finances to prosperity.

IMO the Federal Rerserve needs to be shut down before they destroy the living standards of millions while enriching their crony banks which made bad bets. They are trying to figure out how to disguise this ripoff but its becoming more and more apparent that like any parasite, they are killing the host.

As I've been advising my bros here, get your hard earned money out of the reach of these thieves & pretenders. A vast number of suckers are needed for this ripoff scam with many fast talking con-man economists giving you a line on why impovishing you and lowering your living standard is good for ... you! Don't fall for it, protect yourself now.

[VikramS]

Neshant:

Wow...

How many people do you know who have college degrees and are unemployed? There are people on welfare and food-stamp but how many of them were well educated or high wage earners in the first place?

Even if you assumption about the government cooking up statistics is correct, what about the private sector? All the productivity gains which they are reporting, where do they come from? Are those balance sheets also fraud and cooked? What about those economic statistics, many of them coming from private research groups, which show a rapid rise in industrial production? What about data about consumer spending (like same store sales) which come out every week or every month? Are all of them rigged by some hidden hand?

Granted that things may not be hunky-dory but there not as gloomy as you make them out to be.

You either had a time-machine in 2000 to see 2011 then or you are still stuck in 2000 to see what 2011 looks like. I do not know what industry your work in but take some time to talk to friends in different industries and ask them how their industries have changed over the past ten years. At least my life and productivity has been heavily influenced and changed in the past ten years. My wife too has seen a gradual transformation in her profession (medicine).

And regarding the US: Can you give me one other viable alternative to the USD?

[Ambar]

Neshant, what exactly is your definition of a 'productive society' ? Sure, wireless devices existed in 2000, just the way Commodore 64 existed in the early 80s. And 'cloud computing' is a made up term ? How many datacenters have you managed that makes you deduct the incredulity of its progress and importance?

Since your every post contains canned 'banking crooks and middlemen','boogie government' and 'dont trust anybody/anything not even your home' phrases, would it be a fair assumption to say your earnings dont go into bonds,stocks,401k,pension funds (damn middlemen again) or real-estate. So where exactly do you park your money in? If you are converting everything into gold and hiding it in your basement (since you see government agents and banking crooks everywhere) what if gold goes sideways or inflation adjusted downwards as it did for much of last 2 decades?

Since you think all reports are cooked, how about proving it through empirical evidence dissecting 10-K and 10-Qs of a handful of S&P 500 companies instead of blanket statements ?

According to the bls report,the unemployment rate among those without a college degree is almost three times higher than those with a 4 year college degree. But since you don't trust the bls reports either, how about contradicting through proper statistical analysis than empty nocuous words?

[Hari Seldon]

Dhume is not an Indian and it may be a tad too much to expect him to be pro-India. Hence, his perspective can sometimes be illuminating. His batting for FDI is no surprise at all, quite par for the course, I must say.

Admittedly FDI is not as important for us as for some other countries, but it is the 'governance deficit' that is prime focus in the article. This is not to say cronyism and elite interests riding roughshod over mango people never happens in the west, of course.

We can do without FDI, esp the non-tax paying variety routed out of Mauritius, long-term.

The contrast with a Gujarat where governance has lured in some truly ridiculous sums of promised investment is the contrast worth watching, IMHO.

[somnath]

The contrast with a Gujarat where governance has lured in some truly ridiculous sums of promised investment is the contrast worth watching, IMHO

And the FDI into Gujarat comes from tax-paing, dual taxed locations?

[Hari Seldon]

^^^ Which exactly makes the point that unless governance improves, we will continue to lose desi savings to black money laundered abroad and re-routed into India via tax-havens.

Whether it comes for for FDI or hot money flows such as the FII channel then becomes a separate issue.

A state government has done what it could within the bounds of the law in exemplerarily creating conditions for inward investment - whether from phoren sources or domestic is moot - while protecting the environment and the wages of its citizenry.

The assurance that rent-seeking behavior from whimsical politicos and babus armed with discretionary powers will not ride roughshod over committed investment is the point being highlighted, I guess.

