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US economy has been the most dominant economy since the end of World war 2. US dollar continues to be the store of value and haven for investors in times of risk aversion. 61% of the Forex reserves of countries are invested in dollar-denominated assets and 40% of world debt is denominated in the US Dollar, as per IMF

US dollar was created by the Act of Federal reserve in 1913. At the time, the US had overtaken Britain as the largest economy though Britain continued to hold its sway in the world economy and most transactions continued to be done in Pounds. US dollar was pegged to Gold as were all the major currencies of the world. The US was the major supplier of military equipment during world war and imported huge quantities of gold creating the largest reservoir on the planet. Bretton wood agreement put the seal on the US dollar as the reserve currency in 1944 when all major countries linked their currency to US Dollar while the Federal reserve re-affirmed its commitment to redeem the dollar for the value of gold.

In 1971, stagflation in the US economy prompted a run on the US dollar when the demand for redemption of the dollar against gold created the risk of the US losing out on precious gold reserves. After a round of devaluation of the US dollar against gold, President Richard Nixon delinked the US dollar to gold standard. This effectively removed any limit on the supply of dollars by the Federal Reserve. The devaluation of the dollar also made US exports more competitive giving a boost to domestic manufacturing. 

Petrodollar 

OPEC imposed an oil embargo on the US in 1973 as a protest to its support to Israel in the Yom Kippur war. This created long ques at the fuel stations and effectively brought the oil guzzler economy to a grinding halt. In 1979, US entered into an agreement with Saudi Arabia and oil-exporting countries wherein they agreed to sell oil only against dollars. It created an unending appetite for US Dollar by oil-importing countries like India, China

In return, US agreed to protect the House of Sauds against all acts of internal and external aggression. OPEC countries also pegged their currencies to Dollar or a basket of currencies dominated by the dollar. It helped in insulating the economies of OPEC countries from wide swings of inflation as they were importing most of the goods also in US dollar.

Current status of US Dollar and Covid 19

  1. US dollar continues to be the preferred currency of exchange and US continues to be the largest economy. It is noteworthy that personal consumption as a share of US GDP has risen from less than 58% in 1967 to over 70% today. Unlike other countries, US borrows its way to consumption by issuing US treasury bills which are lapped up by Central banks, Hedge Funds, etc around the world. US redeems Treasury Bills by printing currency since there is no limit on the supply of dollars after the abandonment of the gold standard. Ironically, the holder of reserve currency runs the largest trade deficit in the world at USD 616.8 Bn in 2019. US today has become akin to a consumer that maintains its momentum of consumption by increasing its debt and meeting it by printing currency. Rest of the world is also playing the game as it keeps its factories up and running, needs dollars to buy oil, and gives it the fallacy of increasing foreign exchange reserves denominated in a currency issued by a country that has an unending supply of notes. The question that we need to ask is that is it sustainable?
  2. Total debt carried by US has risen from USD 10 Tn in 2008 to a staggering USD 24 Tn as per Congressional Budget Office. Daily interest cost of the debt is a staggering 1 Bn USD and the debt per person in US is USD73K. As a percent to GDP, it stands at 106.9% up from 68% in 2008 when financial markets were on the brink of collapse. Further, it is 106.9.% of GDP of a country where consumption contributes 70% of the GDP funded by the largest trade deficit in the world. Debt is invariably a pre cursor to a financial crisis and the world is not a pretty place today. 
  3. US has been at the fag end of the curve in the manner in which it is responding to the pandemic. As of the date of writing, US has 7.2 Mn cases of infections with more than 200K deaths. Different countries have followed different approaches in responding to the pandemic. While we are yet to see any meaningful analysis in terms of what would be the most optimum approach in dealing with the pandemic, US has been the worst hit. It may not be an understatement to say that the US is heading into a catastrophe that is both human and economical. 
  4. This crisis is inherently different from the housing crisis of 2008. In 2008, the cash flows of Subprime bonds rated AAA by rating agencies around the world trickled down to zero with the collapse of the housing market. AIG which sold insurance against the default of Subprime bonds through Credit Default Swap (CDS) was staring at losses running into billions of dollars. It was bailed out by US govt which invested a staggering USD 180 Bn to prevent the collapse of the systemically important institution along with investments in major US banks to prevent their collapse. Companies today have created global supply chains to optimize on the sourcing, manufacturing and logistics costs. Covid 19 has disrupted the global supply chain in a manner that was not hitherto imagined. US has reacted to the existing crisis like how it was able to successfully manage the housing crisis of 2008. It has unleashed a Quantitative easing program for a staggering USD 2 Tn. Economists have been pleasantly surprised with the return of demand at Pre-Covid levels in some sectors but the distribution of demand is far from uniform. Companies have been responding to the loss of demand with automation and digitization initiatives which would not help in restoring employment to Pre-Covid levels for quite some time. Supply chain disruptions due to Covid-19 will not help the matters either. The huge influx of liquidity in the world economy may keep financial markets afloat for some time but will lead to inflation and devaluation of US Dollar which has been in an era of unlimited supply. 

