MacroEconomics Explained: Credit Crunches and Recessions

Source: An email forward
Author: Unknown


THE CURRENT ECONOMIC CRISIS EXPLAINED...
{ IN SIMPLE THE DESI WAY }

Khaja Bhai is the proprietor of a Nehari Shop in Hyderabad .
Sales are low and, in order to increase them, he comes up with a plan to allow his customers to eat now and pay later.
He keeps track of the meals consumed on a ledger.
Word gets around and as a result increasing numbers of customers flock to Khaja Bhai’s Hotel.
Khaja Bhai's suppliers are delighted and are very willing to sell more and more raw materials for the meals he prepares.
Khaja Bhai shows them his ledger of receivables and they extend him credit.
A young and dynamic customer service consultant at the local bank recognizes these customer debts as valuable future assets and gives
Khaja Bhai a credit line and then increases his borrowing limit.
Taking advantage of his customers' freedom from immediate payment constraints, Khaja jacks up the prices of his Nehari, Kulche, Jabde, Paaya and Zabaan.
Customers don't mind as they are not required to pay on the spot anyway.
Sales volume increases massively, Banks and suppliers lend more;
Khaja Bhai opens more outlets.
He sees no reason for undue concern since he has the debts of the customers as collateral.
At the bank's corporate headquarters, expert bankers recognize Khaja's
customer loans as assets and transform these into BONDS.
These negotiable instruments are given exotic names such as
JABDA BOND,
PAAYA BOND,
ZABAAN BOND
&
KULCHA BOND.
These securities are then listed
on the Stock Exchange and
traded on markets worldwide.
No one really understands what the names mean and how the securities are guaranteed, but, nevertheless, is their prices continuously climb, the securities become top-selling items.
One day, although the prices are still climbing, a credit risk manager of the bank decides that the time has come to demand payment of one of the debts incurred by Khaja Bhai.
Khaja in turn asks his clients to pay up.
One by one they refuse;
the clients cannot pay back the debts.
Khaja Bhai refuses to serve them any more.
The clients stop coming.
Khaja is really screwed now.
He cannot fulfill his loan obligations and therefore claims bankruptcy.
All Bonds drop in price by between 80 to 95%.
The suppliers of Khaja, having granted generous payment due dates and having invested in the securities are faced with similar problems.
The Meat Supplier defaults on payment to the Cattle Supplier and claims bankruptcy.
The Kulche Ka Aata supplier is taken over by a competitor;
Khaja lays off the cook and staff.
Bankruptcies soar, unemployment mushrooms.
The bank that lent the money in the first place is set to collapse.
It is later saved by the Government following dramatic round-the-clock consultations by leaders from the governing political parties with Khaja Bhai commuting back and forth in his Executive Jet and Mercedes 500SEL, brokering the deal.
The funds required to save the economic collapse are obtained by a tax levied on the common citizens,
Most Of Whom, Do Not Eat
No Nehari,
No Zabaan,
No Sirey,
No Paya...!!!
 GOLMAAL KI JAI HO...!!!
HOPE YOU UNDERSTOOD ?
Ends..................... ........................................................


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http://mayanmuse.blogspot.com/2008/04/sub-prime-factor.html


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http://mayanmuse.blogspot.com/2008/11/global-meltdown-impact-on-indian.html 

Financial Performance of Advertising and Media Companies

Echoing the sentiment of every other holding company that the worst of the recession's impact on the ad business has past, WPP, the world's largest ad conglomerate, today reported a pre-tax profit drop of 16.1% to $1.2 billion down from $1.5 billion in 2008.

In a year it described as "brutal," the holding company also announced revenue for 2009 was down 8.1% to nearly $13.1 billion. Geographically, none of its regions showed any growth. North America dropped 8.1% from the year-prior period, the U.K. fell 6%, Western Continental Europe decreased 10.2% and Asia Pacific, Latin America, Africa and the Middle East and Central and Eastern Europe dropped 6.8%.

All of its business practices declined as well. Advertising and media-investment management declined 8.5% while PR and public affairs dropped 7.4%. Its consumer-insight practice fell the sharpest at 9.5%.

Despite the rough year, the group said there were signs that 2010 would be more financially productive, citing its belief that WPP would experience organic growth in the second quarter.

There were "less-worse trends in the second half and final quarter of the year," WPP said in an earnings statement. "We seem to have moved from staring into the abyss post the Lehman Brothers crisis, to a less worse phase in the second half of 2009 and a stabilization phase towards the end of 2009 and the beginning of 2010."

WPP Chief Executive Martin Sorrell also recently said the company has lifted a hiring freeze instituted last year and started replacing some lost headcount. The total number of staffers at WPP at year-end 2009 was 98,759 compared with 112,663 at the end of 2008, a decrease of nearly 14,000 people or 12.3%.

