Finshastra October 2011

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FINSHASTRA

Finance Cell | MIB | Delhi School of Economics Vol XI | Issue I | Oct 2011

Debt Crisis Impending Signs of Global Uncertainity

Finance Cell, MIB, Delhi School of Economics

From the Editor’s Desk Excerpts from UNCTAD’s Trade and Development Report 2011 The world economy is still struggling to recover from the worst recession since the Great Depression. Courageous, globally coordinated countercyclical policies succeeded in rescuing economies from the brink of collapse. However, unless there is a reversal of the current trend of diminished income expectations of the average household and a return to policies that emphasize the importance of mass income growth as the basis for sustainable and balanced development in rich and poor countries alike, all other attempts to regain growth momentum will be in vain.

In the United States, recovery has been stalling, with the pace of growth well below what is needed to make a significant dent in unemployment. Even the second round of quantitative easing has failed to translate into increased credit for domestic economic activities, as domestic demand has remained subdued due to stagnating wages and employment. With the unresolved euro crisis, the reappearance of severe debt market stress in the second quarter of 2011 and the prospect of austerity measures spreading across Europe, there is a high risk that the eurozone will continue to act as a significant drag on global recovery. Growth rates in developing countries are likely to remain much higher – at almost 6.5 per cent – than in the developed countries. In many developing countries, growth has been driven more by domestic demand than by exports. Emerging market economies (e.g. Brazil, India, South Africa and Turkey, among the G-20 members) have had to deal with the major challenge of short-term capital inflows, attracted by higher interest rates that reflect higher inflation rates or tight monetary policies.

However, recent developments in fiscal and monetary policy in many economies, and the recommendations of major international institutions such as the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD), suggest that recognition of the need for fiscal stimulus during the crisis has not been followed up by a more profound rethinking of the principles of macroeconomic policy. In 2011, many governments have again reversed their policy orientation from one of fiscal expansion to fiscal tightening, and others are planning to do so. As current budget deficits and the stock of public debt have risen sharply in several countries, there is a widespread perception that the space for continued fiscal stimulus is already – or will soon be – exhausted, especially in developed countries. There is also a perception that in a number of countries debt ratios have reached, or are approaching, a level beyond which fiscal solvency is at risk.

High and rising public debt ratios are clearly a legitimate political concern, but like fiscal space, public deficit and debt limits are difficult to define, since they have strong interrelationships with other macroeconomic variables. Therefore, any attempt to identify a critical level of "sustainable" debt is a difficult task. Governments' economic policies and debt strategies have to take into account their specific circumstances and social needs as well as their external relationships.

Finshastra, October 2011

Finance Cell, MIB, Delhi School of Economics

The response to a crisis should depend on its cause. If a crisis originates from the bursting of an asset bubble, a more rational response would be financial reform, and even quite the opposite of fiscal retrenchment, namely countercyclical policies to absorb private sector deleveraging so as to reduce the macroeconomic slump created by asset deflation. If the crisis originates from overexposure to foreign creditors and excessive appreciation of the domestic currency, the appropriate response at the national level might be to improve the debt structure, as well as introduce policies aimed at avoiding misalignments of the real exchange rate and imposing controls on capital inflows.

As the problem of mispricing is a systemic feature of financial markets, regulation should focus on the system, rather than on behaviour inside the system, with a view to ensuring that the system as a whole better serves real productive investment and growth in the real economy. A clear separation of deposit-taking institutions from those that are engaged in investment banking activities could help prevent gambling by commercial banks. This would also reduce the size and increase the diversity of banking institutions. Publicly owned banks could play a more important role, not only for development finance purposes, but also as an element of diversity and stability. These kinds of banks have turned out to be more resilient during crises, and they have partly compensated for the credit crunch in the private system caused by the recent crisis. They may also help promote competition in situations of oligopolistic private banking structures.

The reform agenda in the wake of the global financial crisis is far from being completed. It has advanced slowly, and much of the enthusiasm for reform has waned. There is a very real risk of new crises erupting, and, in a highly integrated and excessively financialized world economy, such crises would not be limited to specific segments of the financial system or to specific countries or regions.

Even if a crisis has its origin in developed countries and their complex financial markets, developing countries and emerging market economies will also be affected, as evidenced by the latest crisis. The G-20 has recognized this fact, but actions by the G-20 alone are not enough. The world economy as a whole is faced with serious and fundamental challenges, such as eliminating poverty and the transition to more climate-friendly patterns of production and consumption. To tackle these challenges successfully, all the other countries in the world need to participate, sooner or later, in the process of finding solutions. These include creating a stable macroeconomic environment that encourages an appropriate level of investment in fixed capital, which is needed for supporting the necessary structural change. Therefore it remains imperative for the international community and its institutions to address the unfinished elements in the global reform agenda more vigorously than has been done so far.

Vaibhav Gupta Editor, Finshastra Student, MIB , Delhi School of Economics

Finshastra, October 2011

Finance Cell, MIB, Delhi School of Economics

Contents 1

5

9

11

1

United States and its affair with Global Markets

5

Last Resort for the'Lender of Last Resort' -Quantitative Easing

9

Debt Crisis and Capitalism

11

Sociology of a Crisis

13

S&P Downgrade And Continuance Of Supremacy Of US Dollar

24

US Sovereign Debt -The Impending Signs of Global Uncertainty

28

Changing Paradigm: Investment Flows

35

The QUIZshastra

37

Struggle for Growth

39

The CEO Corner

41

Finshastra Times

13

24

28

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Finance Cell, MIB, Delhi School of Economics

United States and its affair with Global Markets It took Democrats and the Republicans 82 days to come out with consensus over raising the debt ceiling on 31st July, two days before the dreaded Aug 2 after which U.S. would default on the payment of its bills neither it could raise more money from Capital markets but though still had enough Gold reserve to pay off its bills till Aug 15.

U.S. economy was already at nearrecession levels, due to slow growth prospects coupled with enormous unemployment.

The U.S. Congress finally brokered a d e a l w h i ch w i l l a l l ow U. S. government to pay the interest on its $14.3 trillion (ÂŁ8.8 trillion) debts.

Amid this entire milieu the Markets in Europe were already reeling from a contagious disease of sovereign debt crisis ever since Greece became the 1st victim.

It is said that in International equity markets there is a veritable clearance sale. What starts in the U.S., continues in Europe, Asia and Latin America.

So was the case with the news and impact of debt crisis that was looming over U.S. Rightly said that's how it happened to spread out.

Whatever you do sometimes comes back to bite you that was the case with the U.S. considering the huge bailout it gave to its industry in 2008 following subprime crisis to save jobs and the industries without considering implications of it in times to come.

The U.S. government pledged more than $11.6 trillion on behalf of American

taxpayers over the past 19 months, part of its stimulus package for the industry.

Most of it was raised as debts for its bonds in the capital markets and the increased spending contributed mainly to the rising U.S.

debt which reached its maximum limit or the ceiling set by the U.S. Congress U.S. and world markets were already in a downslide before U.S. Congress passed the resolution over fears of U.S. defaulting its bills and even after its debt celing was raise amid fears of losing the coveted AAA rating.

The fall of Dollar was also evident during this period reflecting the markets lost faith in U.S. treasury bonds and economy.

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Finance Cell, MIB, Delhi School of Economics

After the Debt ceiling was raised, S&P downgraded United States and the story goes from bad to worse.

It is said there's always a first time, well in the history of U.S. i t d i d happened for the first time on 7th Aug 2011 when Standard & P o o r downg raded U.S. from a prestigious AAA rating to AA+.

U.S. just lost a letter on its rating and the markets went into fearful selling mode.

In the US, on 7th Aug after the S&P announced the downgrade the Dow Jones Industrial Average closed down 5.55 per cent, Nasdaq down 6.90 per cent and the S&P 500 down 6.66 per cent highest decline post 2008.

To calm the tumbling markets, US President Barack Obama made an attempt in vain during a press conference on the subsequent day that tax reform and further spending cuts were critical to the US economic recovery.

Waking up to the U.S. markets swipe and tragic news on Monday, Asian stock exchanges also posted sharp losses, European bourses closed significantly lower and emerging market stocks fell 3.3 per cent.

