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World Worse Off Now Than It Was In 2008?

Monday, October 10, 2011

Countries like the “United States are dealing with a much larger sovereign-debt burden…. The world is worse off now than it was back in the heart of the 2008 recession,” says Nassim Nicholas Taleb, author of the best-selling book “The Black Swan”. Taleb also a professor at the New York University in that book had analyzed the markets from a different view and based market behavior on the hypothesis that “unforeseen events with a large impact on markets occur more frequently than statistical analysis predicts...”

Speaking at a news conference last week, he referred to the turmoil during the last global financial crisis of 2008 and said, “The structure of the problem has still not been understood. We haven’t done anything constructive in three and a half years. Nobody wants to do anything drastic now.” According to him, “Bigger problems need better solutions. And concerns are only escalating with the Eurozone debt crisis, credit downgrade back in August, and the stagnant U.S. Economy. As our (US) economy shows signs of slowing, things are only getting worse...”

Taleb criticized U.S. leaders for not doing anything of substance for the past three and a half years and said, "Nobody wants to do anything drastic now… we will pay the price for that lack or urgency. To combat the problems, we've been looking to the Fed and the federal government for stimulus; but it hasn't done the trick yet” He was referring to Federal Reserve Chairman Ben S. Bernanke statement that “he’ll push forward with further expansion of monetary stimulus if needed.”

Taleb argues that “growth fuelled by government debt isn’t really growth” and advised countries to keep their budgets balanced before the situation got worse. These words of wisdom certainly reflect a negative note. But these world views cannot be ignored. The market experts argue that India can behave differently because its growth is insulated? I don’t think so…We are not decoupled from the global scenario.

The argument on whether we are decoupled or not is best explained by Ashish Kumar of Elara Securities. In a recent report he says “Our analysis rejects the decoupling hypotheses for India. The Indian economy is strongly coupled with the business cycles of the US and EU and the synchronisation has only increased over time. Also, as world markets have diversified over time, the Indian business cycle is more synchronised with a composite of all advanced counties (namely EU) rather than just the US. In this context, India has high stakes in the world on a high growth trajectory of 5%. Any uncertainty on the growth of advanced economies does not augur well for the Indian economy.”

What it means that while it is ok to be cautiously optimistic, it would be imprudent to conclude that the world’s problems have been resolved, every time some small positive development unfolds…

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