0710

6 August 2009

New Delhi

Economy watchers across the globe looked out yesterday for the latest employment data from the US for signals about the recession. The numbers were slightly worse than expected, and equity markets dragged their feet.

It struck me as ironic, though - here I live in a nation of 1.2 billion people, and I need to look at employment figures from a nation with one-quarter the number of souls. This singularly unoriginal thought underlines how critical the US economy is to the world - it consumes about one-quarter of what the world produces, and every American goes through roughly 40 times as many goods and services as his Indian peer.

This is a strange imbalance, which has many roots, most of which lie in the quality of Indian  governance. At the same time, the US has consistently benefited from the low cost of capital that is the fallout of its currency being the world's reserve currency.

The financial crisis of the last couple of years is going to change this, but the change will be slow and protracted. Countries like China and Japan, with large portions of their reserves invested in US assets will be careful not to rock the boat, while realising that such dependence on one currency is not too wise. In fact, if there is another phase of risk-aversion in the next 12 months, it could lead to the dollar surging again.

For the time being, though, the dollar continues to be under pressure, and yesterday slipped further to a new low for 2009. 

Long-term interest rates continued to edge higher, and it seems that all the cheap overnight money is not automatically generating more liquidity in the system.