The American fiscal crisis and isolationism

http://www.project-syndicate.org/commentary/hill8/English

In which the author speaks of American isolationism against the backdrop of the fiscal crisis.

This was inevitable; the sharp heat of 9/11 brought this to my mind - for many ordinary Americans, the attacks on the twin towers were a punishment by foreigners for the unwanted presence of American troops on their soil.

And now that the fiscal crisis is - in effect choosing American presence in Afghanistan over schools in their backyard - this is not going to swim.

In places like rural El Paso County, on the eastern plains of Colorado, far from the federal budget debate’s epicenter, spending cuts are the order of the day. School districts are increasing class sizes as they shed teachers, as well as deferring maintenance projects and curtailing the school-bus service. These cuts are having a very real and immediate impact on El Paso County’s residents. Can they, and other Americans who are losing vital services, really be expected to rise above it all and support funding to build new schools in Afghanistan?

Cheap food no one wants

On July 11, the Economc Times carried a graphic feature showing that India is buying more of high-value food.


The share of cereals in verall spending is down from 18% to 15.6% in rural India, whereas that for pulses is up from 3.1 to 3.7; for milk from 8.5 to 8.6; and for eggs, meat and fish from 3.3 to 3.5.

Meanwhile, the NAC has been barking up the tree of pulses, and pressuring the broke exchequer to up the allocation of cereals to the poor, and the non-poor. This only echoes the fixation of our entire food and agriculture system with grains  for several decades, as a result of which we have a glut of grain, the depots are choked, and we are considering exports.

Centralised planning is always behind the curve.

The World of Make Believe

When the debt crisis hit the US in 2008, the Mark-to-market rule for valuing balance sheets was suspended. If it had continued to be enforced, bank balance sheets would have been extremely vulnerable, despite billions of dollars of funding from the US government. As a result, the derivatives that helped ignite the crisis are still sitting in bank books, and valued as the banks would like them to be.


It seems as if the banks are waiting for asset inflation to take place, so that some one can announce, "Game Over", and every one can move into reality mode. Which is why the Fed is trying so hard to ignite inflation with its zero-interest-rate-policy, ZIRP.

Some commentators believe that recent commodity price inflation has been a result of cheap money; many believe that only supply-demand imbalances can sustain price increases. I would tend to side with the latter, while noting that cheap money penalises savers, incentivises consumption at the cost of saving and hence investment, and hence leads to higher commodity prices through the obvious demand route.

Be that as it may, when crude oil prices seemed to threaten the recovery all over again, this June, the IEA coordinated a release of 60 mn barrels from various emergency stashes. The impact on prices was sharp, but it didn't sustain very long. Interestingly, the buyers were not largely speculators or hedge funds, with the exception of a small punt by Barclays; the bulk were oil companies, suggesting that those on the ground (or below it!) are finding supply lines squeezed.

From a gaming point of view, IEA is in danger of having mis-fired - if the release of stocks was intended - even partly - to show OPEC it had some firepower, the threat may have proved to ineffective.

 The most recent egregious example of governments trying to game markets comes from the ECB. Dealing with the Greek crisis, European bankers got hit with a severe Moody's downgrade of Portuguese sovereign debt. However, since Portugal will inevitably require further funding, and commercial loans are not viable, the ECB will have to extend funds to Portugal. With the downgrade, collateral requirements will go up.

Or would, if the ECB had not decided to suspend normal rules for evaluating collateral. This suspension of reality led to the following from Bernd Volk, of Deutsche Bank:

"Given severe rating consequences for Portuguese covered bonds resulting from the downgrade of the sovereign bonds by four notches to Ba2 and also other peripheral covered bonds facing subinvestment grade risk (e.g. Greek covered bonds by Fitch in case of Greek sovereign debt rollover), we suggest a significant “Rating deleveraging” of the financial system, i.e. less use of rating requirements in laws, regulatory requirements, bond prospectuses and other contractual agreements. Instead so-called “indeterminate legal terms” (“unbestimmte Rechtsbegriffe”), to be determined by the respective institution of market participant, could be used."

Tongue firmly in cheek, no doubt.

Birthday thoughts

Here's Seth:

When did you get old?

At some point, most brands, organizations, countries and yes, people, start talking about themselves like they're old.

"We can't stretch in that direction," or "Not bad for a 60 year old!" or "I'm just not going to be able to learn this new technology." Even countries make decisions like this, often by default. Governments decide it's just too late to change.

The incredible truth is this: it never happens at the same time for everyone. It's not biologically ordained. It's a choice. It's possible to put out a hit record at 40, run a marathon at 60 and have your 80 year old non-profit change its business model. It's not as easy as it used to be, but that's why it's worth doing.

TRUE!

The other thing I read recently was, as you get older, you tend to spend more time thinking about the past. This is a clear trap - not only is it a waste of time, but it can also lead to regrets, and guilt, baggage we can do without. Something in my nature/nurture means I don't go here, which is wonderful.

Sharp accounting by DLF

This piece* in the Economic Times signals severe cash - and reporting - pressure at DLF, India's largest real estate company.

Essentially, it suggests that over 75% of the reported sales by DLF during 2010-11 never took place! That is a truly amazing statistic (my own number work suggests a lower figure, but still very substantial). Sales reporting was done on the basis of 'percentage completion'. This is like Soviet accounting - production is equal to turnover - irrespective of whether the stocks rusted in a corner of the stock yard, and with a total disregard to eventual price realisation.