Meanwhile, the price of gold streaked past $1,700 an ounce for the first time ever on Monday, pushing up more than three per cent.

In Madrid, the Ibex-35 slid 2.44 per cent and

Milan's FTSE MIB tumbled 2.43 per cent.

The Asian markets also felt the day's uncertainty. The benchmark Nikkei-225 index of the Tokyo Stock Exchange closed down 2.18 per cent at 9,098 on Monday, as South Korea's KOSPI index closed down nearly four per cent at 1,869.45 points. The KOSPI had briefly plunged more than seven per cent earlier in the day.

Australian stocks fell by more than 2.9 per cent, closing at 3,986 points, while India's Bombay SENSEX index fell 1.82 per cent to 16,990.18 at the close of trade.

"No one really fully understands the full implications of this [US] credit downgrade, which is why we have seen the market sold off hard. It's a classic case of sell first, ask questions later,� that's how it was explained by Ben Potter, an analyst at IG Markets, Hong Kong's Hang Seng index slid 2.17 per cent to close at 20,491 points, while China's Shanghai Composite Index dropped 3.62 per cent to close at 2,531 points.

There were a lot of questions whether we would see a reaction in Shanghai and Shenzhen [to the downgrading of US debt].

The Chinese stock exchanges tend to look inwards, to react to domestic issues such as inflation figures .But certainly it looked like that no Global market was immune to it and what S&P has done over the weekend affected them too as Chinese Government itself holds $1.3 Trillion in U.S. bond securities. The market's concerns were much broader than just S&P's downgrade of the US debt. That is one issue that is contributing to a much broader set of concerns - the debt crisis in Europe [and an] apparent slowdown in the US recovery.

Finshastra, October 2011

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Finance Cell, MIB, Delhi School of Economics

Futures pointed towards losses on Wall Street when it opens on Monday, with the Dow Futures trading down 225 points (two per cent) and S&P 500 Futures down 2.1 per cent.

Gold, the commodity with the safest bet on returns and one which is most influenced by sentiments meanwhile, surged to yet another record high, opening at $1,686.00-$1,687.00 an ounce in Hong Kong.

This paved way for another feared Recession termed as “Double Dip Recession� among investors leaving Markets worldwide directionless and clueless.

Bullion was the only gainer as it was the only safe-haven for an investor with Gold rising to a maximum of $1950 an ounce as a result of U.S. debt crisis.

Shaunik Bhasin, Author is a student at MIB, Delhi School of Economics

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Finance Cell, MIB, Delhi School of Economics

Last Resort for the ‘Lender of Last Resort’ Quantitative Easing Quantitative easing is an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective. A central bank buys financial assets to inject a pre-determined quantity of money into the economy. Ordinarily, a central bank conducts monetary policy by raising or lowering its interest rate target for the interbank interest rate. A central bank generally achieves its interest rate target mainly through open market operations, where the central bank buys or sells short-term government bonds from banks and other financial institutions. When the central bank disburses or collects payment for these

bonds, it alters the amount of money in the economy, while simultaneously affecting the price (and thereby the yield) for short-term government bonds. This in turn affects the interbank interest rates.

Two fundamental easing instruments used by FED Quantitative Easing is an increase in the size of the balance sheet of the central bank through an increase in its monetary liabilities that holds constant the (average) liquidity and riskiness of its asset portfolio. The less liquid and more risky assets can be private securities as well as sovereign or sovereign-guaranteed instruments. All forms of risk, including credit risk (default risk) are included.

Credit Easing involves increasing the money supply by the purchase not of government bonds, but of private sector assets such as corporate bonds and residential mortgagebacked securities. In 2010, the Federal Reserve purchased $1.25 trillion of mortgage-backed securities (MBS) in order to support the sagging mortgage market.

Finshastra, October 2011

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Finance Cell, MIB, Delhi School of Economics

Finshastra, October 2011

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Finance Cell, MIB, Delhi School of Economics

Money injected in the system The US Federal Reserve held between $700 billion and $800 billion of Treasury notes on its balance sheet before the recession. In late

November 2008, the Fed started buying $600 billion in Mortgage-backed securities (MBS).

By March 2009, it held $1.75 trillion of bank debt, MBS, and Treasury notes, and reached a peak of $2.1 trillion in June 2010. Further purchases were halted as the economy had

started to improve, but resumed in August 2010 when the Fed decided the economy wasn't growing robustly. After the halt in June holdings started falling naturally as debt matured and were projected to fall to $1.7

trillion by 2012. The Fed's revised goal became to keep holdings at the $2.054 trillion level. To maintain that level, the Fed bought $30 billion in 2-10 year Treasury notes a month. In November 2010, the Fed announced a second round of quantitative easing, or "QE2", buying $600 billion of Treasury securities by the end of the third quarter of 2011. The steep slope which is visible from 2007 onwards clearly depicts the huge amount of dollar injection by the FED into the US economy which lead to devaluation of Dollar which further result in increase in Gold and Commodity prices, another visible effect were further widening of the gap between the poor and the richer because through increase in stock price the investors gained but due to inflation the poor population of America suffered drastically which is clearly visible through 9% unemployment rate.

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Finance Cell, MIB, Delhi School of Economics

Effects of QE on US Economy Analyzing the effects of quantitative easing in the US economy, public debt, employment, housing, interest rates, the stock market, the dollar, gold and commodities, we can draw the following conclusions on the effects of this monetary tool that is being applied by the Fed. By the use of quantitative easing the FED has: Ÿ Helped finance, through monetization, the large of amounts of debt emitted by the US Treasury in order to stimulate the US economy through deficit spending. Ÿ Maintained low interest rates on Treasuries despite an increase of 30% in the public debt. It has done this by buying approximately 36% of the debt emitted since that start of quantitative easing and becoming the largest holder of US debt. Ÿ Stimulated stock prices and created a "wealth effect," at least in nominal terms.

There is a strong, positive correlation between the size of the Fed's balance sheet and the price of the S&P 500. Ÿ Weakened the dollar in a muted fashion.

Although quantitative easing is negative for the dollar because it increases the supply of the currency, other factors such as US GDP growth, risk aversion and other major central banks monetary policies have stemmed the decline of the green back. Ÿ Stimulated the price of gold and commodities. There is a strong positive correlation between the size of the Fed's

balance sheet and these assets. Quantitative easing has inflationary consequences that need to be monitored.

By the use of quantitative easing the Fed has failed to: Ÿ Reduce unemployment in a meaningful manner.

The unemployment level has remained stubbornly high over 9%, the participation rate of the US population in the labor force keeps decreasing and the employment-population ratio is still at recession levels. Ÿ Create a recovery in the housing market.

New home sales are currently at record lows and the Case-Shiller Home Price Index after a brief rebound from its lows is once again heading downwards. Adjusted for inflation, home prices are at new lows. Ÿ Create a sustainable economic recovery.

During the first quarter of 2011 GDP was lower than expected and everything indicates that this quarter's GDP will also disappoint. As fiscal spending started to contract during 2011, so did the economic activity in the country. The private sector still remains weak and can't make up in the short term the reduction in fiscal spending to keep the economy recovering out of the recession at a brisk pace. Ÿ To reduce the gap between the rich and the poor. The richest 1% of US households earn as much as the bottom 60%.

Rahul Ramteke & Devashish Arora, Authors are students at MIB, Delhi School of Economics

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Finance Cell, MIB, Delhi School of Economics

Debt Crisis and Capitalism Bankruptcy, Lay-offs, People's money evaporating, Loss of l i v e l i h o o d , Governments under enormous debt. The financial crisis that started with the collapse of Lehman Brothers in U.S.A eventually gave a shock to the world economies and thus turned to economic crisis, political crisis, debt crisis. Who is to be blamed? Newspapers say crisis are over. But what about the aftershocks of the financial crisis? Indian Economy, though recovered firmly and quickly from the disaster, faces the aftershocks everyday in form of soaring inflation, may it be food inflation or lifestyle inflation. And so do many other giant economies of the world.

To gain some grasp on what is happening, we can turn to the classical sociologists like Karl Marx's and Emile Durkheim's writing to understand it from sociological perspective.

