Category: Your Money

Competitive Devaluation and a case for Gold

This is the second of three posts by Abhishek Preetam on why he is bullish on the yellow metal. Please welcome him to StockViz and follow him on twitter @AbhiPreetam

Throughout history, countries with high debt-to-GDP ratios are seen to have trouble getting back to their pre-crisis growth story. They can’t grow enough to repay their debts, and have little choice but to default.

A sovereign default usually comes in one of the following three forms:

  1. The country willfully does not repay, force its debtors to take a haircut to reduce its debt burden, readjust its policies and starts growing again (Russia, Argentina).
  2. The country starts printing more money and repays its debtors in worthless new currency (Brazil in the late 1980’s and early 1990’s)
  3. The country devalues its currency (Iceland) and goes through the trouble of cutting expenses, high unemployment levels, and decreased GDP growth in the short run and comes up well at last.

In all the these scenarios, countries will have high inflation for a brief time (brought on by increased money supply). During this period of hyperinflation, whoever is left holding the country’s debt (or its currency), gets wiped out. But, once the readjusted economy gets back on its foot, sound fiscal and monetary policies puts economic growth back on track.


Percent of GDP

Amt in (T = Trillion$, B = Billion$)

GDP (T = Trillion$, B = Billion$)

Per capita (in $)



2.38 T

172.3 B




8.981 T

2.173 T




1.304 T

324.5 B




2.55 T

676.9 B




1.324 T

394.3 B




626.1 B

201.7 B




1.001 T

354.7 B




505.06 B

186 B




867.14 B

332 B




640.7 B

255.3 B




815.65 B

325.8 B




5.37 T

2.15 T




552.23 B

247 B




5.44 T

2.94 T




579.7 B

318.1 B




2.46 T

1.37 T




2.602 T

1.77 T




1.23 T

882.4 B




225.54 B

187.6 B




14.825 T

14.66 T


During the period of readjustment, there is usually a rush into hard assets (gold and commodities in general) whose value cannot be touched by the devaluation/default. Let’s look at the present debt to GDP ratio of various world economies.

We all are aware of Greece’s condition and its upcoming obligation to start making payments on its earlier debts. According to the updates from the Greek government this October, they were not in line with the necessary economic reforms and are also predicted to be stuck in the same rut of economic stagnation in the coming months.

Currency devaluation could have been a way out for Greece. However, it is not feasible for EU economies (thanks to the Euro), and big economies like US. The Euro cannot be devalued because of the diverse set of countries involved, and the impact it will have on the other well off countries (Germany, for example). If Greece, decides to devalue their currency alone, they will have to move out of the union, which will have serious impact on its trade and economic relation with other countries.

The US could get rid of its high debt load by printing more money. This will help it get rid of its debt in the short run, but the dollar will lose its value compared to other world currencies. This also would mean that no other country will buy US bonds and hence won’t lend to US in the future. In short, the USD will lose its reserve currency status and result in a permanent global shift in power.

Looking at the present conditions and hoping that the current turmoil will be over soon seems too optimistic. We seem to be headed down a path that involves Greek default, maybe the abandonment of the Euro and more money-printing in the US.

Some strategists believe that market forgets these issues pretty fast. Just like when Brazil, that had lot of debt during the late 80’s and early 90’s, hyper inflated its way to a 7% Debt-to-GDP ratio. Investors quickly put the past behind and made Brazil one of the shining stars of world’s emerging economies. This story can happen in the case of US as well.

No matter what the outcome, during periods of uncertainty and hyperinflation, investors will look toward Gold as a haven and a preserve of wealth. This looks to me like a pretty good factor driving demand and yet another reason for gold prices to surge. Investors the world over increased their allocation to the yellow metal starting in 2008, and the current lull in the market after the Aug 31st correction in prices may provide investors with enough reason to start buying again.

Sunder’s List

The disconnect between Washington and the rest of the nation hasn’t been this wide since the late 1960s. Washington pre-occupied « The Berkeley Blog

The government’s bacchanalian populism has resulted in the destruction of public finances: India’s road to fiscal ruin

Is it really any wonder that a debt deal has been hard to come by? Europe’s Insult Diplomacy – Businessweek

China has just moved from Stage Three (euphoria) to Stage Four (crisis): Five steps to financial crisis

The Lessons of the Last Three Months

Sometimes it seems there are two Jon Corzines: Insight: The two faces of Jon Corzine

Follow me on twitter: @SunderStockViz

Sunder’s List

This is beginning to feel like 2008, complete with all the rumor and chaos and volatility we saw back then: Europe’s doomed fate | Felix Salmon

For “risk-on, risk-off”, you could read “referendum-on, referendum-off“ on Thursday: Dollar looks even shakier than the euro –

A year ago, Ireland wasn’t much more than one of two “I” nations of the five little PIIGS who were going to bring down Europe: Three Things Greece Can Learn From Ireland

With the Chinese government tightening credit, the massive leakage from the formal banking sector into the ‘shadow system’ ultimately risks a hard landing: Swimming Naked in China | The Diplomat

Wheat is heading for the biggest slump in three years as the second-largest harvest on record swells stockpiles: Wheat Plunging as Decade-High Stockpiles Ease World Shortages

Vanguard’s chief investment officer, Gus Sauter, offers his thoughts: Vanguard’s investment chief on keeping a long-term view in tumultuous times

follow me on twitter: @SunderStockViz

NREGA is evil

Farmer plowing in Fahrenwalde, Mecklenburg-Vor...

Image via Wikipedia

I have always maintained that the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) is evil. Its evil both philosophically and by intent. It was sold as a scheme to create productive job opportunities for rural labor during the non-farming season and was supposed to be active in districts with acute unemployment problems. However, it has morphed into a major boondoggle.

I blame NREGA on our persistently high inflation and our seeming inability to grasp that  unproductive transfer payments always end in tears for the tax payers. And now, Morgan Stanley concurs:

This program has had an adverse impact on domestic inflation for three reasons:

  1. it discouraged workers to go to farms;
  2. local governments that did not have the administrative setup to run this program ended up transferring payouts to workers without getting the full productive utilization of the workers’ time; and
  3. those receiving these transfers ended up spending more on food (particularly protein items), since this represents a large proportion of their consumption basket.

Labour Bureau statistics indicate that, over the last three years, agricultural wages in India have risen by a cumulative 105%, compared with nominal GDP growth of 64% in the agriculture sector.

So the rural farm sector sees an unproductive increase in wages while the urban labor productivity weakens due to global economic slowdown and purchasing power decreases due to the Reserve Bank hiking rates 13 times in a row!

I call NREGA evil precisely because it prevents the movement of labor from unproductive sectors to productive ones. If the goal is to keep the poor unproductive and to pull down the lower middle classes back into poverty, then NREGA has been an unprecedented success. When will this madness end?