Do it yourself

  The US administration has reportedly reached a deal with the Congress majority leader to enhance the debt ceiling on the treasury and mitigate yet another default threat. This, like all previous episodes of default threats and debt ceiling hikes, would inevitably result in more debt, insolent fiscal profligacy and further distortions in capital allocation and unsustainable asset price inflation. At the other end of the spectrum, it could shift a couple of ounces from the weight of global confidence in USD (and hence UST) towards the still nascent movement to de-dollarize global trade. In this context, the following trends may be pertinent to note, especially for the equity investors. Negative divergence in OECD debt and yield The elementary principle of economics is that the price of anything is a function of demand and supply equilibrium. Higher demand pushes the equilibrium to a higher price point and vice versa. However, the bond markets in developed economies have been ...

  “The boy who cried Wolf” is one of the most popular Aesop’s Fables. The Fable is about a young shepherd boy who enjoyed fooling the innocent villagers by lying about a wolves’ attack on his herd. Every other day he would raise a false alarm about wolves’ attack on his herd and seek farmers’ help. Trusting him, farmers would leave their fields unattended and rush to protect his herd; only to find that the boy was lying. Over a period of time, he gradually lost farmers’ trust. One day wolves actually attacked his herd. He went to farmers to seek help; but no one trusted him; and he lost most of his sheep. The moral of the story — “when habitual liars are not believed even when they chose to tell a truth”. The latest episode of political squabble over raising the limits within which the US government could borrow to meet its fiscal deficit, reminded of this inspiring fable. In the past two decades we have seen multiple “debt ceiling crisis” in the US. In the 15 years period from 2...