Karl Marx in his writings gave a detailed account of the evolution of human society and mode of production. Marx says Capitalist societies arose either from feudalism (the case of Western Europe) or Asiatic societies. He condemns capitalism, but at the same time, he says it is important for the society. Marx proposed a theory of human-self evolving, having three different aspects or three different sets of needs or the tripartite self; being the natural self, the alienated self and

the species self. The natural self has basic needs like food, shelter, sex, and need for productive activity. As the human self evolves, these natural needs are either matured when they are satisfied or perverted/distorted when they are not fulfilled. In the alienated self, these natural needs are distorted and not fully satisfied.

Especially the need for productive activity, the need for work, the need to express one's creativity are not met, the self becomes the alienated self and it happens in the capitalist societies. He says the capitalism is the source of the evil system in which natural self is corrupted. Capitalism alienates men from themselves and each other, especially private property corrupts human values and human starts valuing things over each other. And that encourag es aversion, competitions, inequality, and finally CASH NEXUS becomes the criterion for all values.

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Finance Cell, MIB, Delhi School of Economics

The alienating nature of money turns natural human needs into unnatural craving for possession where no one is satisfied. Lust for money, Lust for property, and addiction to things reaches a level that we can't possibly meet. The craving for money and private property have made us so one sided, that an object is only ours when we can actually own it, or have it as capital or actually possess it. All our senses are consumed in gaining or making or consuming money.

All our human capacities have been turned into one drive and that is, to acquire more things. This blind craving for money, for private property and for things has made us so materialist in a sense that people are ready to make payments by multiple credit cards, mortgaging house, having little or no savings for future or for family, and still no one is satisfied from the work, from the society, from the property they own. The World Economies driven by these alienated individuals acquires the nature of the individuals trying to gain more money, going down with rising debts.Talking about Emile Durkheim's work, he gave a concept of Anomie, which signifies breaking down of the normative framework of our lives, the upsetting of rules and expectations, one's sense of one's place in society. He called anomie the melody of infinite aspirations, and said that human lives and societies need regulations -a framework for formal and informal rules that sets limit to what they are entitled to expect, aspire. So in the absence of regulating framework and norms anomie might take place and so one no longer knows what is possible and what is not, what is just and what is not, which claims and expectations are legitimate and which are immoderate. As a result there is no limit to men's aspirations and appetite, because they are no longer restrained by disoriented public opinion and so they no longer know where to stop. Because propensity has increased, demands are heightened, but their

very demands make it impossible to satisfy them. Over-excited ambitions always exceed the results obtained. At the same time, the struggle grows even more powerful and painful, because it is less regulated and because the competition is more keen. So, Durkheim says all we need is social or moral regulation. The observation that moral regulation was absent and, indeed, never even contemplated. As for the bust, now beginning, its consequences may well be anomic in the way that Durkheim described, but we should recall, from the history of the Great Depression, that solidarities of the disadvantaged can also develop.

From Durkheim's point of view, if regulations are brought in societies and in economies the crisis would not take place or could be countered efficiently. Whereas Marx's idea of species self where all the natural needs of human are satisfied, where all are free and equal(in a sense “no regulations�-which can only come by revolution. The fall of capitalism and rise of communism is inevitable-Marx ), the society would be stable. Thus, Marx's alienation and Durkheim's anomie give two totally different viewpoints in understanding the crisis and totally opposite solutions to counter the crisis.

Charmie Parekh , Author is currently a student of MA Sociology at Delhi School of Economics, Delhi University .

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Finance Cell, MIB, Delhi School of Economics

Sociology of a Crisis The fascination of Sociology lies in the fact that it's perspective make us see in a new light the very world in which we have lived all our lives… it can be said that the first wisdom of Sociology is this- Things are not what they seem.

that, how easy credit and debt crisis affect people and their relationships. The lucrative and luxurious life-style of people due to easy loans and easy credit facilities and high return gave them a false sense of prosperity and

Peter L. Berger Between 2000 and 2008 loan officer lended money and keys to millions of people for home loans and car loans that they were not going to pay and even borrowers knew that they cannot afford to pay. In addition to this, bank and other financial institutions started issuing credit cards and also education loan to keep people in debt for the rest of their lives. These millions of transactions between lender and borrower were part of larger financial process that triggered a global financial crisis.

Here we see how the crisis came into picture, and there are so many interpretations on the topic e c o n o m i c a l l y, p o l i t i c a l l y, sociologically etc. But I am going to discuss the topic sociologically. If we talk about August Comte the Father of Sociology he would emphasize the dramatic and far reaching changes associated with economic crisis. At the same time he would also consider societies around the world are holding together such that they do not collapse into something beyond recognition.

On the other hand if we talk about Emile Durkheim, who has talked about the concept 'ANOMIE' in his one of the most famous book Suicide, which means “personal feeling of a lack of social norms, “normlessness”

higher status. Here Durkheim argued that if a person get the habit of higher status, it will lead to more and more aspirations to-achieve and to an un limited extent which cannot be satisfied. The debt crisis on the other hand pushed people on the lower status and suddenly deteriorated their sense of prosperity. Now many people find themselves in a situation where they must reduce their requirements, restrain their needs, and practice self-control.

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Finance Cell, MIB, Delhi School of Economics

Another Sociologist W.E.B.DuBoie who has talked about economic crisis in relation to poor countries that, there is no global plan in place to help the world's poorest people, whose economic conditions are in jeopardy.

The poorest countries are experiencing a catastrophic loss of income because the demand from wealthier countries has decreased, bringing about a corresponding decline in the price of those exports. For example, in 2009 Botswana a country dependent on diamond exports, lost 90% of that revenue. In the face of such crisis, the poorest countries do not have the resource to institute the stimulus package. Without foreign aid and remittance and without revenue from export, poor countries have to reduce their already inadequate public services. As a result, a number of teachers, police, and nurses have been laid off. Finally, the emergency measures governments in richer countries are employing to protect their economies take a toll on the poorest

countries as well. For instance, government subsidies provided by richer countries to favored industries, or policies encouraging bank to lend at home, disadvantag e poor countries seeking to sell their products or trying to secure loans on international markets (Woods 2009).

A s f i n a n c i a l globalization has closely integrated many economies in the world in the past two decades, concerns over international financial collapse have led policymakers to focus on the important question of how the world can manage the negative consequences of this process. Hence it seems global consensus from all the countries to contain debt crisis is only the need of the hour.

Nitin Mukesh, MA Sociology, Delhi School of Economics.

Author is currently pursuing his research in Sociology.

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Finance Cell, MIB, Delhi School of Economics

S&P Downgrade And Continuance Of Supremacy Of US Dollar Dr. Shrawan Kumar Singh, Director, School of Social Sciences, IGNOU, (Retd.) . Author is a renowned Professor of Economics and is also a visiting faculty at Department of Commerce, Delhi University.

Standard & Poor's downgrading of US government debt from AAA to AA+ sent shock waves through the markets. Is it a sign that American economic conditions are worsening?

Does it presage another Lehman moment for the world economy?

Will it cause a huge setback to India's growth prospects?

India's gradualist approach towards reforms has served it well, not just in terms of producing accelerated growth but in ensuring a broad consensus in favour of outcomes. There is no call to discard this approach in pursuit of some illusory growth target in a challenging global environment.

Despite the precarious state of US finances and its lacklustre economy, demand for US Treasuries has largely held up, thanks to the absence of alternate safe havens. Ironically, US debt is still seen as one of the safest investments in the world. How big is the market for US government bonds? At $9.3 trillion, the US g overnment bond market is massive compared to other countries. Daily trading of Treasuries runs into $580 billion, far higher than British gilts ($34

billion) or German bunds ($28 billion), according to a recent study by Fitch.

Treasuries have a solid appeal for the world's central banks. China's central bank holds an estimated $1.16 trillion, followed by Japan with $912 billion. Fitch said the dollar's status and the size of the Treasury market are the biggest reasons investors won't abandon Treasuries soon. The dollar is the global reserve currency, which means a significant amount of global trade is done in dollars.

Central banks in other countries therefore hold large reserves of US currency, mostly through Treasury purchases.