[shyam]

People who attach a lot of importance to BLS data need to look at the following interview of David Stockman in CNBC.

http://plus.cnbc.com/rssvideosearch/act ... layershare

His interview starts at time 3:00. He asks an important question at around 3:35 "Where did the half million jobs that disappeared in last one month(Jan 2011) go?" Did anybody hear about that? Watch it please...

BTW, what kind of economy runs when big banks can get money from Fed at 0% and lend that directly to the government at 3+%, risk free. Experts, please explain. Why can't the cash strapped government borrow that directly from Fed at 0%? Who is eventually going to pay the 3% interest to those banks? Fed? Tax payers? Do those managers deseve huge bonuses? Is there any brilliant strategy involved in such business model?

[shyam]

Jiski Lathi Uskhi Bhains works at all levels.

Absolutely. It was not voluntary. Someone made a comment earlier that implied that the world voluntarily accepted USD as reserve currency.

[Arjun]

Sadanand Dhume nails it, I guess.....Nothing Inevitable About India's Rise (WSJ)

Read it all only

Specific examples quoted in the article may be debatable. But the thrust of the article is very valid...

There is nothing inevitable about the rise of India - and many factors can go wrong yet. Unless the government, India's entrepreneurs and its workforce keep putting in effort and competing as they have done so well in the past - the foot is bound to come off the accelerator. I have faith in the latter two - Indian entrepreneurs are far hungrier for success than many in the West, and the workforce is focused on bettering their future. The traditional Indian reverence for Lakshmi and Saraswati will ensure that the entrepreneurs and workforce compete effectively.

The part that can still let India down is the government - unlike in China, India's rise has been despite the government not because of it. Investors are increasingly talking of the triple-deficits holding India back - current account, fiscal and most importantly deficit in governance (both at micro and macro levels) !!

[abhischekcc]

Governments are much more business like these days, and as Narendra Modi and Nitish Kumar's successes have shown - voters are beginning to understand that the system exists for progress.

[Abhijeet]

Governance governance governance. I see this as easily the most important issue of this decade. India needs to get it right, or it will fritter away this opportunity -- like so many others -- to pull the average Indian out of hellish poverty.

Every year that we waste chasing one useless scam after another lessens the probability of seizing this chance. I am with the writer of that WSJ article that India's rise is not pre-ordained, and mindless politics will destroy it.

[VikramS]

Jiski Lathi Uskhi Bhains works at all levels.

Absolutely. It was not voluntary. Someone made a comment earlier that implied that the world voluntarily accepted USD as reserve currency.

When it comes to reserve currency, you need three to tango. The entity A which is buying (and paying), the entity B which is receiving and the entity C whose currency is used. For a currency to work as a reserve both entities A and B have to agree to to work with currency C.

Now how many candidates are there for currency C, which are acceptable to entities A & B? Not that many. No one forced different entities to use the USD, but it was the default choice since most pairs agreed to use it. Again there is no alternative.

[somnath]

For a currency to work as a reserve both entities A and B have to agree to to work with currency C.

Not just that, if country is the largest "A" by a margin, and also has the deepest and most decontrolled financial sector, the choice is quitee obvious..

[Neshant]

All the productivity gains which they are reporting, where do they come from?

They come from laying off workers and trying to squeeze more out of existing workers with no pay raise while Uncle Ben inflates & lies about there being no inflation. They also come from transferring those jobs overseas. Depending on the industry you are in, a good deal of it is coming from money being borrowed & spent and printed by govt by mortgaging the future, ripping off savers and the productive with the law of diminishing returns in effect. More money is being spent in this top down Soviet style economic stimulus than is coming out the other end and this can only go on for so long.

Are those balance sheets also fraud and cooked? What about those economic statistics, many of them coming from private research groups, which show a rapid rise in industrial production? What about

There is no rapid rise in anything other than printing money, running up the debt and stock market rigging. The idea of rapid industrial growth itself is absurd in an economy where trillions of $ have been gambled and vaporized and continues to be vaporized. If you work in the real economy (do you?), you'd know how hard it is for a company to research & develop a product, manufacture & market (and export) it successfully to earn a dollar. Vaporization of trillons is beyond belief. This is even more so as international competition to things that America produces is becoming stiffer as foreign countries close the technological gap and produce goods cheaper.

