Fake money, fake prosperity

A quote/meme has been floating around on the internet for some time: "Printing money to create prosperity is like printing degrees to create wisdom." There are many variants, but this is the one I like most. This quote has gained currency recently because of the amazing debt the US government generates. The US government has added some 600 billion dollars of debt in the last month. The country adds one trillion dollars of debt every 45-60 days. Total debt is about 33 trillion for a GDP of about 26 trillion. What makes it all worse is that this debt is being added at a time of historically high-interest rates, creating a vicious circle.

I'm not a macro-economist; this is not my area of expertise. However, it's clear that even among the supposed experts, some are alarmed by this and ignore it. It's hard to see anyone who is sanguine about it.

You might now ask what all this has to do with you and me here in India, who are here on this page to talk about our investments, which are mostly domestic. The answer to that question is, 'a lot.' Global economies are interconnected in ways that make ripples in one nation felt across oceans in another, and what is happening in the US is a lot more than a ripple. Because of its dominant position in the global financial markets, a wave in America can become a tsunami everywhere else. As the saying goes, the world catches a cold when the US sneezes. One can add, 'When the US catches a cold, the rest of the world might get the flu.'

It is undeniable that the immediate implication of the mounting US debt and its historically high-interest rates can have a cascading effect on global financial systems. While the going is good for us in India right now, there are several ways that a deepening crisis externally can cause us problems. The biggest is that high interest rates in the US mean that global financial investors can get better returns on their US investments than other countries. This could lead to a pull-out of investments from elsewhere, causing a drop in stock market values and currency depreciation. Are we seeing this already? Perhaps we are. The value of the US dollar significantly influences global trade, both directly and indirectly.

Just as importantly, economic indicators from the United States set the tone for global economic sentiment. Pessimistic outlooks can lead to reduced investor confidence worldwide, causing hesitation in investments and potentially slowing down economic growth in various parts of the world. On top of that, we're now facing a geopolitical crisis of a scale that hasn't been seen in many decades. Moreover, it would appear that the players in this geopolitical crisis have no real interest in resolving it with any degree of urgency. Each seems to be trying to make the situation worse, hoping it will damage others more than itself. The standard operating procedure of international relations seems to be brinkmanship, as close to the brink as possible.

So, most of our focus has to be on domestic investments. It's essential to recognise the larger global picture. No one exists in a vacuum, even though there are times when it can be done. This is not one of those times. The interconnected web of global economies means that a significant policy or economic shift in one part of the world can and often does have implications elsewhere. It's a time to be a little careful, and even while we enjoy being the best-performing large economy, keep an eye on the clouds gathering on the horizon.

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