Very little room left to manage the fiscal deficit

The finance minister P Chidambaram has been very vocal about the fact that the government will do whatever it takes to control the fiscal deficit. “I have said and I repeat it: this year the fiscal deficit will be contained at below 4.8 percent no matter what requires to be done,” Chidambaram had said earlier this month. He has also referred to the fiscal deficit target as the “red line”, which will not be breached. Fiscal deficit is the difference between what a government earns and what it spends.
But the situation seems to be getting more and more difficult. Data released by the Controller General of Accounts (CGA) shows that between April and October, 2013, the fiscal deficit touched 84.4% of the annual target. The fiscal deficit target for the year is Rs 5,42,999 crore. During the first seven months it was at Rs 4,57,886 crore or 84.4% of the target, suggesting that Chidambaram has very little room left to manage the fiscal deficit.
The average fiscal deficit for the first seven months of the year between 1998-1999 and 2012-2013 was at 60.24% of the annual target. In fact, only in 2008-2009, the fiscal deficit was at 87.8% or greater than the current 84.4%.
2008-2009 was the year before the 2009 Lok Sabha election and the government had gone on a spending spree, to attract voters. In fact, the actual fiscal deficit for the year came in at Rs 3,36,992 crore, though the target was Rs 1,33,287 crore. So the fiscal deficit basically more than doubled from a target of around 2.5% of GDP to an actual of 6% of the GDP.
This year Chidambaram doesn’t have that kind of flexibility because his target is already high at 4.8% of GDP. And more than that the international rating agencies are watching. There is a huge threat of the investment rating of India being downgraded to junk status.
If that happens a lot of foreign investors will have to withdraw their money from the Indian stock as well as the bond market, leading to a massacre of the rupee against the dollar, like it had happened earlier in the year. The rupee had touched a high of nearly 69 to a dollar.
So what are the options before Chidambaram? “We will address both the revenue side and the expenditure side,” Chidambaram had said earlier in the month. On the expenditure side, the cut is more likely to be on the planned expenditure side than non planned expenditure.
Planned expenditure is essentially money that goes towards creation of productive assets through schemes and programmes sponsored by the central government. Non- plan expenditure is an outcome of planned expenditure. For example, the government constructs a highway using money categorised as a planned expenditure. But the money that goes towards the maintenance of that highway is non-planned expenditure. Interest payments, pensions, salaries, subsidies and maintenance expenditure are all non-plan expenditure.
As is obvious a lot of non plan expenditure is largely regular expenditure that cannot be done away with. Hence, when expenditure needs to be cut, it is the asset creating planned expenditure which typically faces the axe and that is not good for the overall economy. Some media reports suggest that the government will incur some expenditure this year, but show it only in the next year’s budget.
On the revenue side, newsreports suggest that the government is planning to sell the stakes it owns in Axis Bank, ITC and Larsen & Toubro, which it holds through Special Undertaking-UTI. This stake is currently worth Rs 47,909 crore.
The trouble is this is easier said than done. If the government offers these stakes in these companies to other companies, it will be opposed tooth and nail by the management of these companies. The other option is to sell the stake to investors directly in the stock market. It remains to be seen whether the market has the capacity to digest this.
Also, it is worth remembering that these shares can be sold only once. Or as a chartered accountant would put it, sale of assets from the balance sheet are one-off or non-recurring items.
The expenditure will remain next year, but the government won’t be able to sell these shares again, to bring down the fiscal deficit.
The article originally appeared in the Daily News and Analysis(DNA) dated November 30, 2013 

 (Vivek Kaul is the author of Easy Money (Sage, 2013). He can be reached at [email protected]

