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Most of us these days hear re-assuring words from some or the other economist or politiaicans in recent times:  "Don't Panic, India is not in recession as of now, we are far better than other countries”. This is not another Great Depression or recession, the heat of which most of the countries have and are facing.  “What have we learned? In 1929 investors had a currency backed by gold; nowadays our ruppe or for that matter any other currency are backed by an IOU from the world's biggest debtor. In the year 1929 the financial system was far less sophisticated: no global markets and ecommerce was there. There was not much interdependence of developing countries on developed countries. But, today we have complex and sophisticated financial models which we although trust implicitly — until they fail to predict the impending collapse and major failure. In 1929, majorly communication was mostly by postal mail. Whereas, today we are all inter-liked, with communications around, the globe measured in fractions of seconds. Then the relatively new Federal Reserve was still cautiously finding their way and regularly making mistakes. But today we have a Fed confidently patrolling the financial markets with a huge can of crude. And assuring most of the world that, they will use it to control and imporve the situation.

But later they realise, Why they are not confident that we they are in good hands?  These mistakes were being made to underrule the mistakes being made to dwarf those of the great depression time. Most economist and politicians seem to be ignorant that -ve real interest rates and budgetary deficits are the reason which created the problem in first place. Futher more we have noticed that these major problems have started with the housing sector and the major culprit has been the infrastructure sector.

The reserve bank of india rapidly lowered real interest rates to stimulate borrowing / lending and further the expenditure, though a very less has been done in this regard and no results have been seen for the same. The financial sector is being highly leveraged, which debt-equity ratio going to (6:1): selling assets in order to reduce debt on their balance sheets.  Also we have seen the Reserve Bank of India has been making efforts to bring down the interest rate to coushion money supply and boosting the economy. Also efforts have been make to bring down the PLR (Prime lending rate).

Further the world economy is heading towards a liquidity trap with all money supply sources drying up, also investors are not getting good rate of return on saving which demotivates them to save. Major outflow of deposits from the commercial is forcing banks to liquidate their illiqiud assets.

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Shail Mehta is a qualified analyst of Bullrider.com, with intense experience especially in the field of Technical & Fundamental Analysis. We have been present in the Stock Markets since the past 6 years. Our team of analysts is one of the best teams in the industry with some of the people having an experience of as much as 10 years in this field.

Article Source: ArticlesBase.com - Recession & Liquidity