Q.(1-10): Read the following passage carefully and answer the questions given below it. One word is given in bold to help you locate that while answering a question.
The 10th anniversary of the Great Recession, a.k.a. the Great Financial Crisis of 2007-08, has inspired a spate of comments across the globe. Almost without exception, they warn that the lessons of that financial crisis have not been absorbed, and another giant financial bubble is currently inflating its way to another huge bust. Yet, this near-unanimous chorus of warnings has not stopped stock markets across the world from reaching new heights. Greed is drowning out fear. Many busts are caused by central banks tightening money. Today, we have the opposite: the greatest flood of money ever created (over $10 trillion, according to some estimates). The central banks of the US, China, Europe, Japan and Britain are at the forefront. What happens when these central banks try to return to normal, and the giant flood becomes giant ebb? Optimists claim that central banks can manage the transition smoothly. The US Fed plans to move in baby steps, announcing its intentions well in advance to avoid panic. This assumes that markets are rational, when they are mainly creatures of panic and euphoria, boom and bust. Much has been written about the printing of trillions of dollars by the US Fed after 2008. But the others are not far behind. A recent Financial Times column noted that the Bank of England, created in 1694, had a bank rate of around 4% through most of its history. This fell to 2% in the Great Depression, then rose and peaked at 17% in the inflationary 1970s, before returning to the historical 4%. After 2008, an unprecedented monetary stimulus has reduced the Bank rate to 0.25% today. The Bank has also bought £445 billion (about Rs 36,900 billion) worth of securities by printing money. This enormous stimulus has neither led to a boom in GDP nor in consumer prices. Instead, like stimuli in other countries, it has created a giant bubble in assets like bonds, equities and real estate. Many financial analysts fear that the next bust may come not from Western central bank action but from China. This country encouraged a lending boom to rescue the economy after 2008. But that now seems out of control. China’s debt has exploded from $6 trillion to $28 trillion, and its ratio to GDP is up from 140% to 260%. James Anderlini of the Financial Times (‘China’s economy is addicted to debt’, goo.gl/McRV96) says this has created “an economy addicted to borrowing and afflicted with serious asset bubbles. The ultimate test will come when Beijing eventually attempts to wean the country off this debt dependence.” Historically, bonds and equities have moved in opposite directions. Today, both are at all-time highs. Not because this makes economic sense, but because the tidal wave of central bank money has to be put somewhere. So, financiers are plunging into bonds and equities simultaneously, as in the bad old days of 2003-08. They are also plunging into junk bonds, and even junk countries. Argentina has repeatedly defaulted on its foreign debts in the last 100 years. Yet, in the current financial madness, it has successfully sold 100-year bonds, a privilege once restricted to the most creditworthy nations. Mohammed El-Arian, chief economic adviser of Allianz, complains of a “liquidity delusion” that cheap money will continue to flood in forever. So, there is too much risk in soaring markets.
Such a huge bubble typically occurs when three things happen simultaneously. One, the arrival of an exciting new ‘disruptive’ technology that is difficult to value in the short term, but has huge potential. The second is easy market liquidity to help investors roar into markets. The third is cheap credit. All three elements are in evidence today. The new technologies include electric cars, hyperloops, artificial intelligence and companies with ‘network effects’ (like Uber, Facebook and Amazon). Liquidity is massive and cheap. (Some bonds carry negative interest rates.) Ruchir Sharma of Morgan Stanley says “the scale of today’s tech boom is not readily visible because much of the investment action has moved into the hands of big private players. In 1999, nearly 550 startups went public, and after many ended in disaster, the government tightened regulation of public companies. In part to avoid that red tape, this year, only 11 tech companies have gone public.” “Many are raising money instead from venture capitalists or private equity funds. Venture capitalists have poured more than $60 billion into just the technology sector every year for the last three years — the highest flows since the peak in 2000 — and private equity investors say there has never been a better time to raise money.” Many hyped companies (now called ‘unicorns’) have never made a profit. Yet, investors have thrown huge sums at them, raising their valuations above $1 billion each. The world now has over 260 unicorns, including many in India. A bust is certain everywhere (including India). But nobody knows when. The 2003-08 boom proved that markets could soar for years after being declared irrationally exuberant. Cynics are still buying, hoping to double their money before the bubble bursts. It’s a risky strategy.
Q.1) The underlying tone of the passage is understood to be one of:
Q.2) The acceleration in stock markets, for long years, not conforming to rational belief often happens under which of the following circumstances?
a) Prior to an economic gloom.
b) After an economic gloom.
c) After rate cuts imposed by a central Bank.
d) When prices of commodities stabilize.
e) When bonds and equities move in the opposite direction.
Q.3) Which of the following are described as creatures of panic and euphoria, in the light of the passage?
a) The Central Banks of countries in the world.
b) The Great Financial crises of 2007-08 in several countries.
c) Facebook and Amazon.
d) The stock markets.
e) The hyper-loops.
Q.4) An appropriate title to the above passage could be which of the following?
a) The Bubble that Bursts.
b) Greed Drowning Out Fear.
c) The Tidal Waves of Money.
d) The Destiny of World Economy.
e) The Giants of Economy.
Q.5) “The ultimate test will come when Beijing eventually attempts to wean the country off this debt dependence”-an equivalent expression of the idea contained in this sentence would be which of the following?
a) It will be an easy test China when it evidently saves the country from the debt-trap.
b) It will be an uphill task for China to ensure that the country is rid off the indicated debt-dependence.
c) It will an acid test for China when it finally makes attempts to revive the country from the burden of debt-dependence that prevails at present.
d) Independence from debts is what China eventually aims at.
e) None of the above.
Q.6) The bond and equities are said to be at all-time highs. It is attributed to which of the following?
a) The exuberant economic scenario.
b) The substantial surplus with the central bank.
c) The Economic boom of 2003-08.
d) The Financial crisis in USA during 2007-08.
e) The venture capitalists.
Q.7) China’s current debt, indicated in the passage, has reference to which of the following?
a) Six trillion dollars.
b) Down to 140% of its GDP.
c) Up to 400% of its GDP.
d) The worst position in the world.
e) Twenty eight trillion dollars.
Q.8) Hundred -year bonds of Argentina are sold:
a) To only most creditworthy nations now.
b) To every country in the world as at present.
c) To Allianz.
d) The Defaulters.
e) Not mentioned in the passage.
Q.9) One of the reasons for the ‘huge bubble’-the nick-named concept is shown as:
a) Tough market liquidity.
b) Lack of credit in the market.
c) High- potential disruptive technology.
d) Scarce liquidity.
e) Foreign debts.
Q.10) ‘Unicorns’ as understood from the passage refer to which of the following?
a) Venture Capitalists.
b) China and Argentina.
c) Blue chip companies.
d) Hyped companies.
e) Artificial Intelligence.