The world order is changing in ways that have not been seen earlier. It will be too early to hazard a guess on the world order post the pandemic but will essentially depend on how various countries around the world respond to it. If US fails to respond in time before it’s too late, it may impact the world order and the greenback leading to a crisis of confidence in currencies. Gold may come back in limelight and so may the cryptocurrencies. Time is yet to cast its dice!

Why it took a pandemic to accept the need to better our socio-emotional skills?

Just like that, the pandemic befell us. It was neither planned, nor foreseen. Seven months into the pandemic, we are still grappling to come to terms with the changes around us. We are forced to live the new normal. How have we been able to cope with it mentally and emotionally? Why are experts now discussing the need for better socio-emotional skills during our childhood?  Why did it take a pandemic for us to accept the same? While the World Health Organization has warned of declining mental health to be the next possible pandemic to envelope the world, it is time we woke up to the need to strengthen ourselves mentally and emotionally.

Where and how do we begin? Brought up as an equal and raised in a household of independent women, I hardly experienced gender inequality or understood ‘what it means to be a girl’ in this patriarchal world until I joined a women’s college. The subtle reminders of one’s gender hit me every day – from wearing our uniform dupatta pleated and properly rested on our chests, to not being allowed to stand on the veranda for too long as our eyes may accidentally cross paths with the boys at the college nearby. Honestly, I didn’t know how to fight and where to begin. Though I did have the position of chairperson of the student body then, I should admit I could make little difference to equate genders or call out wherever it was required.

The thought of working towards an equal world started thus, though it took me close to a decade since then to commence the actual work towards a larger change. An incident that touched me at every sensory level pushed me to research and start work soon. It was in 2010 when my son who was just five years old had an unwelcome brush with a gender stereotype, which raised many questions in me and led to the launch of a socio-emotional learning program in schools and colleges. Phrases and expressions like, ‘cry like a girl’, ‘how can boys cry’, and ‘let her stay indoors as that’s the safest option’ are part of our daily lives. Normally we laugh it off or play our part in endorsing the same. Very rarely do we think of the scar that is left on the child or how one sees gender and the privileges that not everyone has.

First step in building socio-emotional skills framework

To make changes at the ground level, a team was put in place to study the gaps in education and research on ways and means to bring about gender and sexuality awareness in individuals. This led us to begin our training workshops for children as young as 10 years. The transformative years when a child discovers and questions the self, and things around is also the ideal age to introduce variations and differences in gender and how to respect and include every gender into our fold. That is how we started our gender and sexuality workshops which form the core of social-emotional learning. Through these workshops, a child is made to understand the differences in gender and how and why it is of utmost importance to see and treat every gender equally and respectfully. The deep-rooted stereotypes in our lives come out unaware, unplanned, and unwanted. Society has conditioned us to think, act, and behave a certain way. Any deviation from what is the accepted ‘normal’ invites derision and makes us feel guilty most of the time. The change in the accepted norms and conditioning is what we call as the larger change and it must start from every house and school. From not encouraging boys to take up household chores, reminding the girl in the family to learn cooking for better marital prospects, scorning at a transgender in a bus or a metro, the reasons and expressions are innumerable. When the world is moving towards creating equal opportunities and equal spaces, awareness about the same must start as early as possible. And hence began our work towards advocating socio-emotional skills as part of the academic curriculum.

It was not easy for us to breakthrough as managements at many schools considered our socio-emotional learning workshops as unnecessary. They instead preferred to focus entirely on academics, scores, and grades.

With the digital revolution dominating the psyche of a child, the pressure buildup was becoming evident. Depression, anxiety, and suicidal tendencies have risen. As the sole focus of many parents and teachers in India is towards academics, the social and emotional wellbeing of a child is not heeded to. Even though organizations like WHO, UNICEF, and UNESCO had recommended life and social skills as essentials during a child’s developmental phase, they are yet to find a permanent place in the co-scholastic curriculum in schools.

