How long will current crisis last?

A good analogy to understand the current financial and economic crisis, that started in 2008, would be to consider a person who falls seriously ill. One option to treat the patient would be to perform an operation, but there are huge risks with this option. The other option would be to gives the patient steroids. This will make the patient will feel better, but only temporarily. Unless the underlying medical issues are corrected, the patient will not recover fully.

The US had these two options in 2008, let the economy fall freely and go into a depression (to correct the underlying structural issues), or to use steroids. The US government took the second option of giving a lot of steroids - rapidly reduced interest rated from 5.25% to almost zero, started income tax rebate program, stimulus package, quantitative easing (QE), etc. Thus the economy got better but did not fully recover. Hence the steroids were required again and again (e.g. QE II and now there is a talk of QE III). While all this is happening the underlying structural issues are slowly being fixed (like the huge debt in the system is getting reduced) which will eventually help the economy recover.

So coming back to the original question - the current process may take another year or two. But after that we should start seeing signs of a sustained recovery... well, at least until the next big crisis!

Rupee at 45 - The Impact (Part II)

Continuing from the previous post; if the Rupee does indeed go to 45 per Dollar, it will have a negative impact on the Indian propery market.

The Rupee had a free fall in the second half of 2011, going from about 44 to a Dollar in June to almost 54 in December. What this meant was that the Rupee lost almost 20% of its value against the Dollar in 6 months!

Now it is well known that Indians abroad are big investors in the domestic housing market. What happened in the last six months was that houses suddenly became very cheap for NRIs. A house that was costing 50 lakhs initially, would now effectively cost around 40 lakhs (almost 20% less)!

This increased buying from Indians abroad was a lifeline for the troubled housing market. Now if the Rupee does go to 45 to a Dollar, it will mean more bad news for the property developers..