So while this road show plays out and an estimated 1.6 trillion deficit is wracked up year after year, its all fun & games until the brick wall shows up as it did in 2008.

I do not know what industry your work in but take some time to talk to friends in different industries and ask them how their industries have changed over the past ten years. At least my life and productivity has been heavily influenced and changed in the past ten years. My wife too has seen a gradual transformation in her profession (medicine).

Not sure what medicine you are referring to. Being a doctor is one of those professions where entry of competition is highly restricted by design with all kinds of barriers (e.g. to foreign doctors) put in place courtesy of the AMA. So yea, medical costs are kept expensive and practitioners will be making good money. Kind of like lawyers who lobby for more and more laws to ensure their job security. Great for doctors, not necessarily so for those working in the real economy.

As for medical researchers and medical device developers, it will be a different story. Assuming they are not resorting to lobbying govts for taxpayer favors and handouts, most are part of the real economy as they have to earn profits by selling their wares or perish.

Any profession where you got to R&D, manufacture and market or export something for a profit, you got it tough in the US today. Any profession with layers of beaurocracy that produces nothing or shielded from market forces especially banking, financing, many govt jobs, lawyers, teachers, public sector unions..etc. is a walk on easy street since it lives off the real economy. Its the former that`s needed to hold the economy up but which is increasingly getting destroyed, not the latter.

Anyway I`m getting tired of typing. Please read the book `How an Economy Grows and Why it Crashes`. You`ll get a good prespective of how simple economics is and never again be fooled by the nonsensical babbling of the financing crowd trying to sell you a bill of goods.

[Neshant]

Neshant, what exactly is your definition of a 'productive society' ?

Below was the response I gave to the same question asked earlier quite a number of times. I`ll suggest reading the book `How an Economy Grows and Why it Crashes` to learn more. I also suggest checking out John William`s shadow stats for the real unemployment stats, BLS publishes a load of bullocks just like CPI numbers.

-----

The fact that one has to ask the above question is itself testament to how badly mauled common sense gets under keynesian economics.

A productive segment of society is one which profitably fulfills a demand in society. A taxi driver gets people from point A to B. A guy working a factory job produces something that people want to buy.

Now unless there is a demand among people to be scammed of their hard earned money by financing & banking crooks, that would be classified as non-productive.

To put it bluntly, its destructive. Even if one accepts the utility role of banks (which is increasingly of marginal value given technology), one has to ask is it worth anywhere near what this 'industry' drains from the productive economy. By all indications, its a useless middle man industry.

Govt stimulating, printing, inflating, bailout-ing, rigging and various other -ing of such an industry is a transfer of wealth from the productive segments of society to the overpriced and/or useless segment of society. A revolving door system between bankers and politicians is the reason for this. I`d throw public sector unions - their salary, their pensions and demands - which are increasingly of galactic proportions into this mix of the unproductive economy.

[shyam]

Now how many candidates are there for currency C, which are acceptable to entities A & B? Not that many. No one forced different entities to use the USD, but it was the default choice since most pairs agreed to use it. Again there is no alternative.

To get the answer to this question you have ask yourself, what was the justification given in Bretton Woods system to accept USD as the reserve currency and why Nixon modified part of it in 1971.

[somnath]

what was the justification given in Bretton Woods system to accept USD as the reserve currency and why Nixon modified part of it in 1971

The rest of the world (precisely 43 "others") agreed to use USD as the reserve ccy as the US promised to peg the USD to Gold (@ 35 oz per USD)...In effect what it meant was that a holder of USD could go to Fort Knox and exchange USD for 35 oz of gold...Ccy manipulation was identified as one of the main causes of the post WWI economic crises, and Bretton Woods was an attempt to pre-empt it - a dollar peg kind of addressed the issue..

Nixon broke the peg in 1971 off because the amount of dollar at Fort Knox was less than a third of the required qty represented by dollars held by non Americans...The system itself thereby collapsed by 1973...

