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Tapering Impact

We checked with six experts on our preparedness for the imminent quantitative tapering

The world's largest economy has just averted a crisis that had threatened to make it a defaulter on its dues. A debt default could have seen the dollar losing value, interest rates going up and the US economy struggling. With the Republicans blinking first, the latest political grandstanding is for the moment over--for six weeks at least until the default threat rises up again in December.

Raising the debt ceiling--a limit which sets how much the US Government can borrow--does not resolve much. The main issue is the burgeoning US debt which stands at over $17.5 trillion and the ability of the government to pay off its dues.

A section of the US policymakers favour a US debt default and consequently repudiation of the debt. Think of this as companies declaring bankruptcy. With the debt cancelled, no one will lend the US money but it gets a fresh start to spend within its tax income. That's forced fiscal prudence for you. This view however attractive is not without global consequences. It would lead to global liquidity crises, interest rates going up and trade and business being affected world-over. The right-wing Tea Party wants this terrifying party on now. This line of action would have another major casualty--that of the trust that the world places on the dollar. Not a pretty picture again. As Warren Buffett put it in a recent interview with CNBC, "Credit worthiness is like virginity; it can be preserved but not restored very easily, so it is crazy to play around with it."

With Obama not considering the debt default route, all problems remain standing. The high level of government spending, the anaemic economy and the Fed's incessant printing of money threaten to bring about a much bigger catastrophe in the future.

The Fed believes throwing money at a problem (the anaemic economy) will make the problem go away. The only hitch with that is that months after the $85 billion monthly programme started, things haven't got much better. So now it wants to continue throwing more money for some more time.

The Fed knows it will eventually have to slow down its money printing presses. This reduction called tapering is inevitable. Here lies the conundrum. It needs to stimulate the economy but it also needs to stop printing money which it cannot immediately do now with the economy already fragile.

There are differing views on when the taper would actually start. Some say December this year, some, next year. A more telling sign is the nomination of Janet Yellen as the next Fed Chairman. Yellen is a known monetary dove and supporter of Bernanke's quantitative easing programmes. The tapering could very likely be postponed further ahead. That'll be good news for emerging economies and bad for the US.

If you feel lost trying to make sense of all the noise, worry not. We got you covered. We talked to leading economists and fund managers to help you make sense of what is happening in the US and how it could impact emerging economies like India. We also discuss what it means for the markets and how you could be affected. Arm yourself with some of the best takes on the unfolding US drama.

In the following days you will read the opinions of :

Saugata Bhattacharya, SVP & Head-Business & Economic Research, Axis Bank
Abheek Barua, Chief Economist, HDFC Bank
Madan Sabnavis, Chief Economist, CARE Ratings
Dhawal Dalal, EVP and Head - Fixed Income, DSP BlackRock
Harshad Patvardhan, Executive Director and Head of Equities, J.P. Morgan Asset Management (India)
Harsha Upadhyay, Head - Equities, Kotak Mahindra AMC

This column first appeared in October 2013 issue of Wealth Insight.