Learning by Proxy | Debt-rimental Budget

As countries move to announce larger stimulus for their economy, the question of how they plan to pay back the debt they are taking on still hangs in the air. We know the source of the next distress!

The developed world is in far greater trouble than the developing nations because they are sinking deeper in debt with each progressing day. The last time nations saw as much debt on their books, they were waging a war! This war is different, no land to occupy, no people to punish.

Capitalism demands growth. COVID not only broke the growth cycle, it has taken nations back 3-5 years. Will the coming crisis break Capitalism’s back?

Burdened by Debt

“I have to go to the government office.” A sentence that implies you have to waste your entire day.

You may have to go to get your property registered or get a driving license or get a business license. The job of the government is to create laws and ensure that they are maintained. There are lawmakers (MPs) and their teams who create the law. Then government officials who administer the law - issuing licenses, etc. And the police and court system meant for the upkeep of the law.

This entire system of people that enable this need to be paid salaries. Apart from this, the government also spends on activities that are for public good - such as building roads, school, etc. - which are supposed to provide returns in the long terms. The salary and the investments comes from the income of the government, which we also call Taxes. While the job of the government is to govern the playing field and not be a player, as I mentioned in the first post of the year; sometimes the government likes to get into business. Indian Railways is a good example of the government running a business.

Apart from the taxes, there are income from such businesses which also contribute to the income of the government. The Budget is an exercise in putting forward to the nation, how the government plans to generate income and where it plans to spend that income.

When the government cannot cover the planned expenditure through the income generated, it borrows the money. Governments issue bonds in domestic and international markets to borrow money. The hope is that the investments made by the government today, will result in the economy's growth and more tax revenues in the future and offset the cost of the borrowing. Private investors like you and I, can buy these bonds for the interest that the government would provide. Apart from that organisations, other countries and our own Central Bank can buy these bonds.

When the central bank buys bonds, it often does that by printing more currency. That currency goes to the government and then into circulation through the contracts that the government may award or other programs that they may undertake.

The finance minister said the gross borrowing from the market for FY22 will be around Rs12 lakh crore ($18.3 billion).

The government had in May increased its gross market borrowing for the current financial year ending in March 2021 by more than 50% to Rs12 lakh crore from the earlier budgeted Rs7.8 lakh crore.

Source: Quartz

Also, last week;

Facebook, Apple, Amazon, all beat expectations. Apple sold 90 Million phones and generated a USD 111 Billion in revenue in one quarter. Just to put that in perspective, Reliance Industries has an annual turnover of USD 92 Billion across all of its business. Apple did 20% more in one quarter. The CEO, Tim Cook, was almost apologetic for having made so much money. How?

Well, when the government gives away one quarter of the GDP as stimulus to people; 80% of it to the rich, it is possible. The US stimulus to date has been USD 3 Trillion (India’s GDP is USD 2.7 Trillion, or so our government says!) and they plan to infuse another USD 1.9 Trillion in the coming weeks. When that goes through, USA would have effective distributed the equivalent of a quarter of their GDP to the businesses and people. Mostly to their businesses.

The businesses in USA have been having a tough time laying off all of their workers and using the stimulus cheques to line the pockets of their executives and shareholders. Such a hard life.

The commentary surrounding Indian budget said “India abandons fiscal prudence and borrows”. America issues debt greater than the entire GDP of India! What the hell are they saying?

How can America go on taking debt? Why can’t other countries do the same?

Most of the Sovereign debt issued by USA is bought by their federal bank, which just issues currency. As I had explained in my blog on Currency, thanks to the Bretton Woods Agreement, the USD has a unique position of being the preferred currency of exchange. Normal economy - If supply increases, which is what the fed is doing by issuing dollar to buy debt; demand craters and the value of the currency falls. But by being the preferred currency, they are immune to this kind of fall.

If India were to print the equivalent of one quarter of their GDP in currency, the value of the Indian Rupee would be decimated!

Have you heard of this thing called Sovereign Debt crisis? The last time it became an issue was back in 2010 when Greece went into crisis being unable to repay their debt.

The debt levels of various countries have spiralled with stimulus measures being taken.

Debt to GDP Ratio

Source: Commodity.com

Some of the biggest economies are neck deep in debt and it looks like they will issue more to dig themselves out.

