Globonomics!

Consulting|Technology|International business

Are we staring in the face of a depression in 2008?

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

If you look at the above link, some of the linkages are chilling. There was a liquidity crisis then too (forget what trigerred it), loans were hard to come by, banks collapsed like nine pins, unemployment soared and the US triggered it followed by a worldwide collapse (nearly 3/4 of a century ago when there was hardly any communication at today’s speed) that got rejuvenated only with the onset of the second world war.

So, in other words, it took a world war to get the world out of a depression back then in the 1930’s.

Ben Bernanke, the current US Fed chairman gave a speech yesterday and was not all that optimistic.  He should know better as he is a student of the depression of the 1930’s.

Now, you would probably appreciate as to why I chose to read the Security analysis as narrated by the legendary Ben Graham as he had a ringside view of the depression (his book is a 1934 classic) as it unfolded and taught us what we call the Bhagvad Gita of investing – the Security analysis. It’s to know the causes of such vicious economic cycles and what is in store for us. We will be able to prepare ourselves from an economic, financial and an investment standpoint.

On a sidenote, coming back to the present, worldwide markets went into a freefall today. Iceland – a land of 350000 people was on the verge of becoming bankrupt and asked for Russian assistance to bail it out. UK has also come out with a bailout package. An Indian has been appointed by the US Treasury secretary, Hank Henry Paulson to figure out how they proceed with buying the illiquid assets of financial institutions so their balance sheets can be rid of the mess.

I would say a recession in the US followed by UK (by the way, New Zealand is already in a recession) and then countries like Germany, France etc. is imminent. China and India might get away with lesser GDP growth. The IMF forecasts a recession (stating the obvious) and predicts a 9% GDP growth for China and a 6-7% growth for India in 2008-09. India’s finance minister went on air today to explain the Indian position and said liquidity is an issue worldwide and India is not immune to it. RBI (India’s central bank) cut CRR (cash reserve ratio – the amount of money banks have to park with the RBI) two days back to encourage liquidity movement in the financial system.

Is the bottom of this mess reached? No way. Its still to find the abyss. Meanwhile, tighten your belts for a long economic recovery that might on till 2010 (conservative estimates). Save money and act thrifty. It will pay rich dividends later. Invest wisely. Even real estate is affected so hold on before you make that expensive flat/house purchase paying astronomical sums – think for a second, a majority of US homes are selling at lesser than the purchase price that even if the bank were to issue a foreclosure they would not be able to make sufficient money to make up the cost of the house. Even posh neighbourhoods have not been spared – Southern California included.

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Written by Naveen Athresh

October 9, 2008 at 12:49 am

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