THE US CAULDRON-THE AFTERMATH OF SUBPRIME

Over the past few weeks the central banks and the markets across the world have been struggling with the sub prime mess that blew up in USA.Let us first understand the basic economic theory of growth and then get down to the current problem.

It has been clearly laid down in economic theory that the fundamental basis for growth is savings and invesment in productive areas of the country.In certain times and periods the domestic savings may be low but as overall economic activity improves, the income levels of improve.After spending on basic consumption (Food etc) the individual spends on discretionary things such as car,house etc.After that he tries to save for his future.This may be through bank deposits,mutual funds,insurance or direct equity.So let us come to the problem in USA.The citizens of USA have been spending through the roof.Over and above their income they have gone ahead and borrowed on their future income and spent it on various things.While this may be good in the short run to provide the demand impetus for various sectors of the economy it is bad in the long run.As economic activity runs through cycles excesses are built in the spending pattern.So when the economy slows down,jobs are cut,spending of corporates reduce as the economy tries it best to cut costs to stay afloat.So when this happens defaults starts in the credit market leading to virtual cycle of problems.

So it clear that the USA has dug a hole for itself which can only be corrected by a deep cut in the economy.Now nobody in the administration wants a recession.It is a virtual calling card for defeat in elections.So they will try their best to stem the problem and print more currency to postpone the problem.

Allied with this problem is the growth in China and the rest in Asia.That we will address in the next article.


As far as the stock markets are concerned it is reflecting the shift in power from developed economies to the developing econmies.Though i believe it is just the begining -There is lot of pain before the shift happens totally.