With GDP growth at 4.8%, Chidambaram is finally speaking the truth

Abraham Lincoln once said “You can fool some of the people all of the taaime, and all of the people some of the time, but you can’t fool all of the people all of the time.” The finance minister P Chidambaram finally admitted the truth yesterday. “Consumer inflation in India is entrenched due to high food and fuel prices and monetary policy has little impact in curbing these prices…There are no quick fixes for inflation, will take some time to fix it,” he said.
“Demand is being stoked by the fact that we have high fiscal deficit and that fiscal deficit was not contained for a fairly long period, I think over a period of two years,”
 Chidambaram added.
What Chidambaram meant was that the government over the last few years has spent much more than it has earned, and has been running huge fiscal deficits. This money has not gone into creating physical infrastructure but largely been given away in the form of various subsidies and so called social programmes of the government.
This spending led to an increase in private consumption, which led to inflation, with too much money chasing the same amount of goods and services. And now the inflation is so well entrenched that it refuses to go. In October 2013, the consumer price inflation stood at 10.09% in comparison to 9.84% in September, 201.
One of the things that inflation does is it kills economic growth. And this is very much visible in the second quarter gross domestic product (GDP) growth number that was announced yesterday. For the period between July and September 2013, GDP growth, which is a measure of economic growth, stood at 4.8%, in comparison to the same period last year.
It was slightly better than the 4.4% GDP growth seen during the first quarter of the year i.e. the period between April and June, 2013. This was the fourth consecutive quarter in which the GDP growth has been below 5%. During the same period last year, the GDP growth had been at 5.2%.
The overall GDP growth was helped by a very good growth in agriculture (actually agriculture, forestry and fishing), which came in at 4.6%. This was much better in comparison to 2.7% growth between April and June 2013 and 1.7% growth between July and September 2012. The primary reason for a robust growth in agriculture has been the good rainfall that the country received during this monsoon season.
As Ashok Gulati, Shweta Saini and Surbhi Jain write in a discussion paper titled 
Monsoon 2013: Estimating the Impact on Agriculture released in October 2013 “Of the 4 broad regions of India: the north‐east, the northwest, the central, and the south peninsular India, as categorized by Indian Meteorological Department (IMD), with the exception of north‐east India, all the other three regions received normal or above normal showers.”
This has led to a robust growth in agriculture. As Gulati, Saini and Jain point out “All this is a very good news for a country’s agriculture, where 53% of the gross cropped area is still rain‐fed, and monsoons alone account for more than 76% of the total annual rains. No wonder then that years of good rains are associated with robust agriculture GDP growth.”
A robust growth in agriculture doesn’t help beyond a point because it forms only around 10.8% of the overall GDP (at factor cost at 2004-2005 prices). Manufacturing which is around 14.8% of the total GDP(at factor cost), grew by just 1%. Even though its better than 0.1% growth seen between June and September 2012, 1% growth clearly isn’t enough.

Trade, hotels, transport and communication, which form nearly 28.1% of GDP at factor cost, grew by 4%. But the growth had been at 6.8% between July and September, last year. Community, social and personal services which form around 14.3% of GDP (at factor cost) grew by 4.2% compared to last year. This was half the growth of 8.4% seen during the period between July and September 2013.
All these factors contributed to a sub 5% GDP growth. High inflation remains a major reason for the same. Lets try and understand how. GDP can be measured in different ways. One way is to measure it from the point of view of various industries and agriculture i.e. factors of production. This is referred to as GDP at factor cost, and this is the measure I used earlier in the piece. So we saw that the GDP growth when measured from this point of view was at 4.8%.
Industries depend on demand from people. When people spend money, it translates into demand for industries, and this in turn leads to GDP growth. But there are situations when people can’t spend as much money as they had been doing in the past. One of the reasons is high inflation where prices of goods go up, leading to people cutting down on what they think is unnecessary expenditure.
This is reflected in the private final consumption expenditure(PFCE) number which is a part of the GDP number measured from the expenditure point of view. The PFCE for the period between July and September 2013 grew by just 2.2%(at 2004-2005 prices) from last year. Between July and September 2012 it had grown by 3.5%. The PFCE currently forms around 59.8% of the GDP when measured from the expenditure side.
Hence, if it grows by just 2.2%, it slows down the overall GDP growth. This is because a slowdown in consumer demand means less business for industries and this impacts GDP growth. This is how inflation kills economic growth.
So the question is where will GDP growth go from here? Montek Singh Ahluwalia, the deputy chairman of the Planning Commission, 
is as usual optimistic and he expects the GDP growth rate “in the second half of the current year to be better than the first half.” But that’s what Ahluwalia has been doing for the last few years, forever trying to tell us that the next quarter, the next six months and the next few years are going to be better. He has become a seller of the great Indian hope trick.
Chidambaram was a little more realistic and he felt that the GDP growth will be close to 6% in the next financial year (i.e. between April 1, 2014 and March 31, 2015)and 8% by 2016-2017(i.e. between April 1, 2016 and March 31, 2017). “India will get back to the high growth path,” he said.
But inflation remains the main bottleneck if India has to go back to what Chidambaram calls the high growth path. The only way for controlling inflation is to cut down on government expenditure and the fiscal deficit. And that is easier said than done. In fact, as per data released by the Controller General of Accounts yesterday, the government has already reached 84.4% of the annual fiscal deficit target during the first seven months of the year i.e. the period between April and October 2013.
To conclude, India needs to grow at a much faster rate if there has to be any hope of getting many more people out of poverty. Ruchir Sharma, author of 
Breakout Nations and the head of Emerging Market Equities and Global Macro at Morgan Stanley Investment Management, explained the situation best in something that he said at a  literary festival in Mumbai late last year. As Sharma put it “People tell me that if India grows at 5% what is the big deal because that is still faster than the US or many of the European countries. And my response to it is that is the wrong way of looking at it because if India grows at 5% per year, India’s per capita income is really low and it is far too low to satisfy India’s potential and for India to get people out of poverty. And which is why India’s case of a 5% growth rate is a big disappointment.”
And now we are not growing at even below 5%.
The article originally appeared on on November 30, 2013
 (Vivek Kaul is a writer. He tweets @kaul_vivek) 

