Wednesday, March 25, 2009

Depression, Recession, Meltdown, Slowdown, Downturn, Inflation, stagflation

The current Economic Scenario both Globally and in India is a matter of concern. Many of the current generation really do not understand what is going on and are confused about words like Depression, Recession, Meltdown, Slowdown, Downturn, Inflation, stagflation etc. If these words are understood in the right context then the scenario becomes clear to the layman and it will diminish The Fear of the Unknown and add a little more confidence, as he/she will really be able to see where he/she stands in the current scenario.
RECESSION: When the GDP(Gross Domestic Product) of a country, which means the total value of the Goods, Services and Agricultural Products is taken into account and if there is no growth for two continuous quarters( a quarter is 3 months in a year), then it is assumed that the country is sliding into a recession. A weight age is given to each of the sectors of the economy and every sector of the economy must pull its weight in order to contribute to growth. If this does not happen then the Economy is considered to be sliding into a recession. The recession is confirmed.

DEPRESSION: When a recession hits a economy and there is a widespread decline in the power of the people to buy goods and services, and when such goods and services cannot sustain themselves and there are large scale layoffs and job losses leading to further inability for people to live normal lives and when the recession moves into 4 quarters then the country is sliding into a depression. In a depression growth continuous to be negative and will take time to move into the positive segment. It is estimated that around 850 billion dollars will have to be pumped into the economy, which mainly means to put money into the hands of people to buy and turn 1% negative into positive. As of this day the USA, Europe, Australia, Japan, Korea, Africa and the latest addition is the Middle East and Singapore/Hongkong are in a state of recession and many of these economies are moving into further negative situations which means depression. A toal of more than 20
million people in all these countries have lost their jobs.

MELTDOWN/SLOWDOWN/DOWNTURN: This means that growth slowdown. The economies of India and China which were expected to grow  by about 9% to 12% during 2008-2009 are now projecting growth at 5% to 7%. India is not into recession and there is every reason to believe that this cannot happen even in 2009-2010.We call this a slowdown/meltdown or downturn. When a country is heavily dependent on its manufacturing, goods and services and agriculture and when these in turn are heavily dependent on exports and when economies in recession cannot afford to buy or import as before then there is bound to be a slowdown. China depends to the extent of 64% on exports and only 36 % on local consumption and as such the slowdown has hit China badly. More than 20 million( one million is 10 lakhs) workers have lost their jobs as they were mostly working in export oriented industries. Having lost jobs they now do not have the money to buy anything they need as such local
consumption is also affected. Remember that China is the 3rd largest economy in the world only next to the USA and Japan. The Middle East economy is fired up by the sale of oil. Remember that Crude was selling around USD 150/- in July/August 2008 and since then the price of crude has come down to around USD 42/-. The largest consumers of oil are the USA, Japan and China and India. When the first three economies of the world who account for more than 55% of the oil consumption and they are in recession then crude prices, which are govered by demand and supply cannot go up. This means the revenues of the Middle East have come down by two thirds and all work and projects which began on the assumption that crude prices will stay at around USD 140/- are now coming to a stand still. Dubai is a totally service oriented Economy like Singapore and Hongkong. When IT, Financial and other services are hit in the major economies these economies also are hit badly.
In contrast India depends only to the extent of 16% of its economy on exports and 84% of what we produce is consumed locally, so it is far fetched to think of India going into a recession.
Yes certain sectors of the economy which were nearly 80% dependent on exports like the IT industry are hit then such of those who are connected with this industry are also hit. This does have a cascading effect on other sectors too but this could lead to a real correction of the economy. Money now begins to have a intrinsic value, rather than just the paper it is printed on, which was the case a couple of months ago.As compared to the countries who are in recession or depression or like China in a slowdown India also is in a slowdown but we haven’t even officially reached a level where 100,000 jobs have been lost. Yes perks have been discontinued, increments have been stopped, salaries have been reduced, work hours have been stagerred but then the Indian Management System is much more humane. Stop complaining and start working and feel happy you have a job.

INFLATION: Inflation is when the demand supply situation works and when demand is more than supply then people are prepared to buy at whatever prices that are quoted then we have a inflationary situation. Like rice and wheat and sugar. When production is disturbed and we have a hungry population then the market, like crude oil, dictates the price. It is like for the last 7 years when the IT industry was on a euphoria of growth, when companies were recruiting people commanded a price which was unrealistic or inflated. For every 5 jobs created there was only one person available and this person went to the highest bidder. This person in turn when he had more money than he would have ever seen in his life at this young age did not think of liquidity or the future and went on a spending spree. Real Estate/ housing came into demand huge demand and prices were inflated. Banks were prepared to lend to this new age buyer and the buyer went in for huge EMI’s on
Flats, Vehicles, holidays and other expenses leaving not much for liquidity. Now with companies downsizing on salaries, people, perks, when companies start laying off people due to business or profit concerns then the demand for such goods come down and the inflationary trend comes down. Our inflation rate today is at the level of 2002 and it is still going down. One of the greatest things about India is that while the savings rate in the US/Europe is in the region of 2% to 4% in India it is in the region of 35% to 40%. Even in times of trouble people have saved money to spend when they do not have a steady income. This will keep the economy moving, maybe slowly but moving not falling. We have a well regulated and strong financial system and our banks are considered some of the strongest in the world. As of today the Market capitalization of The State Bank of India is higher than Citibank, USA. Job losses are minimal and opportunities to work are still
there. Maybe it is not a job of your choice, but remember when you are hungry, anything will do and not necessarily from a 5 star menu card.

STAGFLATION: When the prices of products, goods and services do not go up or come down and when our growth is continuously the same it is considered to be stagnant and as such we have stagflation. 

Inflation is a necessary evil like blood pressure. Your blood pressure must be 80/120 for you to be normal. While the 120 can go up to 140 then 80 cannot go down to 60 which means you are in trouble. This is called low BP. You need to see a doctor immediately.
But when the 80 hits 190/210 then it is high BP and you need to see a doctor too.

Many of us who are in our late 50’s and 60’s have seen these recessionary and downturn situations in the past and we have learnt lessons from it and as such even though I run a business I am running a successful one as I have taken steps long ago to insulate myself in such a situation. Youngsters should not be afraid or lose heart. This is a cycle which happens in your life and like us you have your lessons to learn.

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