The truth is that nobody knows. The one thing almost everyone is agreed on is that the amounts are likely to be staggering. And one of the best ways of putting the bailouts into perspective is by looking at two charts (above).
Also See The Leviathan US Bailouts (Graphic)
The first is the total of all expenses on major programmes undertaken by the US government in the past. This includes the Marshall Plan to revive Europe after the World War II, the Vietnam and Korean wars, Nasa’s expenses and the race to the moon, among others. This figure comes to around $1.37 trillion at current market costs.
The other is the latest financial bailout. Current estimates put this number at $8.5 trillion. It must also be borne in mind that the numbers have still not been finalized. After 25 November, more items have been added to the bailout package, which could cause this figure to swell even further. And the Madoff swindle of some $50 billion against just $15 billion of assets under management is likely to have unintended and as yet unforeseen repercussions in other areas as well.
Some analysts, including Bianco Research, expect the bailout figure to cross $10 trillion. But there are others, not willing to be quoted, who expect it go go even higher.
More tears could follow soon!
Why is the dollar still strong?
The dollar has continued to baffle market watchers. The US economy has been badly battered. The government has been racked by a subprime crisis, lack of confidence among banks, and plummeting sales. All these together have combined to compel the US treasury to pump in more money into the economy than ever before.
Strong greenback: Despite the economic crisis in the US, since July the dollar has risen 19% against the euro and 24% against the pound. Alastair Miller / Bloomberg
Latest forecasts by business economists, as reported by BusinessWeek magazine, estimate the US gross domestic product for the last quarter of 2008 to fall 2.6%. Job cuts are galore, causing most consumers to shrink away from shops.
Under such circumstances, the dollar should have weakened against the euro and the British pound. Instead, since July, the dollar is 19% up against the euro and 24% against the pound. Why?
According to BCA Research, “The dollar rally is attributable to portfolio adjustments globally and is more explainable by liquidation, hedging and other technical factors than by the fundamentals of the US economy.” The dollar weakened after the Fed cut rates to zero on Tuesday.
Stanley Reed of BusinessWeek has a better explanation. Most consumers have clung to their money, he says, and in the face of everything else crumbling —stocks, commodities, etc.—people have stuck to the US dollar. That has helped increase its perceived value.
BCA Research is convinced that quantitative easing in the US, and incentives for the country to devalue its currency to reduce its real debt burden will mean that the greenback is bound to depreciate. This view is shared by commodity traders and gold watchers. They say the dollar will soon begin to sag. BCA Research, incidentally, is also bullish on gold. But Reed points to how “in four of the past five recessions since the 1970s, the dollar finished higher than where it started”.
And most international financial firms, which made London the biggest financial centre in the world, are relocating to the US.
So does that help clarify matters?
Will law firms opt for fixed fees?
The economic meltdown has turned up another unusual development. One of the most prestigious US law firms, Cravath, Swaine and Moore has decided to “make the billable hour irrelevant”. Hitherto, law firms have charged by the hour, sometime by the minute. Telephone calls, discussions, consultations, even reference time in the library, are billed to the client.
BusinessWeek, quotes Evan Chesler, presiding partner Cravath, saying, “(we are) trying more and more to come to alternative fee arrangements”. Ultimately, it could be more profitable, if we are as good as we think we are,” he adds. Obviously, most Indian businesses will also be waiting for a similar response from Indian law firms.
Asia markets see significant inflows
Emerging markets in Asia saw the first significant inflows of foreign exchange in the week ended 12 December, reports Strategy Weekly Fund Flows, a research paper brought out by the BNP Paribas Group. Thailand and the Philippines, however, saw outflows. Taiwan topped the ranks in inflows accounting for $680 million after losing $542 million the previous week.
India came next with net inflows of $441.7 million compared with net outgoes of $37 million the previous week. Of course, despite this net inflow, India’s outflow for the year to date stands at $13.1 billion.
R.N. Bhaskar runs a company with significant interests in distance learning and examination certification and writes on corporate and business policy issues. Comments on this column are welcome at email@example.com
Graphics by Ahmed Raza Khan / Mint