Why the Modi bull market is likely to continue

narendra_modiVivek Kaul  
If foreign investors into the Indian stock market are to be believed, India is currently in the midst of a Modi rally. Goldman Sachs had explained this phenomenon best in a note titled Modi-fying our view, published on November 5, 2013. “The BJP led National Democratic Alliance (NDA) could prevail in the next parliamentary elections that are due by May 2014. Equity investors tend to view the BJP as business-friendly, and the BJP’s prime ministerial candidate Narendra Modi (the current chief minister of Gujarat) as an agent of change. Current polls show Mr.Modi and the BJP as faring well in the five upcoming state elections, which are considered lead indicators for the general election next year. Even though the actual general election outcome is uncertain, the market could trade this favorably over the next 2 quarters, which argues for modifying our stance,” the Goldman Sachs note pointed out.
Every bull market has a theory behind it. But ultimately any market goes up when the amount of money being brought in by the buyers is more than the amount of money being taken out by the sellers. For the Indian stock market to continue going up, and for the so called “Modi” rally to continue, the foreign investors need to continue bringing in money into the country.
The foreign institutional investors have made a net investment of Rs 72,791 crore since the beginning of the year. During the same period the domestic institutional investors have net sold Rs 65,694 crore.
In fact, numbers for the month of November make for a very interesting read. The foreign institutional investors during the month have made a net investment of Rs 6108 crore. During the same period the domestic institutional investors have net sold stocks worth Rs 9376 crore.
Through this data we can conclude that foreign investors have been more bullish on Indian stocks than Indian investors. Why has that been the case?
A possible interpretation of this is that the domestic institutional investors are worried about the overall state of the Indian economy. The Goldman Sachs summarises these challenges well as “the macro challenges that India faces in terms of external and fiscal imbalances, high inflation and tight monetary policy.” And given this, they have been net sellers during the course of this year.
The foreign investors are not bothered about the state of the Indian economy and that is why they have been buying Indian stocks. Why is that? A possible explanation is the fact that they have access to all the “easy money” in the world at very low interest rates.
They have been borrowing and investing this money in the Indian as well as other stock markets all over the world. This has been possible because of all the money being printed by the Western central banks. This has led to a situation where there is enough money floating around in the financial system and hence, kept interest rates low.
So for the foreign investors to continue investing money in India, it is important that interest rates in the Western world continue to remain low. For that to happen the Western central banks need to continue printing money. And that is the most important condition for the so called “Modi” rally to continue.
In case of the United States, which has been printing $85 billion every month, the decision to continue the easy money policy rests primarily in the hands of Janet Yellen, who is currently the Vice Chair of the Federal Reserve of United States, the American central bank, and will take over as its next chairperson early next year.
So will she continue printing money? Jeremy Grantham, the chief investment strategist of GMO, and one of the most acclaimed hedge fund managers in the world, believes that Yellen will continue to print money, and follow her predecessors Ben Bernane and Alan Greenspan, and ensure that the Federal Reserve continues to run an easy money policy in the process.
As Grantham puts it in 
Ignoble Prizes and Appointmentshis most recent quarterly newsletter “My personal view is that the Greenspan-Bernanke regime of excessive stimulus, now administered by Yellen, will proceed as usual, and that the path of least resistance, for the market will be up.”
And this will mean stock market rallies not only in the United States but all over the world, including in emerging markets like India. “My personal guess is that the U.S. market, especially the non-blue chips, will work its way higher, perhaps by 20% to 30% in the next year or, more likely, two years, with the rest of the world including emerging market equities covering even more ground in at least a partial catch-up,” writes Grantham.
What is interesting is that another veteran of the US markets and one of its foremost investment newsletter writers Richard Russel has had something similar to say in the recent past. Russel in a recent note titled 
Get Ready for the Mania Phase explained that there are three phases to any bull market. In the first phase the wise and seasoned investors enter the market and pick up stocks which are going dirt cheap, because of the previous bear market.
In the second phase, which happens to be the longest and the most deceptive phase, retail investors flirt with stocks and buy them very carefully and not on a regular basis. In the third and final phase of the bull market investors really take to stocks. As Russel writes “The third or speculative phase of a bull market is characterized by a wild and wooly and ever-increasing entrance by the retail public. This phase is characterized by hot tips, hype and pure greed.”
This third and final phase of the bull market has started in the United States, feels Russel. “This is where I think we are now in this bull market. I believe that during the next 12 months we will experience a surprising and ever-expanding rush by the “mom and pop” public to enter the market. At the same time, veteran investors and institutions will seize the opportunity to distribute stock that they may have held for years,” he writes.
And this phenomenon along with the easy money policy of the Federal Reserve will lead to a global rally in stocks. As Russel puts it “All primary movements are international in scope, and this bull market will be no exception.”
The trouble of course is that this rally will not be based on any fundamentals, but just a lot of easy money chasing stocks. And that is something that cannot last beyond a while. The bubble will burst and there will be a lot of pain. As Grantham puts it “And then we will have the third in the series of serious market busts since 1999 and presumably Greenspan, Bernanke, Yellen, et al. will rest happy, for surely they must expect something like this outcome given their experience. And we the people, of course, will get what we deserve.”
The article originally appeared on on November 30, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)