This Covid-19 pandemic and its subsequent repercussions have led educators, parents, and decision makers to alter their thinking and engage in meaningful conversations and discussions revolving better mental health. This thought process had a trickle down effect into various spaces that brought about the realization that for a better and healthy tomorrow, social-emotional health and care needs to be given utmost importance and it has to begin from a young age. From understanding oneself and people around us, breaking stereotypes and conditioning, developing empathy and compassion, to analysing one’s emotions and behaviour patterns, social-emotional learning encompasses all the necessary life-skills that one needs to be adept at for peaceful coexistence. Short term arrangements to handle mental health is not a solution for a healthier future generation. The road to a healthy tomorrow is in making a child understand his/her capabilities and shortcomings at an early age and handhold them in their transformational journey. Socio-emotional skills are the way to building a tolerant and compassionate young gen and the work has to start now.

2020 has been an extraordinary year. The onset of COVID-19, consequent lockdown, payroll cuts, retrenchments, and bankruptcy of companies like JC Penney, Hertz etc has been the new normal and guess what, the year is not over yet!

Financial markets have been on a roller coaster ride. A steep slide in March followed by fiscal stimulus / liquidity measures and the strong pull back in financial markets. Among all this mayhem, gold has become the new darling of investors outperforming all asset classes over the last three years delivering compounded return of over 16%.

Other than doomsayers, it has taken all the analysts by surprise.

So, what is fueling the rally in gold? I have tried to enumerate some of the key drivers of the rally which should provide some color to the future outlook of the asset class as an investment proposition –     

  • Gold is traditionally considered as a hedge against inflation and a safe haven for investors in times of uncertainty. Gold has a negative correlation with REAL interest rates in US. REAL Interest rate refers to the difference between US Treasury yields and inflation. Gold as an asset class gains when interest income does not compensate for the loss of purchasing power due to inflation. When the REAL interest rates fall, gold goes up in value and vice versa. Below is a chart of REAL interest rates and gold prices over the last 40 years.
Gowth Graph of Gold Price Rate
Graph showing inverse relationship between Real interest rates (red line) and Gold prices (yellow line)

Central banks have been on a spree of money printing in the aftermath of COVID-19 to provide liquidity to businesses to survive the downturn. Fed Bank alone has printed 3 trillion US Dollars in the aftermath of Corona. Interest rates have been maintained near zero to provide relief to businesses to enable them to raise money to tide over shrinking cash flows / service existing loans. Low interest rates also provide relief to Central banks to service sovereign debt which has ballooned due to fiscal stimulus.

Injection of money in the economy coupled with supply chain disruptions due to lockdown have raised inflationary expectations. US Treasury yields are at historic lows pushing REAL Interest rates below zero sparking a rally in gold.

  • Goldman Sachs in its report released in July ‘20 has warned that the U.S. dollar may lose its status as the world’s reserve currency. To quote from the report of Goldman Sachs “The resulting expanded balance sheets and vast money creation spurs debasement fears. a greater likelihood that at some time in the future, after economic activity has normalized, there will be incentives for central banks and governments to allow inflation to drift higher to reduce the accumulated debt burden.”  With US Treasury yields falling to all-time lows, fear of loss of faith in Greenback, Central banks may look at gold as the favoured asset class to diversify their holdings.
  • Monetary and fiscal stimulus by Central banks helped in avoiding another Lehman brothers and a repeat of 2008. It implies that there is more money chasing financial assets than ever before. With world economy shrinking in the aftermath of lockdown, debt yields falling to all-time lows, there exists incentive to shift allocation in favour of gold. Geo-political challenges, pandemic and intensifying trade war strengthens the choice of gold as an asset class.

Future outlook in the rally in gold

While the above arguments sound convincing than ever before, we need to closely look at some more data points to see whether rally in gold is sustainable.

Gold does not generate cash flows and has minimal utility as an asset class except towards jewellery. Therefore, traditional models of estimating the fair value of the asset by estimating / discounting cash flows do not work in case of gold.

There is a traditional belief that gold does not fall in value. If we go back into history, gold made a high of $1800 in 2011 only to fall below $1100 levels in 2015. So, gold DOES fall in value and the fall could be steeper than we might think.