Source: FT

With central banks’ asset purchasing programmes increasing wealth inequality and the coronavirus adding to social inequality, including even life expectancy, the pressure for populist policy is intense. Historically, populism has encouraged monetary financing of public debt, followed by a descent into inflation. This is deeply troubling. For the moment, though, investors’ most pressing financial concern should be the reality that the world economy is hostage to debt and wayward monetary policy. There will, in the end, be a reckoning. But the timing of any market crunch is inherently unpredictable — nor how it hits any particular country such as the UK. The American economist Herb Stein famously remarked that if something can’t go on forever, then it will stop. Less well known is the rejoinder by fellow economist Rudi Dornbusch who said: Yes, but it will go on a lot longer than you anticipate.

Source: FT

Source: Bloomberg

So the pandemic has taken us back to the World War II levels in terms of debt, and we have not even hit the peak yet!

Also, it is not over yet. America, India, Japan, and most of Europe are considering more borrowing to get through 2021. Where will this halt and how will it be paid back? If you look at the chart above, there is one thing that is not apparent. It’s called base effect.

If my GDP is 100 and my debt is 100% of GDP, I need to make 100 to get it back to zero. If my GDP is 100,000 and my debt is 100%, I need to make 100,000 to get it back to zero. Also 2% interest on 100,000 is a lot more than 8% on 100. Also, growth rates of advanced economies are low because of the same base effect and those of developing economies, high. The developed world should be worried.

After the second world war, the victors broke Germany’s back and America extracted Bretton Woods and the primacy of the US Dollar in exchange for shaving off the loans. How much economic growth would be needed to clear this debt off the governments’ balance sheets? Is it even possible?

Also, if in the next two decades, the primacy of the dollar or the Euro or the Pound is threatened, what would these countries do?

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High on Taxes

There are direct taxes like Income Tax where it is possible to fudge your earnings based on contributions made and such things, and then there are indirect taxes which are flat rate taxes on transactions. Whether or not you make money, you have to pay GST when you buy food at a restaurant.

India moved to GST in July 2017. Since then the government has had a transparent reading of how much taxes were collected as GST and by extension how much business has been done in India.

So it came as a tremendous surprise when,

The Finance Ministry said that the record GST mop-up points to economic recovery and action against tax evasion. Goods and Services Tax (GST) collections in January (for sales in December) rose 8.1 per cent to Rs 1,19,847 crore, the highest level since the July 2017 rollout of the indirect tax regime. Pickup in economic activity along with compliance measures and action against tax evaders by use of data analytics along with the recently introduced technological systems of e-invoicing contributed to the surge in GST revenues.

Source: The Indian Express

While tax evasion might be a thing, most of the evasion is by small businesses, not large ones. It is near impossible for large businesses to evade GST. The large businesses have been complaining of declines and we are hitting GST records!

What makes sense is that the number that were being reported in 2018, 2019 about the condition of the economy were not entirely accurate. And that the level of economic activity in December 2021 is greater than the level of activity that was seen in December 2019.

To offer further proof;

[…] the National Payments Corporation of India (NPCI) reported a minor bump in UPI transactions for January 2021. UPI recorded 2.30 Bn transactions in January 2021, which is just 3% higher than the 2.23 Bn transactions recorded in December 2020. The transaction volume also increased by 3% from INR 4.16 Lakh Cr to INR 4.31 Lakh Cr.

Source: Inc42

There is just more economic activity at present, all data points in the same direction. This data alone gives me much hope for India and our ability to dig ourselves out of this economic hole.

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Zeppelins

As the last decade of the 19th century was starting, two brothers founded a newspaper company in Dayton, Ohio called The Evening Item. The newspaper failed, lasting only a few months. After that failure they decided to capitalise on the craze for cycles that was sweeping America and started a bicycle shop. As the decade wore on they both got interested in flight and it would a decade before they flew their invention at Kitty Hawk, North Carolina. While the Wright bother were still repairing cycles...

Across the Atlantic, a retired German Army officer, Count Ferdinand Von Zeppelin was inventing the Airship. He patented his idea in 1895. Airships differed from Airplanes in that they used light gases like Hydrogen and Helium to provide them lift. They also fly at lower altitudes of about 5000 feet and need extremely little energy to operate compares to planes. The downside is that they are far slower.

Climate change might bring them back!

paper in the journal Energy Conservation and Management published in September posits that just one airship could move 21,000 tons of stuff using almost no energy at all if we used airships to harness the free winds of the jet stream, the narrow band of fast-moving air above the troposphere, where planes fly. These winds, which average 100 miles per hour and can be as speedy as 250 mph, could propel an airship from Denver to China in about seven days or from Los Angeles to Tokyo in four, says Julian David Hunt, of Austria’s International Institute of Applied Systems Analysis and the paper’s first author.