Again, participation in the "gold standard" was voluntary, and the US gave something in return for the USD to be the reserve ccy...Even now, USD's status as reserve ccy is on account of lots of factors, its not "forced upon" anyone..

[shyam]

That still remains as an alternative.

[Neshant]

Again, participation in the "gold standard" was voluntary, and the US gave something in return for the USD to be the reserve ccy...Even now, USD's status as reserve ccy is on account of lots of factors, its not "forced upon" anyone..

The so called 'gold standard' worked because only foreign govts (not individuals) could supposedly redeem dollars for gold from the US. Of course the catch was that since US was THE superpower, any govt that even thought about approaching the US to trade in their dollars for gold would be treated with hostile intent.

Basically the gold standard was a standard in name only. No country could really dare exchange large quantities of dollars for gold unless they wanted to land in trouble with the US for declaring 'economic warfare on the USD'. Eventually the European nations had grown strong enough and did just that to break the dollar's hegemony and that signalled an end to the chrade.

Similarly we all saw what happened to Saddam when he tried to kick off a trend of pricing and selling oil in euros. So yea, it is 'forced upon' anyone producing that strategic commodity. With US power waning however, its anyone's guess what's going to happen.

[somnath]

Similarly we all saw what happened to Saddam when he tried to kick off a trend of pricing and selling oil in euros

Its not so easy to shift to another ccy..Iran has tried it, China has tried it of and on...The legcy advantages of USD are enormous..

And Saddam was ousted because of that?! Maybe in conspiracy theories..Any sources?

[shyam]

The legcy advantages of USD are enormous..

Not when it is printed endlessly to export inflation. Times are different now. It is indicated by willingness of countries to buy physical gold in exchange for USD.

[wig]

International Monetary Fund director Dominique Strauss-Kahn calls for new world currency

Dominique Strauss-Kahn, managing director of the International Monetary Fund, has called for a new world currency that would challenge the dominance of the dollar and protect against future financial instability.
Russian President Dmitry Medvedev last month said the currencies of Brazil, Russia, India and China should be included in the SDR valuation basket. The same month, Sarkozy said that the yuan should be included, and US President Barack Obama’s administration said it supports such a transition “over time”.

However, among the yuan's drawbacks is that it is not freely traded and China's capital markets are largely closed.

Strauss-Kahn said: "Increasing the role of the SDR would clearly require a major leap in international policy coordination. For this reason, I expect the global reserve asset system to evolve only gradually, and along with changes in the global economy."

Strauss-Kahn's views come a week before finance ministers from the Group of 20 developed and developing nations meet in Paris to discuss proposals by French president Nicolas Sarkozy for changes to global economic governance.

http://www.telegraph.co.uk/finance/curr ... rency.html#

[somnath]

is indicated by willingness of countries to buy physical gold in exchange for USD.

Is it? India -RBI - did one (relatively small) txn on Gold (about 6 billion dollars), and the market moved..the daily txn flows in the fx market is about 2 trillion USD, you think there is enough physical gold going around to replace the dollar?

International Monetary Fund director Dominique Strauss-Kahn calls for new world currency

wishful thinking...Any IMF ccy will again be subject to the political will of the dominant members of the "sponsors"..Just as US held the key to the Gold standard, and Germany holds the key to Euro, the dominant members in an IMF SDR will hold the key...Non-starter...

[abhischekcc]

Now how many candidates are there for currency C, which are acceptable to entities A & B? Not that many. No one forced different entities to use the USD, but it was the default choice since most pairs agreed to use it. Again there is no alternative.

This flies in the face of known facts. US/UK have forced/bullied the countries of Middle East to accept the USD as the currency of oil trade. It even used Pakistan to attack India (1965) to remove Indian Rupee as the currency in MEA countries so that INR could be replaced by USD.

One of the US has fought wars against Iraq is to intimidate the local governments of ME. Iraq did shift to Euro before it was invaded a second time, and Iran also had started to talk about shifting to Euro when intimidation tactics started over it.

So, yes, US has bullied oil countries to trade in USD.

[VikramS]

The reserve currency is a choice made after keeping in mind all the factors, including military strength and the willingness to use it. That geo-political security is what gives its foundations.

