Sougata Basu is the Founder of DaulatGuru.com. He has an MBA in Finance from Boston University and has done Electrical Engineering from BIT, Mesra, India.
August 2010: Almost 2 years after the financial crisis of 2008, we still do not see a real recovery in the US economy. The data on unemployment and debt levels in US do not indicate any significant improvement. The economic crisis of 2008 was not a sudden disaster like an earthquake or a tsunami that happened without sufficient warning signals. It was building up as the consequence of serious economic problems that started many years ago. Some economists and finance experts had predicted it accurately. However the Government agencies, media and financial services firms didnâ€™t pay attention to these experts. So what should we learn from the 2008 experience?
First, we must do an independent analysis and shield ourselves from the noise in the media. Second, whatever the politicians, CEOs or FED Chairman say may be completely wrong. Third, if something has not happened in the past doesnâ€™t mean it cannot happen in the future.
Please take a look at the video below:
Let us consider the story of my neighbourâ€™s son. He didnâ€™t learn how to properly speak or write in English. However, he somehow managed to get an admission to a low-ranked engineering college in India. He took a loan of INR 10 Lacs for the course. After the course he didnâ€™t find a job because of his poor communication skills. Instead of taking a course to improve his English, he decided to pursue a Masters degree from Australia. So the problem of not finding a job was postponed for 2 years. But this solution didnâ€™t solve his real problem and instead increased his loans by another INR 30 lacs. After his Masters degree, he still couldnâ€™t find a job. The problem was worse this time because he had much more debt.
This is exactly what US is doing now. It is taking on more debt to postpone its current problems. This may work temporarily. But in the long run, it can be disastrous. Though it is not possible to exactly predict the date and time of the next economic collapse, it is possible to predict the direction.
We all understand that easy availability of cheap debt was one of the main reasons for the crisis. However the steps take n after the crisis have only increased the debt. So a problem caused by high debt has been solved by taking on higher debt. Debt is good only if the return on the investment is greater than the cost of borrowing. If someone takes debt at 6% to build a factory and sells the goods to get a net profit of 10%, then thatâ€™s a â€œgoodâ€ debt. If someone takes a huge debt and simply consumes it, then thatâ€™s generally not a good use of debt. So a consumption driven society mainly financed by debt is not sustainable in the long run.