India’s problem is its outsized reliance on foreign capital for growth. This capital is now fleeing causing the rupee to lose value, which creates even more capital flight. Indians do not stand idly by while their rupees plummet in value. Rather, they have been purchasing gold to preserve their savings, and this is also adding to the rupee rout.
In response to this cycle, the new head of the Reserve Bank of India announces a series of palliative measures. While these measures will do little or nothing to break the vicious circle the subcontinent finds itself in, at least someone is doing something ceasing the downward march of the rupee, for now.
When the trade deficit widens, economic growth suffers. The formula for GDP is Consumption + Investment + Government + Balance of Trade. A negative balance of trade reduces GDP, but rising imports generally indicate a strengthening economy. However, this “recovery” is different as strengthening economic numbers of every stripe seem unable to increase the demand for labor in this country. While imports have risen, export growth has leveled off. You can see for yourself what happens when exports stop growing:
Cheap money is being used to paper over the problems in the economy. Light vehicle sales have rebounded to pre-GFC levels, and at first glance, this is a positive development. However, the information is being presented without context. Placing August’s sales results into context places a giant gap in the mainstream media narrative.
First, a sales pace from 2007 isn’t that great. The red line illustrates that from 1997 to 2007, auto sales surpassed this month’s pace in all but two months while the country’s population was lower, 267 million to 302 million in those years compared to 316 million today. Since 1998, the country has added six New York Cities, but auto sales have basically remained flat during this time.
Second, in light of this chart showing declining incomes for Americans
you may wonder where people are getting all of this money to purchase shiny, new cars. Wonder no more:
- A record 84.5 percent of people acquiring cars in the second quarter financed the deals with loans or leases, Experian said on Tuesday. That is up from 79.7 percent in 2008.
- The shifts came as average credit scores for new car loans from all lenders fell for the fourth consecutive year.
- U.S. banks made 36 percent of their car loans to subprime borrowers in the second quarter, up from 34 percent a year earlier, according to data from Experian.
- On nearly 20 percent of new car loans, lenders take the additional risks of allowing borrowers six to seven years to repay.
- Total U.S. outstanding auto loans rose to nearly $751 billion, up 10 percent from a year earlier.
Credit fueled expansions are never sustainable. In addition to the various bubbles created courtesy of your Federal Reserve, please add the “New Car Bubble” to the list.