The issue is not whether fiat currencies are being debased; they are. The question who is the king of the fiat. Right now the only possible alternative, the Euro is a mess.

It is true that hard-assets may continue to rise in price as the fiat gets debased.
http://amalgamator.co.uk/images/200%20y ... 0ratio.jpg

[SwamyG]

Recently I read somewhere {ask me not where, for I won't tell} Businesses are forced to change because:
1) Economic Meltdown
2) Rapidly Developing Economies - China & India were named
3) Social Network and Mobile devices.

[somnath]

It even used Pakistan to attack India (1965) to remove Indian Rupee as the currency in MEA countries so that INR could be replaced by USD.

One of the US has fought wars against Iraq is to intimidate the local governments of ME. Iraq did shift to Euro before it was invaded a second time, and Iran also had started to talk about shifting to Euro when intimidation tactics started over it.

So, yes, US has bullied oil countries to trade in USD

Mother of all conspiracy theories! Any sources, especially of the "1965 war"? It would be interesting to know what logic would be there for INR as a reserve ccy! Esp in 1965, when we were basicaly a third rate economy with fourth rate prospects with a fifth rate ccy!

[Virupaksha]

Somnath,

Indian rupee was the currency of the arab world until 1967.

[svinayak]

Over the last five centuries, the Indian rupee has at different times been the official currency of countries as far flung as Somalia in East Africa and Australia. It remained the official currency of Dubai and Qatar until 1959

http://mostlyeconomics.wordpress.com/20 ... -currency/

Historically, the Indian rupee was regarded as an offi cial currency of other countries, including Kuwait, Bahrain, Qatar, the Trucial States (United Arab Emirates (UAE) since 1971) and Malaysia in previous times. The Gulf rupee, also known as the Persian Gulf rupee, was introduced by the Government of India as a replacement for the Indian rupee for circulation exclusively outside the country with the Reserve Bank of India [Amendment] Act, May 1, 1959. This creation of a separate currency was an attempt to reduce the strain put on India’s foreign exchange reserves. After India devalued the rupee on June 6, 1966, those countries still using it – Oman, Qatar and UAE – replaced the Gulf rupee with their own currencies. Kuwait and Bahrain had already done so earlier in 1961 and 1965, respectively.

[Virupaksha]

http://indianbanknote.blogspot.com/2008 ... earch.html

We have lost so much information about our past that no wonder we are repeating the same mistakes again and again.

[svinayak]

We have lost so much information about our past that no wonder we are repeating the same mistakes again and again.

But we have CT people come again and again making fool out of themselves

[shyam]

And repeat the old arguments that we went through years ago....

http://en.wikipedia.org/wiki/Gulf_rupee

[shyam]

Is it? India -RBI - did one (relatively small) txn on Gold (about 6 billion dollars), and the market moved.

Not just India. Central banks of even tiny countries like Sri Lanka, Mauritious, and Bangladesh bought gold from IMF. Chinese central bank is also buying gold. Point to be noted is that these are not private people who are buying it, but central governments who accumulate forex are replacing their USD with physical gold, whenever that is available in the market for purchase. Unless US takes some serious steps to retain its currency value, more and more countries will choose some way to dump dollars and that will push inflation back into US.

Australian central bank that sold part of its gold, thinking that that is junk, years ago look now like fool.

[somnath]

Somnath,

Indian rupee was the currency of the arab world until 1967.

That was NOT a reserve currency, by any means...It was continuation of a British legacy where INR was legal tender in the Middle East...

One, the gulf rupees were not "unsecured/uncovered liabilities" with RBI (unlike USD, where each USD is a liability of the Fed) - they were "purchased" by the respective nations by paying in GBP (which was held with RBI rsseves)...

Two, it did not offer convertibility to the international banking system, only bilertal convertibility fro the Middle Eastern central banks and for travellers into India..

Three, the biggest chestnut - the validity of the INR as legal tender depended upon each INR obligation offshore being backed up by a Sterling reserve with RBI @ a fixed exchange rate (India was int he sterling area)...Therefore for each "Gulf INR" issued by RBI, it had to keep an equivalent amount of GBP in in its reserves...In which case, the "reserve currency" was GBP, not the INR!

