What does the US Government Shutdown mean for the economy

October 1, 2013

The Government shutdown means that from tomorrow government employees would not be paid for work or would have to work without pay in some cases for an indefinite time.

This means a lot of hardships for their families. Though President Obama has signed a law confirming that citizens on military duty will be paid their salaries and will continue to be on duty.

Nevertheless, what this means for the economy is that the spending power of the consumer is going to go down and so is the investor confidence. Thought the real impact of this shutdown will depend on the time for which the shutdown happens. The longer it stays the worse it is going to get. Businesses are going to shrink as the consumer spending power goes down, companies will stop new investment plans and hiring plans and this spiral will begin. This may potentially slash off some GDP points from the economy.

Now, what makes it more scary is the timing. This is because of the overlooming debt ceiling issue. When the debt ceiling will be reached is a difficult question to answer. However, according to predictions, its going to be somewhere between the October 18 to November 5 period.

If both these issues are not handled with care, it could have huge recessionary impacts on the US economy.

What it means for various US services :


Argentina Debt Crisis, 2002 – A Debt Structuring Case Study

September 10, 2013

In 2002, Argentina faced a financial crisis and had no choice but to devalue its currency and default on its debt. Before this the Argentine peso was tied to the dollar at 1:1 and after devaluation it settled to 4:1. 

Solution : Debt Structuring. Argentina exchanged old debt with the new debt at 30 cents to the dollar and returns were linked in terms of GDP indexed bonds. 

What are GDP indexed bonds ?

Suppose a country has been growing in the last few years at an average rate of 3% and is expected to do so in the coming years. Suppose also that this country can issue debt using a fixed-income bond with a coupon of 7%. This country can issue a GDP-linked bond that pays 7% when output growth at the end of the year is exactly 3% and will pay more or less accordingly to its economic performance. That is, for example, if the country grows 1% instead of 3%, then the GDP-linked bond will pay a coupon of 5% instead of 7%. Conversely, if there is an unusually better economic performance and the country grows 5% instead of 3%, then the GDP-linked bond will pay a coupon of 9%. <Source Wikipidea>

Why GDP indexed bonds worked ?

The incentives of the creditors and the debtors were both aligned as both of them wanted to come out of recession. 

How is American Corporate Debt restructured ?

Bond is swapped for equity, with bondholders becomeing equity holders. Chapter 11 of bankruptcy filing.

What are vulture funds ?

They took advantage of a clause that all claimants are treated equal. That is if Argentina would pay the claimants who accepted debt structuring, they would also have to pay what they owed to other claimants.

Referrences : 

  1. http://en.wikipedia.org/wiki/GDP-linked_bond

A view point on current run for emerging nations currencies

September 9, 2013
  1. Popular view : US QE tapering
  2. Contrary view : Shrink in consumption, leading to lower exports and hence, higher CAD. Eurozone is now running an overall surplus in CAD. They have run austerity measures and hence, the demand in the Eurozone has shrunk.

This post is in continuation to the post : https://sayantansays.wordpress.com/2013/08/26/reasons-why-the-ruppee-is-falling-against-the-dollar/

Structure of the Federal Reserve

August 28, 2013
  1. The Federal Reserve Board comprises seven governors; but, for most of its history, the Board has operated in the shadow of its chairmen, three of whom (Marriner Eccles, William McChesney Martin, and, most recently, Alan Greenspan) served for nearly 20 years.
  2. Monetary policy is, in principle, decided by the Federal Open Market Committee, which includes 12 voting members: the seven Fed governors, the president of the New York Fed, and four presidents of the other 11 regional Federal Reserve Banks (who serve on a one-year rotating basis). In practice, however, Greenspan and many of his predecessors came to dominate the FOMC.

Reasons why the ruppee is falling against the dollar

August 26, 2013
  1. India’s external deficit is 5% of the GDP in 2012-13 compared to 2.8% in 2008-09
  2. A large current-account deficit is a classic symptom of a pre-crisis economy living beyond its means – in effect, investing more than it is saving.
  3. This is where QE comes into play. It provides the means in terms of foreign investments to live a lavish life and to keep spending more. 
  4. The emerging markets including India have high interest rates, there by attracting foreign investors.