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Finance Cell, MIB, Delhi School of Economics

US Treasury debt has long been recognised as the global risk-free asset. In most financial models, returns in any asset are benchmarked against equivalent risk-free rate. The US government bond yield is the bare minimum return required for any US dollardenominated asset. A rating cut can impact big holders of US Treasuries. Take China. It held at least $1.159 trillion of US Treasuries at end of May 2011, about 26% of the total held by foreigners, and would be biggest loser in a downgrade. Investors who had lent cash against Treasuries as collateral on loans would require more bonds as collateral. Such a move would in effect force borrowers to cut trades and spark a deleveraging wave through markets. The yield on US government debt is at the heart of virtually everything in the investment world thanks to capital asset pricing model and modern portfolio theory.

If there is no risk-free rate, investors will need to look elsewhere to structure their investments, and think differently about valuation. If the US credit rating be downgraded, Treasury debt prices would fall sharply and yields move quickly higher. One could expect to see rapid re-pricing — in a downward direction — of all financial assets, not just Treasury debt.

The predominance of the U.S. will continue since its relative position, relative to other countries such as the euro area and Japan, remains to be significantly superior, as before.

In brief, the U.S. continues to be a preeminent leader for now, but a weaker leader than before, but with significant resilience and potential for assertion in the future. The intellectual capital, the institutional strengths and the value of the external assets of the corporate sector provide the U.S. with strengths that could potentially be harnessed.

If it fails, it will hurt both the U.S. [economy] and the global economy [Y.V. Reddy, The Hindu, August 18, 2011]. The dollar will sail merrily on as before, having everybody in its hypnotic hold. As per available research data, foreigners today own a record high of 46 per cent of US Treasury Bills, as against just 1 per cent in 1945. This will continue. The US is like a cat, in having nine lives and landing on its feet, however hard the fall.

US government debt still remains the most sought after asset; partly because of want of alternatives, partly because there is no other asset market that is so liquid and partly because the dollar, for all its weakness, remains the international reserve currency.

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Finance Cell, MIB, Delhi School of Economics

The rating cut does not seem to have affected the status of US treasury bonds as a safehaven investment. As other asset classes have become more volatile and risky, bond prices have risen (and yields fallen further), partly also as a result of expectations of low short-term interest rate for a year. The downgrading by itself does not significantly

big chunk of their own reserves in it. That's why the US' credibility as a debtor is crucial to keep the global economic cogs turning.

The net result is that while interest rates are likely to rise in the US and growth will be impacted adversely as a result, it is not a Doomsday scenario. It was time the world moved away from the US dollar. Favoured

alter the current situation where the dollar holds sway for want of a real contender. The dollar is also currency of choice for world trade. Most investors even central banks of various nations have regarded US as the ultimate safe haven and have thus parked a

the special drawing rights (SDRs) – the benchmark currency of the International Monetary Fund (IMF) – to replace the US dollar as the world's reserve currency.

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Finance Cell, MIB, Delhi School of Economics

Impact on World Economy The world economy is in turmoil again.

While it is difficult to anticipate all the consequences of the downgrading of the U.S. government's long term debt, there is little doubt it will add to the existing uncertainty and make recovery that much more difficult. Political leadership in the EU/US had failed spectacularly to acknowledge or communicate: (a) the size of the problem; (b) the time over which it had been created and exacerbated; and (c) what really needed to be done now. Belated market recognition of the real problems has generated three powerful tailwinds now driving the current storm. First, markets have realised that EU leaders did not resolve very much. Second, markets have realised that the US Congress and Administration have bought another 18 months for debt issues in the US to be addressed. But, as in the EU, the 'debt deal' highlights debt unsustainability in the US to be much larger than anyone had appreciated. So, the focus on marginal

deficit reduction over the next 10 years is inadequate. Third, the effects of earlier fiscal and monetary stimulus are fading.

The outlook in the developed world for the coming years is bleak. Whilst the debt problems of the EU and US have been highlighted, no one is focusing on the worse debt overhang in Japan. In relative terms, it is nearly twice as large as that of the US and 60% larger than Italy's. That may be because Japan's debt is financed (almost entirely) internally. The debt of the EU and the US is financed significantly (50+%) by external creditors. The source of financing does not make a mountain of debt any more sustainable in a shrinking economy. Japan has, for the last two decades, been moribund. It has deflation, a no-growth future, and a steadily diminishing population. The EU, the US and Japan have dictated and imposed their will on emerging markets (EMs) for too long. Finally they are having a long-delayed come-uppance [Percy S Mistry, 2011'a'].

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Finance Cell, MIB, Delhi School of Economics

If Europe's debt and growth crisis is not solved, European integration itself is at risk.

The full dimensions of the much deeper structural faults that the debt crises in the EU and US reflect (and we have not even begun to focus on the even larger debt crisis in Japan) have not yet been recognised by politicians in any of these three supposedly 'developed' economic spaces. In mid-2011, the world economy has reached a point where fiscal stimulus on the part of the EU, US and Japan is no longer possible.

In short, the world (especially the EU, US and Japan) has run out of ideas, strategies and tactics as well as ammunition to boost global consumption and output through artificial stimulus.

The world may now have no alternative but to permit inevitable and desirable structural adjustments—especially in the balance sheets of households, corporates and governments—to occur without further delay so that genuine sustainable recovery can commence without artificial props. But the world economy as a whole will be sliding sideways for the foreseeable future—which is what the massive market corrections of the last

two weeks seem to be signalling. [Percy S Mistry, 2011 'b']. If Europe's debt and growth crisis is not solved, European integration itself is at risk. But to solve it, voters must be convinced to support the necessary measures.

That is something only politicians, not central bankers can do.

More than the downgrade, the impact for the rest of the world will be the slow pace of recovery in the US and that has implications for the world in terms of capital flows, in terms of trade flow. As the world stares at another financial meltdown, economists across the globe are crunching numbers and cutting GDP growth estimates for the world's

biggest economies. However, GDP growth estimates for three of Asia's largest economies – China, India and Korea – remain unchanged. However, for order to return, financial markets need to return to stability.

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Should rating agencies be trusted? With the U.S. rating downgrade by Standard & Poor's leading to a fresh financial turmoil even before economies could recover fully from the subprime mortgage-led global meltdown in 2008, the United Nations Conference on Trade and Development (UNCTAD) warned against reposing blind trust on “irresponsible� private financial institutions, including rating agencies, in assessing economic policies and public finance management. The urgent need to reform is the financial system, whose dysfunctionality lies at the heart of this crisis. The case of the rating agencies, whose incompetence and cynicism have become evident following the 2008 crisis, if not before. Despite this, we have done nothing about them, and as a result we are facing absurdities today. We could have created a public rating agency (a UN agency funded by member states?) that does not charge for its service and thus can be more objective, thereby providing an effective competition to the current oligopoly of Standard & Poor's, Moody's, and Fitch. There is thus enough justification to subject Supranational Entities: S&P (and rating agencies in general). to the continuing evaluation of an international overarching watchdog mechanism equipped with the authority to rate and regulate them.

The idea has been canvassed by many governments and in global forums for some years. It is high time steps were taken to this end by entrusting the responsibility of formulating a scheme to an inter-disciplinary body of eminent persons of impeccable reputation set up by the Economic and Social Council (ECOSOC) of the United Nations.

[B.S. Raghavan, 2011]. Policymakers cannot ignore the fact that their tasks have been made doubly urgent with the prospect that rating agencies could spoil the party. More decisive

and aggressive reforms are the need of the hour. Greater transparency from the rating agencies is required, while changing their fee structure, in which they are paid by those firms that want to have their financial products rated.

Why not simply ban products whose safety cannot be convincingly demonstrated, as we do w i t h drugs?

Nothing has been done to regulate t a x havens, which not o n l y deprive governme nts of tax revenues but also make financial regulations more difficult. Once again, we could have eliminated or significantly weakened tax havens by simply declaring that all transactions with companies registered in countries/territories that do not meet the minimum regulatory standards are illegal. A correct fiscal policy by itself cannot tackle the structural problems that have brought about the current crisis. It can only create the space in which we make the real reforms, especially financial reform. Without such a reform we will not overcome this crisis satisfactorily nor avoid similar, and possibly even bigger, crises in the future. [Ha-Joon Chang].