Basically, in absence of an infrastructure of minting and managing ccy issuance, and a large volume of trade with India (legacy of the Raj), INR was used as an official tender in ME countries...It was actually the facilitation of GBP as the "reserve ccy" in the sterling area...

A lot of countries issued their own ccies once they got independence...The rest broke off with the INR devaluation of 1966 agaisnt the GBP...again, a reserve ccy will not "collapse" because of a devaluation.Here a deval against the "real reserve ccy" caused the proxy to collapse..

By 1965, a lot of countries had gone their own ways..If the US wanted to "remove" usage of Gulf INR, it simply had to withdraw bileteral aid, whcih would have immediately triggered a BoP crisis and deval (which is exactly what happened in 1966)...No need to go through a war with all its attendant complexities...

[somnath]

Not just India. Central banks of even tiny countries like Sri Lanka, Mauritious, and Bangladesh bought gold from IMF. Chinese central bank is also buying gold. Point to be noted is that these are not private people who are buying it, but central governments who accumulate forex are replacing their USD with physical gold, whenever that is available in the market for purchase. Unless US takes some serious steps to retain its currency value, more and more countries will choose some way to dump dollars and that will push inflation back into US.

As a signalling tool, purchase of Gold is fine...But Gold to be an alternate "reserve ccy", there needs to be that kind of amount available! Between all the Asian central banks, there is about 3-4 trillion dollars of reserves...Is there enough physical gold lying around to convert of it into XAU? The simple answer is no, there isnt...

[Christopher Sidor]

BTW, what kind of economy runs when big banks can get money from Fed at 0% and lend that directly to the government at 3+%, risk free. Experts, please explain. Why can't the cash strapped government borrow that directly from Fed at 0%? Who is eventually going to pay the 3% interest to those banks? Fed? Tax payers? Do those managers deseve huge bonuses? Is there any brilliant strategy involved in such business model?

This is supposed to bring some discipline to government borrowing. You see if Central Bank, in this case the Federal Reserve, were to give the money directly to the government then the US politicians would succumb to their basest of desires. To print their way out of trouble. This was in the era before WWI called debasement of coinage.

If the money is pushed through via private players, the risk is supposedly contained, as the banks and bond players would do due diligence before lending money. That is all the banks and bond players would check the paying capacity of the government, its existing debt and so on. Also governments are not know for the most efficient utilization of money. Rather government money goes into projects which will enable sitting congress men, congress women and senators to get reelected, without a regard to its most optimum utilization.

That is why money has to be borrowed from the market, so that financial discipline is enforced. Offcourse like all good intentions, there are side-effects.

[somnath]

^^^ First, no bank got "funded" by the Fed @ 0%. what they had was a liquidity g'tee, effectively a sovereign g'tee on certain types of liabilities...Wasnt just the US, many central banks across the world extended that facility..This was during the crisis...Usually, Central banks also have swap lines with banks to provide short term liquidity (known as repos and reverse repos in India) - again these are not at zero cost....

NExt, there is no uniform deployment in US treasuries @ 3% - there is a full term structure of interest rates, and 3% is the yield for 7-8 year bonds...There is a significant amount of risk in funding 7 year assets out of shrt term liquidity - its not a "brain dead" arbitrage...

[Abhijeet]

That was NOT a reserve currency, by any means...It was continuation of a British legacy where INR was legal tender in the Middle East...

One, the gulf rupees were not "unsecured/uncovered liabilities" with RBI (unlike USD, where each USD is a liability of the Fed) - they were "purchased" by the respective nations by paying in GBP (which was held with RBI rsseves)...

Somnath, that was a very informative post.

I've heard this "INR was the currency in the Middle East" repeated many times on BR, with the implication that it was India's influence that caused it to happen. Your post does a good job of explaining the real reason. Thanks.

[svinayak]

I've heard this "INR was the currency in the Middle East" repeated many times on BR, with the implication that it was India's influence that caused it to happen. Your post does a good job of explaining the real reason. Thanks.

The fact is there was an Indian economy trading with the region before the British came in. That economy was was just taken over by the British.