I asked a CA friend about the accounting practices involved, and he tended to believe that ET had got it wrong. But looking at the skeletal balance sheet on the DLF site, it would seem that there have been some very 'interesting' changes on the company's balance sheet between March 31st 2010 and March 31st 2011:

1. 'Stocks' have gone from Rs. 12481 cr. to Rs. 15039 cr., an increase of roughly Rs. 2500 cr.

2. 'Other current assets' - a convenient grab-bag, have gone from Rs. 4684 cr. to Rs. 7890 cr., an increase of over Rs. 3000 cr. A look at DLF's annual report for 2010 shows that the ET has it right - this includes 'unbilled receivables' - note below.**

For a business with sales recorded at Rs. 9000 crores, over Rs. 3000 crores has appeared by way of unbilled revenues. This is a whopping amount; if the unbilled receivables are not converted into cash soon, DLF is going to have a whopping cash management problem on its hands. 

Meanwhile, between year-end 2010 and year-end 2011, Rs. 5500 crores worth of investments have dwindled to under 1000 cr., a diminution of Rs. 4500 crores in financial assets, while loan funds have gone up by over Rs. 2000 crores.

This all looks like deep distress.



*Real estate: Experts doubt 'percentage completion' method of revenue calculation by builders - The Economic Times

** Here is the relevant revenue recognition policy from the 2010 annual report:
" Unbilled receivables disclosed under Schedule 11 - “Other Current Assets” represents revenue recognised based on Percentage of completion method (as per para no. 7a and 7b above), over and above the amount due as per the payment plans agreed with the customers."




 

Sovereign credit

The argument is not whether Greek will default or not, but how to handle the inevitable default. Do they outright stop paying on their bonds? Or "roll them over" for later payment? Or call in the bonds and issue new ones with longer maturities? Germans are insisting that at least a third of the bailout fall on private creditors. Anyway you cut it, (1) it ain't been settled yet and Greece will run out of money in 8 weeks, and (2) Greece will default.Right, Greek government is in debt up to its ears, more than $42,888 per person, not solvent like the US with a government debt of $44,900 per capita.Now y'all explain to me, because I want to know, how the US is in better shape. I'm waiting

MA

At 22, my mother was a Romantic. A lover of literature, and a closet poet, she dreamed of turreted castles and a white knight who would carry her away. Since they lived in a different time and place, she spirited herself away to Allahabad University, to lose herself in books, and write a Ph.d. 

One day, her guardian, the venerable RN Banerjee, ICS, asked her “Child, have you considered marriage?”

“No, Uncle Banerjee.”

“Are you averse to it?

“No, Uncle Banerjee.”

That was enough: a knight, not on a white horse, but in white and tan shoes, was produced, the Romantic agreed to marry him, and one of the 3 critical pieces of evidence stands in front of you.

During the short period of their engagement, Ma told me, she decided her life was to have one goal, to have a happy family. Our childhood was truly glorious; we were bathed in love, cushioned in security, and Ma seemed to have inexhaustible energy – she ferried us to and from school, and swimming and singing, to birthday parties and film shows: and every meal – at least four of them a day, was a delight.

When my younger sister was about 10, Ma’s father-in-law, a man known for his simplicity and conviction, told her – now that the children don’t need you so much, it is time for you to give back to the world from which you have received so much. Ma turned on a dime – beginning with the Delhi Red Cross, in 1967, Ma began a life of social service.

If her father-in-law oriented my mother in this direction, her life’s work was inspired by her own mother – a widow before she was 40, my gentle Nani could never fully accept the fact that she became part of our home – her daughter’s home -in her last years. Ma decided that she would set up a home for elders, one where they could spend the twilight of their lives in dignity. And so was born GODHULI.

It took the better part of a decade to create this facility. The biggest stumbling block – as in any thing in our country – was the government. Despite adhering to every rule in the book, the completion certificate would not be granted without servicing DDA in customary fashion. Ma made clear, simple choices. She would not pay. At 75, she made 52 trips to the DDA to get her files cleared, every one recorded in her diary. It was only when she petitioned the Lieutenant Governor’s office that the files were cleared, and Godhuli came into being.

The last 2 years of Ma’s life were an object lesson in dignity and the importance of choices – when chronic diabetes turned to kidney failure, the doctors prescribed dialysis. Ma spent last summer in her beloved mountain cottage, giving thought to the matter. By the time we returned to Delhi, she had made her decision – I have lived a full life, done what I wanted. I am not going to spend my last years dependent on a machine.

So simply stated, there was nothing to contest. The decline was gradual, but despite a crippling fall last December, Ma limped back to work, supporting the wonderful younger women who have taken on her beloved ‘balwadis’, and chairing meetings at Godhuli. Her last meetings were on a Thursday; by Friday, she became breathless, and by Monday, she slipped into unconsciousness.

“I want to die in my own home” she said. As always, Ma made her choices clear, and our lives simple. Her maids were devoted to her, and her daughters were angels of concern, love and tenderness.

She passed so, so gently into her future – one in which, I am sure, her choices will be even more crystal-like, her concern with giving and living even more vibrant.

Thank you for being here for her, and for us. Go home, not with sorrow, but with peace and a sense of belonging.

Om Shanti, Shanti Om.