The link between economics and politics stares us all across the Atlantic.

The G-20 must discuss developments in the US and EU and demand better macroeconomic management from both, aimed at stabilizing the global economy. The global environment in recent past has become a lot more intricate than it has ever been. The process of this shift, which began post the 2008 crisis, is likely to end with some sort of structural realignment on political, geographical and economical fronts.

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If leaders really wished to turn the crisis into progress, the current impasse would be seen in the context of the bigger picture of reform.

As the US beings to get to grips with its longterm deficit, the Eurozone attempts to survive its existential crisis, and China seeks to reduce its addiction to dollar-denominated debt and internationalise the renminbi, leaders could discuss how to shape solutions as part of efforts leading to wider global monetary reform and rebalancing. After all, a sustainable America, solid euro and open China form the crux of most visions of a new monetary order. Indeed, far from harbouring grand ambitions, myopia prevails. Necessity is not just the mother of invention, but of reform. Yet with our current lacklustre leadership, of following events rather than shaping them, it may take yet another monetary crisis before our politicians feel the need to tackle this lightning rod.

has only exacerbated existing problems.

A persistent slowdown in the developed economies, characterized by anaemic economic growth, is likely to dampen commodity prices, which should do its bit to rein in global inflation.

Conclusion: The effectiveness of monetary policy in the United States is virtually at an end.

A US economic turnaround will primarily be driven by improvement in the fiscal scenario, though a road map is far from clear. The situation in the Eurozone, on the other hand, is made worse by deeper limitations in policy options compared to the US and the burden of a monetary union without the accompanying fiscal consolidation. Japan's economy is not expected to head north anytime soon — the devastation wrought by the tsunami earlier this year

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India would have to weigh its options carefully. In the near future, the rupee is likely to continue its downward trend, which ceteris paribus will boost Indian exports, currently enjoying a golden run. A persistent slowdown in the West could, however, make this boom unsustainable.

Clearly, India cannot assume it will not be impacted by global trends. It needs a strategy to strengthen the domestic sources of growth and minimise the impact of external factors. And it is in the context of the danger that we have seen why the

global monetary system needs serious rethinking and redesign.

Bretton Woods moment looks like it really could be upon us. The world lacks what it had first time round, 67 years ago: authority and direction. Questioning the economic policies of various countries in the current e c o n o m i c s c e n a r i o, t h e UNCTAD report on Trade and Development 2011 pointed out that fiscal tightening policies adopted by governments worldwide in recent times to plug their debt burdens would solve only part of the problem without addressing the basic issues. For, a premature tightening would endanger global recovery whereas the best strategy for dealing with public debt would be to promote economic growth. UNCTAD feels that fiscal imbalances are not the driving factor in economic crisis, but rather a result of the slowdown which compelled governments to resort to stimulus measures for revising national economies. “Economic growth in developing countries, as a group, suffered less impact from the financial crisis, partly thanks to active counter-cyclical measures; as a result, fiscal balances improved in 2011 and debt-to-GDP ratios remained in check�.

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The report disapproves of the fiscaltightening measures the developed countries led by the United States seem keen on adopting. At this juncture not only will such belt-tightening be counter-productive, but when adopted by some of the biggest economies, it will pose a major risk for the global economy. Policymakers do not appear to have learnt the right lessons from the crisis. There is hardly any justification for the current shift towards austerity. Fiscal imbalances were not the cause, but the consequence, of the crisis. Fiscal retrenchment, especially the moves to cut the fiscal deficits, and curbing public debt are inappropriate responses and, when projected as something that needs to be done to regain the confidence of the financial markets, self-defeating. The much anticipated reform of the global financial

and monetary systems, especially the regulatory aspects, has been slow in coming.

It is well recognised that financialisation of commodity markets has affected the prices of such basic goods as food staples and energy. Urging greater transparency in d e r iva t ive s, t h e r e p o r t wa n t s a n inter nationally-coordinated, tighter regulation of financial investors. To remove the disconnect between foreign exchange markets and macroeconomic fundamentals, the report calls for a rules-based system to monitor exchange rate movements at the multilateral level. These suggestions are by no means original. But seldom has a U.N. agency so eloquently called for a check on the unbridled expansion of global finance as UNCTAD has done now.

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Select References Chandrasekhar, C.P. (2011): Debt as Bargain Counter, Economic & Political Weekly, August 13.

Chang, Ha-Joon (2011): Let's detoxify the markets, The Hindu Business Line, August 10.

Dowd, Maureen (2011): Has Obama run out of luck?, The Economic Times, August 8.

The Economist (2011): An underperforming president, The Financial Express, August 6.

Editorial Comment (2011): What Does Standard & Poor's Downgrade Mean?, Economic & Political Weekly, August 13.

Epstein, G and R Pollin (2011): “Regulating Wall Street: Exploring the Political Economy of the Possible”, PERI Working Paper Series, No. 256, March.

EPW Research Foundation (2011): Aftermath of the US Debt Downgrade, Economic & Political Weekly, August 20.

US needs structural reforms, fiscal cuts won't help. Opinions vary across the US political spectrum, but Jared Bernstein, a former member of Obama's economic team, uses the Congressional Budget Office's (CBO) latest figures to point out that the $787 billion Recovery Act created around 2.5 million jobs and shaved 1.5 percentage points off the unemployment rate. So it looks like it's time Obama came up with another big jobs push. How does this square up with the task of cutting the deficit? There's little doubt the US is one push away from a double-dip. And, in any case, unless there is GDP growth, the deficit/debt situation is not going to get better. Immediately, the US has to make big structural reforms – according to Jon Huntsman who is running for President in 2012, complying with the 17,000-page tax code costs taxpayers $400 billion each year; former President Bill Clinton, just out with 14 ways to

increase jobs, bemoans the sharp rise in rules and regulations that make getting things done tough.

The US needs more jobs now. It is one thing to get the diagnosis right; it is yet another to come up with the remedy. US President Barack Obama channeled the national frustration with the economy that threatens his political standing and challenged the US Congress to pass a $447 billion jobs plan tilted heavily towards the Re publican prescription of tax cuts. The question is whether, in the face of an ongoing national crisis, we can stop the political circus and actually do something to help the economy. Better tax break would be something that would spur along innovation and wealth generation and creates ancillary jobs. The 2012 presidential election and the political consequences of public blame for inaction on joblessness formed an undercurrent in the speech.

Gopalakrishnan Adarsh (2011): How the US is living beyond its means, The Business Line, August 7.

Izureita, Alex (2011): Instability in the US: It is not debt but the lack of it, Economic & Political Weekly, August 20.

Mathur, Anirudh (2011): The opportunity of crisis, The Financial Express, August 12.

Minsky, H (1964): “Longer Waves in Financial Relations: Financial Factors in the More Severe Depressions”, The American Economic Review, Vol. 54, No.3, May, pp.

324-35.

Mistry, Percy S (2011'a'): Heading for another depression?, The Financial Express, August 6.

Mistry, Percy S (2011'b'): Will developed debtors adjust to reality?, The Financial Express, August 10.

Patnaik, Ila (2011): As the debt piles up…

The Financial Express, August 13.

Rajwade, A.V. (2011): Committees that ruined US finances, Mint, August 18.

Raghavan, B.S. (2011): Downgrading the US will change nothing!, The Hindu Business Line, August 12.

Ram Mohan, T.T. (2011): A Continuation, Not a Repeat of 2008, The Economic Times, August 18.

Schurenberg, Eric (2011): The Dollar Note, Mint, August 31.

Seshan, A (2011): Downgrade and rupee impact, The Hindu Business Line, August 8.

Stiglitz, Joseph (2011): A contagion of bad ideas, The Economic Times, August 10, 2011.

UNCTAD (2011): Trade and Investment Report, Geneva.

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COVER STORY

Rahul Goel , Tax and Regulatory Services, KPMG. Author is a Tax Senior with KPMG.