Decoding why running a bank did not make sense for Tata Sons

tata logo
Vivek Kaul  
Tata Sons, the holding company of the salt to software Tata group, has decided to withdraw its application for a banking license. So you won’t see a Tata Bank anytime soon.
The reason for the Tatas withdrawing the application for a banking license can be best explained through a line that Walter Bagehot, the great editor of 
The Economist wrote in his 1873 classic Lombard Street: A Description of the Money Market. As Bagehot wrote “the main source of profitableness of established banking is the smallness of requisite capital.”
Among other things that the Tata group would have needed to do to run a bank would have been to consolidate all the financing companies in the group under a non-operative financial holding company (NOFHC).
This would also mean bringing the non banking finance companies(NBFCs) of the group like Tata Capital under the umbrella of the NOFHC. And this is where the entire business model of the Tata Bank would have started to become unviable.
The Tata Bank would have had to maintain a statutory liquidity ratio of 23%. For every Rs 100 that a bank raises as deposits, it needs to compulsorily invest Rs 23 in government bonds. The bank would also have to maintain a cash reserve ratio of 4%. Rs 4 out of the every Rs 100 that a bank raises as a deposit needs to be parked with the Reserve Bank of India(RBI).
Over and above this, the bank would also have to loan 40% of its money to what the Reserve Bank calls the priority sector. This includes lending to certain segments like agriculture, retail traders, self employed individuals etc, which can be pretty risky.
These requirements make it difficult for corporates like Tata Sons which run large NBFCs, to turn themselves into banks. If it wants to convert itself into a bank it will have to park 4% of its time and demand deposits with the RBI as CRR. It also needs to invest 23% of its deposits in government securities to maintain the SLR.
An NBFC does not need to do this, but a bank does. This immediately means a higher capital requirement for a bank. The banks do not earn any interest on the money they park as CRR with the RBI.
While the risk involved in investing in government securities is low, the returns are low as well.
Hence, the increase in profit will not be commiserate with the higher capital that will have to be deployed to run a bank vis a vis an NBFC. And this goes against Bagehot’s basic principle of banking.
Over and above this, if an NBFC wants to become a bank it needs to ensure that 40% of its lending is to the priority sector. The trouble is that the existing loan book of an NBFC may not meet this requirement. And in order to become a bank it may have to rejig its loan book substantially. Now that, may or may not be financially viable. It may also increase the riskiness of the overall lending. Further, for an NBFC to become a bank it would have to convert each of its branches into a bank branch over a period of 18 months. It would also have to ensure that 25% of its branches would be in rural areas with populations under 10,000 and without existing bank branches. This is another provision which would require an NBFC wanting to become a bank to invest a substantial amount of capital in setting up branches and other infrastructure. But this wouldn’t lead to immediate returns.
The norms require that the bank promoter list his business within three years and bring down his shareholding to 40%. This has to be further whittled down to 20% by the 10th year and 15% by the 12th year. As explained, any NBFC looking to become a bank will have to invest a lot of capital to get the business up and running. But the returns against this money invested will not come immediately. Hence, it is unlikely that when the bank has to list itself three years down the line, it will get a great valuation.
Given these reasons, running a bank did not make much sense for Tata Sons. The group also felt that running a bank would come in the way of international operation, which account for 64% of the revenue. A Tata Sons spokesperson explained the reason behind this to several newspapers. As he put it “The operating companies with overseas operations at times need to provide financing solutions to their customers. Since all financing companies in the group need to be under the NOFHC, there could be situations, wherein a given country is not a priority for the proposed bank but extremely important for an operating company.”
The Tata group however did not rule out their interest in entering the banking sector in the time to come.
The company shall continue to monitor developments in this space with great interest and looks forward to participating in the banking sector at an appropriate time,” Tata Sons said in a statement.
The group can look to enter the banking sector in the years to come, given that the RBI is now looking to provide banking licenses to domestic aspirants on tap. In a discussion paper titled 
Banking Structure in India—The Way Forward released in August 2013, the RBI has proposed issuing banking licenses on tap. “There is a case for reviewing the present ‘stop and go’ or ‘block’ bank licensing policy which promotes rent seeking and considering ‘continuous authorisation’ of new banks. Such entry would increase the level of competition, bring new ideas and variety in the system,” the paper said.
Foreign banks looking to enter India do so through the continuous authorisation process. But domestic aspirants till now have had to wait for the RBI to open the license window. The RBI issued 10 new banking licenses in 1994. It followed it up with two more licenses in 2004.
The article originally appeared on on November 28, 2013

