It is a commonly known fact that various financial instruments are co related and this becomes evident when you determine their relative values. For example : Gold and the dollar. When the value of the dollar falls, the gold price rises. (Can be explained by this: if say for $1200 dollars, you get 10 gm of gold and if the value of the dollar falls, then gold (10gm) won't be equal to $1200 anymore. It will cost you more). Similarly, between currencies (eg:when the dollar appreciates, the value of the rupee as an exchange medium w.r.t the dollar decreases).
Even economies are coupled. The biggest example is that of the EU, which is a massive exercise in having a linked economy amongst various countries to aid progress in the region.
This coupling effect has become more pronounced with a rise in globalisation. With improved trade between nations, the possibility of an economic shock in one nation spreading to others is very high, as was visible during recession, when all Western nations faced tremendous problems, the after effects of which are visible in monetary and fiscal policies throughout the world even today.
However, during the recession, it was seen that emerging economies like India and China did way better than their Western counterparts, posting envious growth figures. The world looked upto us for a speedy economic recovery. All this led to talks of the possibility of these economies getting decoupled from the Western(especially the US) economies. There are hundreds of web pages solely dedicated to this topic and discussions have ofter led to the same conclusion: There is no credible evidence to prove that decoupling exists. It is not surprising considering the settings under which these economies post such remarkable growths:
1. The too-big-to-fail banks, who were allegedly the main proponents of the global crisis, had a small presence in India thus preventing a massive backlash here, similar to a one seen in the US.
2. The use of varied financial instruments is constantly regulated by a vigilant central bank in India.(In fact, we have a lot of the central bank policies to thank for a lack of major problems during the recession).
3. India always had a strong domestic demand, which is evident in the way demand picked up during the past few months, leading to strong results by various companies, especially the auto industry.
4. Even now, India is partially insulated from the global economy. Its largest trading partner is China, unarguably the fastest growing economy today(though beset by its problems) .India's service industry, which contributes to more than 50% of India's GDP , was never deeply troubled by the crisis and has bounced back strongly (the industry , especially the IT sector, took immediate measures to ensure that they remained safe. The only casualty was Satyam, I guess, and it was for altogether different reasons).
5. Even in China's case, an undervalued currency continued to provide China an edge over the other nations in exports and it went on to become the world's largest exporter, dethroning Germany.
But all these factors do not prove decoupling. Sample this:
1.The stock markets in Asian countries fell heavily in the wake of the crisis, suggesting an existing co relation with the Western economies.
2. It was not as if problems didn't exist in India. WPI inflation started growing out of control crossing double digit figures and created a head ache for the ruling government.
3. Though the food inflation was due to a number of reasons other than the crisis, India still suffered due to this problem, showcasing its vulnerability even further.
4. India's dependence on the global economy is growing stronger day by day with more Indian firms out on a foreign acquisition spree. As such an increased exposure by these companies to foreign markets can create potential trouble in the future.
5. Our neighbour (China, not the other neighbour :D) is not doing well either. A suspected asset bubble in real estate followed by rising inflation, a possibility of hardening government stance on credit availability are just a few of the problems troubling China right now. In fact, the EU is banking on a strong Chinese growth to pull the world out of the slump created due to the Greek crisis. Looks like that wish might not be fulfilled.
So economic decoupling is something which cannot be proved with the available data.
However, there have been possible cases of a decoupling of the values of gold/silver and the dollar. There was a simultaneous increase in the value of both gold and the dollar. The reason for the increase in dollar value was obviously a weakening Euro. There was a flight of capital towards dollar backed assets as investors started losing (and are still losing) confidence in the Euro. This has helped the dollar gain strength, though it is potentially risking US exports and an increasing fiscal deficit there. At the same time, in such times when you cannot trust a single currency to help you out of a crisis like this, investors look out for an instrument which has no debt content and which is a true currency (the dollar and other currencies are simply paper notes backed by some underlying asset). Hence they invest heavily into gold to protect their funds thus driving up gold prices and showcasing a decoupling effect. A similar explanation can be given for silver.
Even economies are coupled. The biggest example is that of the EU, which is a massive exercise in having a linked economy amongst various countries to aid progress in the region.
This coupling effect has become more pronounced with a rise in globalisation. With improved trade between nations, the possibility of an economic shock in one nation spreading to others is very high, as was visible during recession, when all Western nations faced tremendous problems, the after effects of which are visible in monetary and fiscal policies throughout the world even today.
However, during the recession, it was seen that emerging economies like India and China did way better than their Western counterparts, posting envious growth figures. The world looked upto us for a speedy economic recovery. All this led to talks of the possibility of these economies getting decoupled from the Western(especially the US) economies. There are hundreds of web pages solely dedicated to this topic and discussions have ofter led to the same conclusion: There is no credible evidence to prove that decoupling exists. It is not surprising considering the settings under which these economies post such remarkable growths:
1. The too-big-to-fail banks, who were allegedly the main proponents of the global crisis, had a small presence in India thus preventing a massive backlash here, similar to a one seen in the US.
2. The use of varied financial instruments is constantly regulated by a vigilant central bank in India.(In fact, we have a lot of the central bank policies to thank for a lack of major problems during the recession).
3. India always had a strong domestic demand, which is evident in the way demand picked up during the past few months, leading to strong results by various companies, especially the auto industry.
4. Even now, India is partially insulated from the global economy. Its largest trading partner is China, unarguably the fastest growing economy today(though beset by its problems) .India's service industry, which contributes to more than 50% of India's GDP , was never deeply troubled by the crisis and has bounced back strongly (the industry , especially the IT sector, took immediate measures to ensure that they remained safe. The only casualty was Satyam, I guess, and it was for altogether different reasons).
5. Even in China's case, an undervalued currency continued to provide China an edge over the other nations in exports and it went on to become the world's largest exporter, dethroning Germany.
But all these factors do not prove decoupling. Sample this:
1.The stock markets in Asian countries fell heavily in the wake of the crisis, suggesting an existing co relation with the Western economies.
2. It was not as if problems didn't exist in India. WPI inflation started growing out of control crossing double digit figures and created a head ache for the ruling government.
3. Though the food inflation was due to a number of reasons other than the crisis, India still suffered due to this problem, showcasing its vulnerability even further.
4. India's dependence on the global economy is growing stronger day by day with more Indian firms out on a foreign acquisition spree. As such an increased exposure by these companies to foreign markets can create potential trouble in the future.
5. Our neighbour (China, not the other neighbour :D) is not doing well either. A suspected asset bubble in real estate followed by rising inflation, a possibility of hardening government stance on credit availability are just a few of the problems troubling China right now. In fact, the EU is banking on a strong Chinese growth to pull the world out of the slump created due to the Greek crisis. Looks like that wish might not be fulfilled.
So economic decoupling is something which cannot be proved with the available data.
However, there have been possible cases of a decoupling of the values of gold/silver and the dollar. There was a simultaneous increase in the value of both gold and the dollar. The reason for the increase in dollar value was obviously a weakening Euro. There was a flight of capital towards dollar backed assets as investors started losing (and are still losing) confidence in the Euro. This has helped the dollar gain strength, though it is potentially risking US exports and an increasing fiscal deficit there. At the same time, in such times when you cannot trust a single currency to help you out of a crisis like this, investors look out for an instrument which has no debt content and which is a true currency (the dollar and other currencies are simply paper notes backed by some underlying asset). Hence they invest heavily into gold to protect their funds thus driving up gold prices and showcasing a decoupling effect. A similar explanation can be given for silver.
1 comments:
A very lucid explanation for a very difficult concept.
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