[…]

These lower-flying vehicles, known as hybrids, are likely what we’ll see in the nearer future. Aerospace company Lockheed Martin’s hybrid prototype sports three cartoonish bubbles up front to help with navigation and engines to assist with maneuverability. The company’s hybrid design uses 20% aerodynamic lift — a lightly fuel-powered boost for a bit of a “plane-like effect” — and helium for the remaining 80% buoyant lift, Boyd says. The end result uses significantly less fuel than a plane and can access many areas other vehicles can’t.

Source: One Zero

Air traffic for cargo is expected to rise three folds. The current planes would be catastrophic to climate. Using airships will reduce the carbon footprint a great deal. A vast amount of fuel is burnt getting the plane off the ground because it uses powered lift as opposed to airships that use buoyant lift. Also, planes operate at about 900 Km/h topping off at about 1000 Km/h. Airships can be expected to operate at a quarter of that speed.

For innovators, this opens up possibilities since the constraint is the material technology today. If Zeppelins could be designed with more sturdy material, it would be possible to have them fly in the jet streams and travel faster. That companies like Lockheed Martin are spending research dollars on airships is a very positive development.

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Self Goal

The United Kingdom is what it is thanks to the robbery that they call colonialism. So when they decide to score a self-goal, it gave me immense pleasure. Brexit - a gift that keeps giving.

The country is under lockdown, and there is a definite slowdown in economic activity. In the meantime, Brexit has introduced new paperwork for all good moving from Europe to the United Kingdom. Needless to say, nobody enjoys the paperwork. So they are avoiding it!

Fear of hassles and red tape stemming from the introduction of the new rules governing Britain’s trade with the European Union that came into effect on Jan. 1 led to dire predictions of overwhelming gridlock at British ports.

But, so far, the opposite has happened. Apart from hardy souls like Mr. Anderson, truckers are increasingly shunning ports like Holyhead. They are fearful of the mountains of paperwork now required for journeys that last month involved little more than driving on to a ferry in one country and off it in another.

Source: New York Times

Truckers are choosing to take a longer ship ride to Ireland from France, or even Scotland, where paperwork seems to be a lot less and Holyhead is said to be looking like a “Ghost Town”. This is true of many of the ports in England, and they need to change something for things to return to their earlier state. UK’s loss is Ireland’s gain.

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Iron Fist Opens

For the last 26 years, Jeff Bezos has run Amazon with an iron fist. He was the ultimate authority on everything. He used ruthless tactics to grow his business and often squeezed many of the competitors out of business. The peculiarity of the way law is interpreted in America meant Amazon never got pulled up for all those tactics. Instead, there was a problem with Apple selling books! Having a second player in a space monopolised by ONE.

Whenever Amazon was questioned on antitrust, Jeff Bezos loved to frame Amazon as a part of the retail industry of which they only had a single digit percentage, rather than as a part of the e-commerce industry where they had 60% market share.

Jeff Bezos will be stepping down as CEO of Amazon. Jeff Bezos is 57, he could have quit at a nice round number of 60. Why now?

COVID created unprecedented tail winds which has pushed Amazon to occupy 25% of even the retail industry. With several retailers filing for bankruptcy, jobs being lost and the democrats in power, it is going to be hard to keep up the charade that Amazon is a small fish.

There is going to be an anti-trust case, which at the very least will split AWS and Amazon.com. As the founding CEO of a company and its majority shareholder, he cannot be seen dumping shares of Amazon. Those shares are worth a paltry USD 200 Billion. Hence he needs to quit.

Here is what will happen.

Jeff Bezos is going to turn into a philanthropist. He will create a trust and dump all his Amazon shares into that trust. To make it seem like the trust is engaged in philanthropy he will donate 100 Million, which in absolute terms seems large but relative to his net worth is probably less than his annual travel bill. He will then sell shares of Amazon for the just cause of philanthropy.

Then he will build a space company because that is the only way he can spend so much money. Or perhaps he can buy up a few hundred thousand acres of land in America like his buddy from Seattle, Bill Gates did.

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Trickle Down

I noticed while going through New York Times that the precipitous fall in cases in America began the day, Twitter froze Donald Trump’s account.

Coincidence?!

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Also

Did the COVID-19 virus emerge from Wuhan - A theory

In a work from home, teach from home, world you could learn from the same professor for the entire year only to find out he died a year earlier!

The Talent crunch in silicon valley is so real - when a company acts strangely, recruiters target everyone!

While the Chinese are busy building villages in Arunachal Pradesh; the government has time for this!


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