Financial stability within the country does not mean your investments are immune to global developments, especially in the US While the going is good for us in India right now, there are several ways in which a deepening external crisis can cause problems for us
Dhirendra Kumar
CEO, Value Research
Printing money to create prosperity is like printing degrees to create wisdom. This meme has been floating around on the Internet for quite some time, and though there are many variants, I like this one the most. It has recently gained currency because of the massive debt that the US government is generating. The country has added nearly $600 billion debt in the last month. It adds $1 trillion debt every 45-60 days. The total debt is about $33 trillion for a GDP of about $26 trillion.
What makes it worse is that this debt is being added during a period of historically high interest rates, creating a vicious circle. I’m not a macro economist and this is not my area of expertise. However, it’s clear that even among the supposed experts, some are alarmed by this. It’s hard to see anyone who is sanguine about it. You might ask what this has to do with us in India, where the prime concern for most investors is their investments that are mostly domestic. It does, in fact, have a lot to do with us.
Global economies are interconnected in a way that the ripples created in one country are felt across oceans in another, and what is happening in the US is a lot more than a ripple. Due to its dominant position in the global financial markets, a wave in America can become a tsunami everywhere else. As the saying goes, when the US sneezes, the world catches a cold. In the current scenario, it might as well be the flu.
It is undeniable that the immediate implication of the mounting US debt and its historically high interest rates can have a cascading effect on the global financial systems. While the going is good for us in India right now, there are several ways in which a deepening external crisis can cause problems for us. The biggest issue is that high interest rates in the US could result in global financial investors earning better returns on their US investments than other countries. This could lead to investments being pulled out from elsewhere, causing a drop in the stock market values and currency depreciation. Is this taking place already? Perhaps. The value of the US dollar significantly influences global trade, both directly and indirectly.
Similarly, economic indicators from the United States set the tone for global economic sentiment. A pessimistic outlook can lead to diminished investor confidence worldwide, resulting in a decline in investments, potentially slowing down the economic growth in various parts of the world. Besides, we are now facing a geopolitical crisis on a scale that hasn’t been seen in many decades. It would appear that the players in this geopolitical crisis have no real interest in resolving the issues with any degree of urgency.
Each seems to be trying to make the situation worse, hoping it will damage others more than itself. The standard operating procedure of international relations seems to be brinkmanship, as close to the brink as possible. Hence, even as our main focus remains domestic investments, it’s essential to recognise the bigger global picture. No one exists in a vacuum, even though there are times when it can be done. This is not one of those times. The interconnected web of global economies means that a significant policy or economic shift in one part of the world can and, often has, serious implications elsewhere. It’s time to be a little careful, and even as we enjoy the benefits of being the best performing large economy, it is important to keep an eye on the clouds gathering on the horizon.
(The author is CEO, VALUE RESEARCH)
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This story originally appeared on: India Times - Author:Faqs of Insurances