 (Vivek Kaul is a writer. He tweets @kaul_vivek) 

Five years later: It's time Western countries stopped printing money

helicash Vivek Kaul  
It was around this time in 2008, that the Federal Reserve of United States, the American central bank, started printing money to buy bonds. This process came to be referred as quantitative easing(QE) and gradually spread to other central banks in the Western world.
When the process was first initiated many writers (including yours truly) said that high inflation was on its way in the United States. Comparisons were made to Zimbabwe which was facing hyperinflation at that point of time.
In July 2008, a few months before the financial crisis broke out, the British newspaper 
Guardian reported that ordinary hen’s eggs were selling at $50billion eachThese were not American dollars, but dollars issued by the Reserve Bank of Zimbabwe. Between August 2007 and June 2008, the money supply in Zimbabwe had gone up 20 million times.
With the money supply increasing by such a huge amount, inflation went through the roof. In early 2008, consumer price inflation was said to be at 2 million percent. By the end of the year it had reached around 230 million percent.
The feeling was that United States was headed towards something similar, though not of a similar proportion. Five years on, people who felt that way, continue to be proven wrong. Inflation levels in the United States and much of the Western world continue to remain very low. The consumer price inflation in the United States was at 1% in October 2013. This is the lowest it has been at since October 2009.
So the question is why is there has been no inflation? As Niels C Jensen writes in 
The Absolute Return Letter dated November 7, 2013 “The reality is that we have seen plenty of inflation already from QE – just not in the places nearly everyone expected it to show up. Asset price inflation is also inflation, and we have had asset price inflation galore. Many emerging economies have struggled with consumer price inflation in recent times. It looks as if we have been very good at exporting it.”
Countries printed money with the intention of ensuring that there would be enough money going around in the financial system and this would lead to low interest rates.
At lower interest rates people would borrow and spend more, and this in turn would revive economic growth, which had dried up in the aftermath of the financial crisis, which broke out in September 2008, after investment bank Lehman Brothers went bust.
But people had other ideas. They had borrowed and speculated in the real estate market between 2002 and 2008. Once the real estate bubble burst, they were left hanging onto homes, with considerably lower market values. The loans that people had taken still needed to be repaid. Hence, they wanted to repair their individual balance sheets and did not want to take on any more loans. They were more interested in repaying their outstanding loans.
In this scenario, there was little demand for loans from individuals. Financial firms cashed in on this by borrowing money at close to 0% interest rates and investing it in financial and other markets all over the world. And this has led to what economists call asset price inflation, where stock markets and other markets, are at very high levels, even though the underlying fundamentals don’t justify that. The trouble is when these bubbles burst they will create their own set of problems.
There is another reason behind why people are not borrowing even though interest rates are at very low levels. Jensen calls this the impact of the rational expectations hypothesis. As he writes “economic agents (read: consumers and businesses) make rational decisions based on their expectations. So, when the Fed – and other central banks with it – keep ramming home the same message over and over again (and I paraphrase): “Folks, we will keep interest rates low for some considerable time to come”, consumers and businesses only behave rationally when they postpone consumption and investment decisions. They have seen with their own eyes that central bankers have been able to talk interest rates down, so why borrow today if one can borrow more cheaply tomorrow?”
So the longer people postpone their borrowing, the longer government and central banks will have to keep printing money in order to keep interest rates low, in order to entice them to borrow.