US Sovereign Debt The Impending Signs of Global Uncertainty

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US Sovereign Debt Meaning A debt instr ument issued by the US government is sovereign debt. The funds required by the government to spend can come either from tax receipts or from borrowing by the United States Department of the Treasury. Such amount borrowed by the US administration represents US sovereign debt.

Repayment of the debt cannot be forced by the creditors and only protection available can be downgrading of international standing i.e. sovereign debt rating of a country which makes it difficult for the country to borrow in future.

History of US Sovereign Debt In US, the treasury cannot borrow beyond the debt ceiling as decided by the Congress.

US debt has a long history of deficits. The ceiling was fixed at $ 1,000 billion in 1981, revised to $ 5,500 billion in 1996. The debt ceiling has been raised 68 times since 1960.

Prior to the debt ceiling crisis of 2011, the debt ceiling was last raised on February 12, 2010 to $14.294 trillion Why the fuss now?

On April 15, 2011, Congress passed the last part of the 2011 United States federal budget, authorizing federal government spending for the remainder of the 2011 fiscal year, which was to end on September 30, 2011. For the 2011 fiscal year, expenditure was estimated at $3.82 trillion, with expected revenues of $2.17 trillion, leaving a deficit of $1.48 trillion.

Soon after the 2011 budget was passed, the

debt ceiling set in February 2010 was reached.

However, in case the debt ceiling is reached, the US Treasury can declare a debt issuance suspension period and utilize "extraordinary measures" to acquire funds to meet its obligations but which do not require the issue of new debt, such as the sale of assets from the Civil Service Retirement and Disability Fund and the G Fund of the Thrift Savings Plan. To meet the requirements of the administration these measures were in fact implemented on May 16, 2011.

As of May 2011[update], approximately 40 percent of US government spending relied on borrowed money. If the debt ceiling had not been raised, the federal government would have had to cut spending immediately by 40 percent, affecting many daily operations of the government, besides the impact on the domestic and international economies. Treasury can determine what items would be paid. If the interest payments on the national debt are not made, the US would be in default, potentially causing catastrophic economic consequences for the US and the wider world as well. (Effects outside the US would be likely because the United States is a major trading partner with many countries. Other major world powers who hold its debt could demand repayment.)

Therefore, failure to increase the debt limit would have caused the government to default on its legal obligations like payments for Social Security and Medicare benefits, military salaries, interest on the debt, and many other items.As per the estimates made by the US treasury department the debt ceiling fixed by the US Congress was enough only to keep government spending going till August 2, 2011 and accordingly there was an immediate need to raise the debt ceiling.

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Increase in the debt ceiling requires the approval of both houses of Congress in US. Republicans and Democrats (political parties in bi-polar political scenario of US) insisted that an increase in the debt ceiling be coupled with a plan to reduce the growth in debt. There were however, differences as to how to reduce the expected increase in the debt. Initially, Republican legislators (who held a majority in the House of Representatives) opposed any increase in taxes and proposed large spending cuts. As opposed to this, Democratic legislators (who held a majority in the Senate) favoured tax increases along with smaller spending cuts.

And this lack of consensus between the two political outfits was what led to a lot of hue and cry across the globe. The immediate crisis ended when a complex deal was reached that raised the debt ceiling and reduced future government spending.

After numerous discussions and tea-party diplomacies, President Barack Obama announced on July 31 that an agreement had been achieved between the Democrats and the Republicans. Thereafter, the legislation (Budget Control Act of 2011) was passed by both the House and Senate and signed by President Obama on August 2, the date estimated by the Department of the Treasury that the borrowing authority of the US would be exhausted.

On August 3, 2011 the national debt of the US rose by $ 238 billion (or about 60% of the new debt ceiling), the largest one-day increase in the history of the United States. For the first time since World War II, the US debt surpassed 100 percent of gross domestic product.

The whole episode goes to show that how a party in control of only one chamber of Congress (in this case, Republicans in control of the House of Representatives but not the Senate or the Presidency) can have significant influence if it chooses to block the routine raising of the debt limit and how it was used to score political points by the minority party by criticizing the out-of-control spending of the majority.

The repercussions The analysts around the world were divided on the quantum of the ramifications, in case, the US Congress failed to raise the debt ceiling limit and the US government defaulted in payment of its obligations.

The failure to raise the debt ceiling would have resulted in the administration being unable to fund all the spending which it is required to do by prior acts of Congress. Therefore, either the US would have also defaulted (failed to pay the interest and/or principal of US treasury securities on time) thereby creating an international crisis in the financial markets or alternatively, the government would have to promptly reduce its other spending drastically.

In either case, it would have been a bane for the global financial markets. Economists say the consequences would have been globally catastrophic like financial markets would take fright, interest rates would soar, dollar would slump and banks would call in loans, creating a second credit crunch.

However, the US averted this crisis by passing the law and increasing the debt ceiling but this came with its share of repercussions. On August 5, the credit-rating agency Standard & Poor's downgraded the credit rating of US government bond from AAA to AA+ for the first time in the country's history. Markets around the world as well as the three major indexes in the US then experienced their most volatile week since the 2008 financial crisis with the Dow Jones Industrial Average plunging for 635 points (or 5.6%) in one day. Yields on US Treasuries, however, dropped as investors, anxious over the dismal prospects of the US economic recovery and the ongoing Eurozone debt crisis, fled into the safety of US government bond.

Impact on India In reality it's big institutions that hold most of the debt: big institutional investors have about 20 per cent, the Federal Reserve and private investors each have about 10 per cent, government agencies like social security have about 35 per cent, and foreign holders (like China) hold about 30% of the debt.

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US crisis to benefit India: India will be impacted in the short term because of the US sovereign debt crisis, but it will also benefit from the economic turmoil as softening crude prices will bring down inflation, prompting the Reserve Bank of India (RBI) not to hike rates, a leading industry lobby said Monday."One positive fallout of the rating downgrade, we feel, could be the Indian market perception that a possible decline in crude prices may signal a pause in RBI rate hikes, buoying investor sentiments," the Federation of Indian Chambers of Commerce and Industry (FICCI) said in a statement."Additionally, the spreads between a US sovereign and Indian sovereign paper of comparable duration may decline, thus acting as an enabler to foreign institutional investors

inflows into the country. This may have a sobering impact on the current account deficit, even though this may not be exactly desirable."

An uncertain global environment could, however, depress India's exposure to global markets (exports of goods and services, more than a quarter of India's GDP) and knock off percentage points from India's GDP growth," the industry lobby said while outlining some of the risks.

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Changing Paradigm: Investment Flows Dr Rajendra Prasad, Associate Professor. Author is a visiting faculty at Department of Commerce, Delhi School of Economics,

FDI inflows to developed countries, for the In this world only three first time remain below 50%. (see Figure1). things are permanent – FDI inflows to developing economies rose by change, death and taxes.

12% (to $574 billion) in 2010. This is due to the Business environment is fact that their recovery is relatively fast, the changing very fast. The economies, having strength of domestic demand, and increasing been on the peak for a long time, are showing South-South flows. The TNCs are moving the signs of decline and those which remained production to developing countries so as to depressed are rising. remain cost-effective and competitive in the Year 2010 is different, different in the sense global product networks and also to cater to that FDI inflow as per cent of global GDP has shift in international consumption. gone down below 2 per cent (see Table 1).Though global FDI inflows in 2010, $ 1244 billion, were 5% higher than the year 2009. If we compare the inflows with 2007 figures ($1971 billion), the year 2009 and 2010 recorded declines of 39% and 37% respectively. The moderate growth in 2010 over 2009 has been due to slowly rebounding of cross-border mergers and acquisitions which was because of increased profits Source : UNCTAD, based on WIR 2011, UNCTAD report and FDI/TNC of foreign affiliates of TNCs, database(www.unctad.org/fdistatistics) especially developing countries. It was for the first time that developing countries absorbed more than half of the FDI i n f l o w s . Item 1990 2005-07 2008 2009 2010 UNCTAD 50 338 61 147 57 920 62 909 h a s Global GDP 22 206 a estimated that during Global FDI 207 1 472 1 744 1 185 1 244 t h e y e a r Inflow a 2011 the 0..93 2.92 2.85 2.04 1.98 f lows are FDI/GDP (in %) expected to reach $ 1.4 Table 1: Global GDP and Global FDI Inflows a= billion dollars. Source: WIR 2011, UNCTAD. – 1 . 6 trillion.