Gold Pieces
Investing in gold without understanding other economic indicators could be gamble

There does exist a distinct risk that dollar may lose its status as the world’s reserve currency. Money printing by US Fed, debt at 107% of GDP and the world’s largest trade deficit at USD 616 billion, could be the harbinger of a fresh world order. While the collapse of US dollar and the rise of alternative currencies may be inevitable, there is nothing to indicate that we are about to breach the tipping point for it to be imminent. There goes a saying that markets may remain irrational much longer than we can remain solvent. For all we know, US dollar may continue to hold fort as the reserve currency in the absence of alternatives for few more cycles of rise and fall in gold prices. 

Let us look at some data points on the real demand for gold in Q2, 2020. Consumer demand for gold jewellery fell by 53% in Q2, 2020 due to lockdown and buying by Central banks fell by 50%. So, what is driving the spike in gold prices? Investment demand for gold increased by 98%. Rally in gold prices is therefore due to Investment demand which is feeding upon itself and is reminiscent of the tech bubble of 2000 before its collapse. 

Most investment houses & analysts are bullish on gold today. But were they bullish on the yellow metal when it began its upward trajectory in the last quarter of 2015? Unfortunately, the answer to this question is NO. These voices tend to follow not predate the rally in an asset class and become louder when the asset class gets nearer to peak ( highest point in prices) than trough (lowest point). And then they pick another asset class citing it to be the next wealth creator and then another.

Today skepticism runs high over investment in equities while there is herd buying happening for gold. It normally pays to play contrarian in markets and resisting doing what is common sense.

An eight year old was brought to the emergency room of a hospital in a stage of shock. She had a short duration illness with fever, skin rash, red eyes with vomiting and diarrhea. The child was given intravenous fluids and oxygen and rushed to the pediatric intensive care unit. She was started on antibiotics and supportive treatment. When the history was reviewed, it was noted that she had come in contact with a relative with COVID-19 infection three to four weeks before. She was diagnosed to have Pediatric inflammatory multisystem syndrome (PIMS) – temporally related to COVID-19 (PIMS-TS) or Multisystem inflammatory syndrome in children (MIS-C) – temporally related to COVID-19.

Pediatric inflammatory multisystem syndrome– temporally related to COVID-19 (PIMS-TS) is a newly described condition with the first reports in the journals about a few months ago.

Year 2020 has had this dubious distinction of being a year of turmoil. The COVID-19 pandemic has been an event which happens once in a century. Last such event which affected the world as we know it, was way back in 1918 when the Spanish flu wreaked havoc across the whole world.  Children have been reported to be affected very mildly as compared to adults and elderly. 

Initial Reports

In the month of April 2020, there started emanating reports in medical literature of children who were previously well presenting with illness, fever, red eyes and swelling of glands in the neck. This description resembled a condition known as Kawasaki disease. But what made it worse was that these children presented with hypotension (low blood pressure). 60-100% of children had features of vomiting, abdominal pain, and diarrhea. About 60% of children had features of brain fever.  They were managed in the emergency room because the blood pressure had fallen significantly. Some of these children also had decreased heart function and swelling of coronary arteries which supply the muscles of the heart with oxygen rich blood which could have led to a circulatory shock. These reports from the United Kingdom were followed by reports from Italy, USA and recently from India too. 

The unique phenomenon which was noticed by epidemiologists was that the areas from which these patients were being reported were from those geographic areas which had witnessed a surge of COVID-19 infections three to four weeks prior. This has led to some experts suggesting a temporal association of COVID-19 infection with this multisystem inflammatory syndrome.

Symptoms & Treatment

The usual age of children being affected by this condition is about 8 to 10 years. These children present with fever for 3 to 4 days associated with redness of eyes, mouth and lips with skin rashes and presence of tender nodes in the neck. They have a sudden deterioration in the form of low blood pressure, cold clammy extremities and feeling faint with decreased urine output. These children need admission to the intensive care unit most of the times. The children need to be resuscitated with fluids and drugs to improve their blood pressure. Supportive treatment is very important. Drugs like intravenous immunoglobulin and steroids can be used to control the inflammation in the various organs of their body.

High fever in children, in contact with Covid-19 patients, could be due to PIMS-TS
High fever in children, in contact with Covid-19 patients, could be due to PIMS-TS

Many of these children according to the literature when evaluated for COVID-19 antibodies were found to be positive. This would substantiate the claims of temporal association of this condition with COVID-19 infection. The knowledge about this condition is still in a stage of evolution as more and more cases across the globe are being reported. There have already been reports of this condition from the cities hit by the COVID-19 infection like Delhi, Mumbai, Chennai and Pune. This condition has been reported in those geographic areas which have had a surge of COVID-19 cases about 4 to 6 weeks prior. The most important aspect is recognition of this condition early and early initiation of treatment. However the condition thankfully is associated with low mortality.  