The London-based company -- which is the parent of creative network Ogilvy & Mather, direct agency Wunderman, media shops Mindshare and Mediaedge:cia as well as PR shop Burson-Marsteller -- posted results on par with most of its competitors. Omnicom, reported a 20.7% decline for 2009 in net income last month, and Interpublic Group of Cos. a 13.4% revenue drop for the year. Of the four biggest companies, Publicis Groupe fared the best with a drop in profit of 9.8%.

Economic Development in India and China vis a vis the UK and USA

 Hans Rosling on the rise of China and India over the years. Witty, interesting and a simple take on the linear data involving growth in life expectancy and per capita income. He manages to illustrate how political changes affected these two development indicators and how things are expected to pan out. The key points to be noted include the impact of war on the economy and how  skewed economic growth can be a dampener.
http://www.ted.com/talks/hans_rosling_asia_s_rise_how_and_when.html

DELLOITE ON THE GLOBAL ECONOMIC OUTLOOK

Deloitte economists offer more optimistic persective in Global Economic Outlook Q4 report

Written by five Deloitte global economists, it predicts that, although developed country economies will continue their serious downturns, the massive infusion of government money should restore activity to the credit markets and set the stage for recovery. Emerging countries will feel the negative effects of this downturn.

The report looks at the historical precedent of financial crises in Norway, Finland, Sweden, and Japan in the 1990s, as well as the United States during the savings and loan crisis. It suggests that bank recapitalization can be beneficial to economies and that the financial burden on taxpayers is not necessarily onerous. Yet the report also notes that economic downturns triggered by financial crises tend to be deeper and longer than those that start for other reasons.

'Unlike some past financial crises, this one resulted in a rapid and massive governmental response on both sides of the Atlantic,' said Dr. Ira Kalish, Director of Global Economics, Deloitte Research. 'Thus, there are reasons we can be cautiously optimistic about the medium-term outlook for the global economy.'

The report offers a long-term view, suggesting impacts in multiple business sectors. 'The credit crunch is part of a long-term restructuring of the economy,' said Dr. Kalish. 'The result will see a shift in the U.S. economy away from a consumer-driven import base to an export-based economy. Asia on the other hand, will develop as more consumer-based economies. This creates opportunities and challenges for business across industry sectors.'

'In the United States, recapitalization of banks will help to revive credit market activity,' continued Dr. Kalish. 'Eurozone banking consolidation will have a positive long-term impact on European capital market efficiency. Finally, the emerging economies of Russia, India, and China, while slowing, will remain important drivers of global growth.

'Once economic recovery resumes, inflation will be a significant challenge in many countries, with some like India and China already walking a tight rope. The longer it takes for countries like these to address inflation, the more difficult it will be to suppress future inflationary pressures.'

Omar Fahoum, Chairman and Chief Executive of Deloitte & Touche Middle East, commented on the findings of the study for the Middle East by saying: 'GCC currencies are effectively pegged to the U.S. dollar not to make their currencies competitive but to reduce volatility in their export receipts; their single biggest export, oil, is priced in U.S. dollars. When the price of oil went up, increased income resulted in asset bubbles especially in the real estate market. Saudi Arabia, U.A.E., Qatar, and Kuwait all have asset bubbles as well as high levels of inflation. The question now is whether countries that currently peg to the dollar will move fully to the Euro or to a basket where the Euro has a substantial weight. The former is highly unlikely because news of the demise of the U.S. dollar was premature as we are currently witnessing, and countries would have had to revalue their currencies causing their competitiveness to be hit. GCC countries will probably remain pegged solely to the U.S. dollar because they have the money to essentially buy themselves out of the situation'.

Offering a closer look at the impact of the volatile price of oil, Dr. Kalish said, 'A drop in oil price could partially offset the negative impact of the credit crisis. However, relatively elevated oil prices will negatively impact production.' The OECD predicts this impact on growth to be greater in the U.S. due to its high reliance on energy and weaker currency (at $120.00 per barrel, -0.21- -0.51 and -0.06- -0.2 percentage points in the United States and Euro Zone growth respectively).

Country findings:

• Brazil faces a slowdown in growth due to lower commodity prices and reduced demand for manufactured exports. The country will probably resume moderate growth once the global economy eventually recovers.

• In China, the outlook is hazy, with GDP slowing and the Chinese government balancing as best it can both rising inflation and slowing growth.

• India faces slower growth. Longer term, the outlook will depend on the government's ability to invest in infrastructure.

• In Japan, our best guess is that the downturn will be short-lived and the recovery will be relatively robust.

• Russia faces the perception of risk on the part of foreign investors. Excessive dependence on oil is but one of several factors that pose future problems for Russia.

'This report is meant to provide a strategic perspective about the economy for the business community,' explained Dr. Kalish. 'In the current environment, it is important for companies in both developed and emerging countries to understand the risks they face and the potential impact on their business strategies.'