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The changing pattern of inflows in 2010 is also reflected in the largest FDI recipients.

Half of the top 20 host economies were from developing and transition economies, compared to seven in 2009 (see Figure 2) .

The shift is also reflected in UNCTAD's Inward FDI Performance Index, which measures the amount of FDI that countries receive relative to the size of their economy (GDP). The index for developed countries as a group is below unity (the point where the country's share in global FDI flows and the country's share in global GDP are equal), and their ranking has fallen in the post-crisis

Source : UNCTAD, based on WIR 2011, UNCTAD report and FDI/TNC database(www.unctad.org/fdistatistics)

period compared to pre-crisis period of 2005-07. In contrast developing countries increased their performance index above unity (see Figure 3).

Source : UNCTAD, based on WIR 2011, UNCTAD report and FDI/TNC database(www.unctad.org/fdist atistics)

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FDI Outflow Within developing countries, there are significant regional differences. While East, FDI inflow to developed countries South-East Asia, and Latin America got the contracted in 2010 (see Table 2). In value, lion's share within developing countries; the outflow from has been very high, but in flows to the least developed countries, landlocked countries, i s l a n d developing states, and Africa declined (see Figure 4).

Among the developing countries, East Asia is the l a r g e s t Source : UNCTAD, based on WIR 2011, UNCTAD report and FDI/TNC recipient and database(www.unctad.org/fdistatistics) C h i n a , belonging to terms of growth rate, developing and this part is the largest recipient. Among transition economies have done better over other regions of developing countries the developed nations. Normally the figures of largest recipients during 2010 have been global inflow and outflow should be the Libya (North Africa), Nigeria (West Africa), same, but due to inconstistencies in the data Angola (South Africa), Brazil (Latin collection and reporting methods of America), British Virgin Islands different countries, changing nature of (Caribbean), Bahrain (West Asia), India investment, and distinction between FDI (South Asia), Thailand (South-East Asia), and portfolio investment, the difference New Caledonia (Oceania), and Russian arises.

Federation (CIS).

Outward FDI from developing and transition economies reached 388 billion in 2010, an increase of 21% over 2009.

Investors from South, East and South-East Asia and Latin America were the main drivers of growth in FDI outflows.

Source : UNCTAD, based on WIR 2011, UNCTAD report and FDI/TNC database(www.unctad.org/fdistatistics)

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Table 2: FDI Inflows by Region/Economy (In millions of dollars) R e gi o n /E co n om y Y e ar W o rl d D e v elo p e d E c on o m ies De v el o p in g E c on o m ies Af r ic a La ti n Am er ic a & C ar r ib .

W e st A sia E ast Asi a So u th A si a So u th - E as t A sia Oc e an ia So u th - E as t E u ro p e & C IS

R e gi o n

W o rl d D e v elo p e d E c on o m ies De v el o p in g E c on o m ies Af r ic a La ti n Am er ic a & C ar r ib .

W e st A sia E ast Asi a So u th A si a So u th - E as t A sia Oc e an ia So u th - E as t E u ro p e & C IS

F D I I n f lo w s 2006 1 461 863 977 888 429 459 46, 259 98 459 67 112 131 829 27 821 56 701 1 278 54 516

2007 1 970 940 1 306 818 573 032 63 132 169 514 78 211 151 004 34 297 75 740 1 134 91 090

2008 1 744 101 965 113 658 002 73 413 206 733 91 564 185 253 51 901 46 947 2 192 120 986

2009 1 185 030 602 835 510 578 60 167 140 997 65 993 161 096 42 458 37 981 1 887 71 618

2010 1 243 671 601 906 573 568 55 040 159 171 58 193 188 291 31 954 79 408 1 511 68 197

2007 2 174 803 1 829 044 294 177 10 719 61 731 221 688 114 391 17 709 55 413 39 51 581

2008 1 910 509 1 541 232 308 891 9 750 80 580 218 436 133 173 19 897 25 185 125 60 386

2009 1 170 527 850 975 270 750 5 627 45 544 219 500 142 941 16 405 33 845 79 48 802

2010 1 323 337 935 190 387 564 6 636 76 273 12 999 174 283 15 079 42 223 71 60 584

F D I O u tf lo w s 2006 1 405 389 1 154 983 226 683 6 943 68 129 151 566 85 402 14 812 28 782 45 23 723

Source : WIR 2011, UNCTAD report and FDI/TNC database(www.unctad.org/fdistatistics)

Within developing economies, there are regional differences in outflows. China and

Source : UNCTAD, based on WIR 2011, UNCTAD report and FDI/TNC database(www.unctad.org/fdistatistics)

Hong Kong invested $76 billion and $68 billion respectively in 2010. In Latin America, countries like Brazil, Chile, Columbia and Mexico increased the acquisitions abroad. However, major investors in West Asia fell significantly. From CIS countries, Russian and Kazakhstan carried out most of the acquisitions with

strong support from the state. Among the developed countries, trends were quite divergent. Outflows from Europe and the USA were up by 9.6% and 16% respectively, while Japanese outward FDI dropped further in 2010 (-25%). In 2010, six developing and transition economies were among the top 20 investors (see figure 5).

Many TNCs from developing and transition economies are investing in other e m e r g i n g m a r ke t s.

Approximately 70% of FDI projects (both greenfield and brownfield) were in these economies only (see Figure 6).

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During the year 2010 of all the over $3 billion mega-deals, seven involved developing and transition economies

(12% of the total), compared to only 2 (3% of the total) in 2009.

Thus, it is very clear that the developing and transition economies are rising, both in terms of market demand and supply of investment.

Certainly, God's socialism is working. Europe is suffering from sovereign debt, and the US is not far behind, whose AAA status has been lowered

by Standard and Poor's. Cracks are visible in the EU.

21st Century belongs to those who did not enjoy fruits of development for very long.

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The QUIZshastra 1

W h i ch C o m p a n y h a s

recently replaced Reliance from the position of India's Largest company by Market Capitalization?

9

Which country's credit rating has been

recently reduced to Aa3 by Moody's?

10

Recently which Indian company has

2

Recently NSE has announced that a

particular company will not be a part of its benchmark Nifty in another two months.

Which company is this?

3

America and Western Nations some time

been penalized by the Competition Commission of India for abuse of market dominance and unfair trade practices?

11

Which US company has decided to sell

its International Credit Card Business? Also

earlier this year have imposed anti-dumping duties on two East Asian Nations for the export of coated paper. Which are these two East Asian Nations?

4 5

Name the new CEO of Apple Inc. Name the person who would be replacing

the Indian, who at S&P recently downgraded the US Government Debt Ratings.

6

Which Indian Automobile firm has

recently surpassed Tata Motors as India's largest company by Market Capitalization?

7

Which company has been reported as the

top defaulter in the National Pharmaceutical Pricing Authority's list?

8

name the company which would be buying its business.

Indentify X and Y. “ X a Delhi based bank

recently entered into an insurance joint venture with an Indian Subsidiary of a US based Insurance Company

12

Why a Double Dip is called a ‘double

dip’.

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Why even the best struggles for growth

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Struggle for Growth Rabindra Roy, M.A. (Kanpur), D.Phil. (Oxon.). The author is Associate Professor in Sociolog. He is also the author of The Naxalites and their Ideology (1988) and Living with Difference: Essays in a Philosophical Anthropology (2005).

In the prevailing mood in India today, the economic watchword is growth, and the maintenance or enhancement of the current rate of growth. Anything that hampers or curtails this is felt to be , as in some way critical. Obviously this has not always been the case, nor is it likely to perpetually remain so. The mood and climate of economic activity differs from time to time and place to place. And in keeping with this, economic crises are not all of the same kind. Equally if in an economic crisis there are a large number of losers, there are also gainers. The effects of an economic crisis differ widely over the spectrum of the population, and what is experienced as the crisis by some or even many, is seen as an opportunity by others.

Whereas a large part of the economic activity of the western nations is integrated and administered through formal agencies for their regulation, even in those nations there is considerable activity that does not conform to this overall prevailing tendency.

