World 2150 - part II

First we will see how the India and China become the twin powerhouses.

Reason 1: Countries found lesser need to manage currency.
The manufacturing boom in china and service one in India started with the low end work in the early 90’s. To sustain the low cost advantage for their software and manufacturing exports (weaker the currency, cheaper the exports), the Governments in these two countries managed their respective currencies.

But as these industries grew bigger, they moved away from cost competition. China’s spending in their universities were starting to bear fruit, as the R&D boomed in the early 2010s, while Indian software firms moved away from back office operations to complex data mining and analytics. As this started to happen one curious phenomenon occurred- Bangalore got bangalored!

The software companies started outsourcing their low end back office operations to first tier-2 cities, then to smaller towns like Meruts and Gobichettipalayams, which had low cost advantage. This was the result of the massive investment in human capital in small towns a decade back. This resulted in growth permeating in every corner of the country.

Companies now competed on quality, not cost as they did earlier. Exports needn’t be cheaper, the forex reserves which previously had bloated on account of weak yuan/rupee, suddenly evaporated, and US was found wanting. Why?

The biggest blunder of Dubya wasn’t stem cell research or even Iraq war, but TAX CUTs!

A series of mistakes snowballs into a catastrophe. Bush tax cuts encouraged the US customers to buy like hell. This is how the US business cycle which would otherwise in the recession phase went into the biggest growth phase ever. But it was built on weak foundation, credit.

When lender lends a million, he is the boss. But if he lends a trillion, you know who the boss is. Asian countries amassed a huge forex reserves unleashed by the bush dollar tsunami, and the reserves ploughed their way through to US by way of T-bills. This was the source of consumer credit.

By 2005, there were already enough things to escalate oil prices, iraq war again, hurricanes Evan, Charlie, rita, and the biggie Katrina. These became a regular feature in the coming years, and the oil prices hit the roof. How did it bring the downfall?

Asian nations dependent on oil found the import bill too hot, their forex reserves declined. Less forex, less credit.

Even the tax increase couldn’t salvage the situation, as the economy fell into a debt trap. Company after company filed for bankruptcy or takeovers, which saw Tata motors, mount a successful takeover bid for Ford, CNOOC gobbling up Conaco Philips and a host of big ticket takeovers.

Note: Some of them are a bit exaggerated; but you can’t prove/disprove me, can you?
End of part 2