Summary Pediatric Inflammatory Multisystem Syndrome – temporally related to COVID-19:

  • Predominantly seen in older children rather than infants or toddlers.
  • Suspect if child is febrile with skin rashes, red eyes and gland swelling in the neck.
  • Loose stools, vomiting and abdominal pain can be the presenting symptoms.
  • If the child is acutely ill with disorientation and cold hands and feet, he needs to be seen by a health care provider as soon as possible.
  • Treatment is available and mortality is very low when treated adequately on time.

The COVID-19 pandemic cases are increasing globally, and the number of confirmed cases in India has crossed more than 1.5 million. COVID-19, which started as a health concern, with continued lock-downs and social distancing, normal business activity has taken a back seat leading to economic slowdown. The International Monetary Fund (“IMF”) in its latest report projects the global and Indian economy to contract by 4.9% and 4.5% respectively in 2020.

The pandemic has made a difference in each and every one’s life. Positive changes include – individuals becoming more health conscious, more quality time with family and children, slowing down from their busy life schedule and taking life easy, becoming more technology oriented. Negative changes include heightened fear on health, job safety, and financial stability.

Now let’s look at real life cases of how the pandemic has affected the financial position of individuals

  • Mr Kumar is a website designer and digital marketing professional in Mysore. His monthly income more than doubled over the last three months.
  • Mr Bharath, an IT professional in Bangalore – had to take a pay cut of 20%
  • Mr Ram, who owns a fast food restaurant in Bangalore, had closed his business for three months. But he still managed to pay the rent and staff expenses from his personal savings
  • Mr Chandan, who was working as a travel consultant, has lost his job and is searching for new job.

Loan moratorium is helping individuals manage their cash flows; however the financial situation could worsen after the moratorium period ends. Many have lost their jobs or taken a pay cut in this on-going pandemic, exposing the financial vulnerability. Individuals who had a financial plan in place, would be in a better position to weather the storm, while those who did not have a right financial plan would be under financial stress.

Boost your Financial immunity at COVID Times

Key principles of personal finance are simple and effective, but many don’t follow the same as it requires a lot of discipline. Here are some of the key principles which can help boost financial immunity during current times.

  • Boost Your Income—COVID has changed the way businesses operate. We might witness a structural shift in certain sectors and industries. Individuals who have lost their job or who have got a pay cut should be cautious as the demand for their skill set is reduced or has become obsolete. So they should hone new skills which can make them more employable.
COVID Times: Boost Your Financial Immunity
Best time to develop a new skill
  • Never depend on single income —Make investment income your second source of income.  During good times, you need to save for your rainy days. Have a target saving every month, so that you will be well prepared for the future
  • Keep your expenses under control—COVID has brought in forced discipline. Many used to spend Rs 4,000-5,000 on a weekend pre-COVID, so their total spending was close to Rs.20,000-25,000 over weekends in a given month. Now all this unnecessary weekend expenses have drastically reduced. It would be better, as we get back to normal—to cut down unnecessary expenses.
  • Have a health insurance—COVID being a medical crisis, an individual is exposed to health risks. In an unforeseen event of hospitalisation, the financial burden can be significant. It’s better to take a decent health insurance cover, so that the financial risk would be reduced to great extent. You can even think of topping up your current health insurance limits. Most of the insurance companies have come up with top-up policies specifically for COVID times.
  • Avoid getting into new debts – During uncertain times, loan or debt can hurt very badly. It’s better not to take any new loan or debt. Also be wise in using credit cards. In this environment, it is easy to come across a lot of offers and discounts which might entice us to use our credit cards or get into debt. It would be better to postpone purchase, instead of getting into a debt trap.
  • Build an emergency fund – Three to four months of expenses as emergency fund which will come in as handy during tough times.

Conclusion :

An economic slowdown can significantly affect the financial position of an individual. The basic principles of personal finance though simple, need lot of discipline to be on track. Please remember the current economic slowdown, is just one of the slowdowns; We might have to see more in the coming years. If you were not well prepared for the on-going slowdown, you can start building your financial immunity with the above-mentioned key pointers.