And in India, though integration through formal agencies seems to be growing, it seems to me that the large share of economic activity is conducted outside its purview. The rhetoric of crisis and their ver y

material consequences of gainers and losers is most marked in this administered section of population.

Almost everyone desires to live comfortably.

Notions and levels of comfort may vary, but when people have to face material hardships to which they are unaccustomed, they do not all face and cope with them in the same way.

The prevailing reaction to unprecedented hardship, in addition, is influenced by the political and social climate of the times.

Times of crisis demand more of people than is customary, whether this more takes the form of determined endurance or unwillingness to suffer. Bad times call forth both the best and the worst in people. It is Hegel who remarked that the periods of happiness are empty pages in the book of

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Finance Cell, MIB, Delhi School of Economics

Story of Steve Jobs

“Steve was among the greatest of American innovators - brave enough to think differently, bold enough to believe he could change the world, and talented enough to do it. By building one of the planet's most successful companies from his garage, he exemplified the spirit of American ingenuity. By making computers personal and putting the internet in our pockets, he made the information revolution not only accessible, but intuitive and fun.

And by turning his talents to storytelling, he has brought joy to millions of children and grownups alike. Steve was fond of saying that he lived every day like it was his last. Because he did, he transformed our lives, redefined entire industries, and achieved one of the rarest feats in human history: he changed the way each of us sees the world.�

--Barack Obama Steven Paul "Steve" Jobs was a versatile American business magnate and inventor.

He was co-founder, chairman, and former chief executive officer of Apple Inc. He had previously served as chief executive of Pixar Animation Studios, became a member of the board of directors of The Walt Disney company in 2006, following the acquisition of Pixar by Disney. He was credited in the 1995 movie Toy Story as an executive producer.

Jobs was adopted by Paul and Clara Jobs.

After school lectures, he went to the

Hewlett-Packard, California. He was soon hired there and worked with Steve Woznaik as a summer employee. Sleeping on the floor in friends' rooms, returning Coke bottles for food, and getting weekly free meals at the local Hare Krishna temple.

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Finance Cell, MIB, Delhi School of Economics

Jobs also travelled to India to visit Neem Karoli Baba at his Kainchi Ashram in search of spiritual enlightenment and went back a Buddhist!

Apple was funded in 1976 by Steve Jobs, Steve Wozniak and Ronald Wayne. At the end of May 1985 – following an internal power struggle and an announcement of significant layoffs –Jobs was relieved of his duties as head of the Macintosh division.

Around the same time, Jobs founded another computer company, NeXt Computer. NeXt Mail, was an example of his "interpersonal" philosophy and one of the first to support universally visible, clickable embedded graphics and audio within e-mail.

In 1996, Apple announced that it would buy NeXt for $429 million, bringing Jobs back to the company he had co-founded. He was formally named interim chief executive in September 1997. In March 1998, to concentrate Apple's efforts on returning to profitability, Jobs terminated a number of projects, such as Newton, Cyberdog, and OpenDoc .In recent years, the company has branched out, introducing and improving upon other digital appliances. With the introduction of the iPod portable music player, iTunes digital music software, and the iTunesStore the company made forays into consumer electronics and music distribution. In 2007, Apple entered the cellular phone business with the introduction of the iPhone, which included the features of an iPod and, with its own mobile browser, revolutionized the mobile browsing scene. While stimulating innovation, Jobs also reminds his employees that "real artistship", by which he means that delivering working products

on time is as important as innovation and attractive design.

Jobs earned only $1 a year as CEO of Apple; he held 5.426 million Apple shares,

as well as 138 million shares in Disney.

Forbes has estimated his net wealth at $8.3 billion in 2011, making him the 34th wealthiest American.

In August 2011, Jobs resigned as CEO of Apple, but remained at the company as chairman of the company's board. Hours after the announcement, Apple Inc. (AAPL) shares dropped 5% in after-hour trading.

On October 5, 2011, he died peacefully in presence of his family.

The erstwhile CEO of Apple shall remain source of inspiration for thousands of “wanna be” entrepreneurs and geeks.

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Finance Cell, MIB, Delhi School of Economics

Finshastra Times China warns of trade war over U.S. bill on yuan's value A U.S. Senate bill seeking to punish China for manipulating the yuan risks triggering a trade war, Chinese officials said. The measure disrupts trade between the U.S. and China and violates World Trade Organization rules, Foreign Ministry spokesman Ma Zhaoxu said. A procedural vote in the Senate cleared the way for action on the bill this week.

Eurozone finance ministers postpone decision on Greek rescue Finance ministers in the eurozone delayed a decision about providing further assistance to Greece, although they acknowledged that the Greek government has made progress in trimming its debt. Eurogroup Chairman Jean-Claude Juncker emphasized that none of the eurozone nations is seeking a Greek default, and he rejected concerns about Greece exiting the euro area. The ministers did reach an agreement to provide Finland with collateral in exchange for Greek aid.

Protest against Wall Street spreads across the U.S. An anti-capitalism protest has grown beyond Wall Street, spreading to Boston, Chicago and Los Angeles. Organizers are planning a march Thursday at Washington's Freedom Plaza to "denounce the systems and institutions that support endless war and unrestrained corporate greed." Although without a single leader or a list of demands, protesters said they are close to transforming their anger into a durable U.S. cause that isn't controlled by the political elite.

Analysis: Politicians are manufacturing a recession Some economic indicators are improving, but politicians in Europe and the U.S. are turning a recovery into a recession by cutting government spending, according to The Economist. "You know, if it weren't for the politicians, the economy would have a fighting chance," an Economist Free Exchange blogger writes. "A global economy with decent cyclical fuel and no obvious imbalances is being betrayed by politics.�

Analysis: India's social progress doesn't mirror improving economy India is reaching many of the development milestones that China passed years ago, but India's social progress in areas such as infant mortality and life expectancy lags far behind, as illustrated by The Economist's Daily Chart. "A child's odds of surviving past their fifth birthday are as bad in India today as they were in China in the 1970s," the magazine noted.

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Greece plans mass layoff, spending cuts to obtain rescue funds The Greek government approved $8.8 billion in spending cuts and committed to laying off thousands of workers in a last-ditch effort to secure the next round of funding from an EU-led rescue. Prime Minister George Papandreou said the latest austerity measures will bring Greece's 2012 deficit to 6.8% of gross domestic product. Greece previously agreed to a 6.5% target.

Financial system is on verge of credit crunch, analysts say Analysts warned that the global financial system could be facing another credit crunch, as credit default swaps on banks worldwide reach fresh highs. In the past two months, the cost of insuring debt of banks in China, Australia and elsewhere has surged. "The money ran out in June, and what you are seeing now is the beginning of a new credit crunch, except this time it will be truly global, not Western," said a senior credit analyst in London.

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Finance Cell, MIB, Delhi School of Economics

U.S. economy is "close to faltering," Bernanke warns.

Federal Reser ve Chair man Ben Bernanke told the Joint Economic Committee of Congress that the U.S. job market likely won't improve quickly and that the overall economy is "close to faltering." He said he shares many of the views of anti-Wall Street protesters.

"They blame, with some justification, the problems in the financial sector for getting us into this mess, and they're dissatisfied with the policy response here in Washington," Bernanke said.

Analysis: There's a better way to pressure China on the yuan If the U.S. wants to force an increase in the value of China's yuan, there's a way to do it that is less dangerous and more beneficial to both countries than congressional legislation, according to The Economist.

"America should ignore China's peg -- and its warnings against taking further steps to loosen monetary policy -- and adequately reflate," a Free Exchange blogger writes. "That will place pressure on China to revalue, but without putting the country in a position that weakens international institutions and a key diplomatic relationship."London.

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Finshastra Team Finance Cell, MIB, Delhi School of Economics

Anuratn Purushottam Convener, Finance Cell

Ankit Singh

Vaibhav Gupta Editor and Design, Finshastra

Shaunik Bhasin

Sikha Rathi

Shampy Agarwal

Sunita Arora

Nripanshi Bansiwal

Aanchal Khaneja

Neetu Sherawat

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