In fact, interest rates are so low that banks are also not in the mood to lend. They would rather use the money that they have in proprietary trading activities. This explains to a large extent why financial firms have been borrowing and investing money in financial markets all over the world. While, money printing hasn’t exactly led to what central banks thought it would lead to, it has benefited governments tremendously. This is primarily because money printing has ensured that interest rates continue to remain at low levels and has allowed governments to borrow easily at ridiculously low interest rates.
As William White 
writes in a research paper titled Ultra Easy Monetary Policy and the Law of Unintended Consequences “Indeed, long term sovereign rates in the US, Germany, Japan and the UK followed policy rates down and are now at unprecedented low levels. However, there can be no guarantee that this state of affairs will continue. One disquieting fact is that these long rates have been trending down, in both nominal and real terms, for almost a decade…Many commentators have thus raised the possibility of a bond market bubble that will inevitably burst.”
This has led to government debts exploding. “Italy’s government debt has jumped from 121% to 132% of GDP over the past two years alone. Spain’s debt-to-GDP has gone from 70% to 94% and Portugal from 108% to 124% over the same period. An interesting brand of austerity I might add! Expanding the government deficits at such speed would have been devastatingly expensive in the current environment without QE,” writes Jensen.
Money printing has been bad for old people. The corpus they had saved for their retirement has hardly been able to generate an income that is good enough to live on. This has impacted people in the United States as well as Europe.
Also, a new stream of research coming out seems to suggest that money printing has an impact on income growth and in turn economic growth. “Charles Gave of GaveKal Research produced a very interesting paper earlier this year, linking the low income growth to QE – another nail in the coffin for economic growth. Charles found that during periods of negative real interest rates (which is a direct follow-on effect from QE), income growth in the U.S. has been low or negative,” writes Jensen.
This is primarily because when interest rates have been low for a very long period of time and are expected to be low for the years to come, there is very little incentive for the private sector to either hire new workers or increase capital spending. And when this happens income growth is more than likely to stagnate. This has an impact on consumer demand, which in turn influences economic growth.
John Mauldin captured 
this idea beautifully in a recent column where he wrote “The belief is that it is demand that is the issue and that lower rates will stimulate increased demand (consumption), presumably by making loans cheaper for businesses and consumers. More leverage is needed! But current policy apparently fails to grasp that the problem is not the lack of consumption: it is the lack of income.”
Once these factors are taken into account it is easy to suggest that it is time that the Western central banks and governments wound up their money printing plans. It is time for quantitative easing to come to an end. As Jensen puts it “It is time to call it quits. QE proved to be a very effective crisis management tool, but we have probably reached a point where the use can no longer be justified on economic grounds. The obvious problem facing policy makers, though, is that if financial markets are the patient, QE is the drug that keeps the underlying symptoms under control.”
Financial firms have been able to borrow money at close to 0% interest rates and invest it in financial markets all over the world. This is because quantitative easing or money printing has managed to keep interest rates at very low levels. Once money printing is stopped or even slowed, interest rates will start to rise. This will mean that asset bubbles all over the world will start to burst, which will create its own set of problems.
And that is the real problem. The question is who will blink first? The central banks or the financial markets?
The article originally appeared on www.firstpost.comon November 27, 2013

(Vivek Kaul is a writer. He tweets @kaul_vivek)