India / US: A Strikingly Similar Paralysis

Policy Paralysis wafts like an invisible veil of smoke into a room full of card players with cigarette stubs lying on their ashtrays, and goes almost unnoticed until someone begins to sneeze. The 2 largest democracies in the world have come from opposite ends of the growth curve, and now seem to be treading down the same road to nowhere for a whole host of reasons.

The US has been on a tepid recovery as far as the numbers go, although the number of jobless citizens out there still spells worry. Recent studies show that the US would grow at approximately 2% this year, which is leaps and bounds ahead of Europe, which at this stage is still stuck with its own economic malaise.

The 2nd largest democracy in the world however still has a looming 15 Trillion dollar debt problem which stands out on the world stage like a perennial eyesore, perennial because it would take a lot of courage and discipline to set right. The American Congress in the meantime, does not have the appetite for any more constructive decision-making unless they are compelled to.

The largest democracy, India on the other hand appears to have fallen from the grace it had only a few months ago. In February this year, to an attentive and burgeoning middle-class, over a televised budgetary address, the finance minister proudly projected an 8.5% GDP growth for this fiscal.

Little did he know then, that by Christmas, a whole host of factors which include supply side pressures along with external conditions both within and beyond his realm of control would mercilessly throw these figures out of the window.

It is easy to point of that the policy paralysis in the 2 largest democracies have different root causes. In the US, it has been the result of severe ideological differences. One party thinks that a Robin Hood Tax on the rich coupled with increased Government spending is the way out of a recession while the other thinks that Government is in fact the problem!

In India, it has been incoherent policies and intra-party fighting between ministries about the right way ahead clubbed with the odd multimillion rupee scandal that grabs the headlines every now and then.

Having reached this regrettable state of paralysis, there are 2 key points that must be noted. Firstly, Paralysis is a Government operating under Crisis.

Paralysis simply permits the inertia of inaction to prevail until a disaster unfolds. When forced into action, the path of political brinkmanship will first be embarked upon, until one of the 2 sides decides to blink. The other side would then claim a sort of victory regardless of the outcome. The US debt debacle and the most recent payroll tax hike are text-book illustrations of this phenomenon.

The second point to be observed is that the anaemia of paralysis also causes the government to start kicking a whole bunch of half-filled cans down the road. It’s almost as if a government that has been given the mandate to govern by the people has lots its credibility to rule. In India, key differences on policy matters by different ministries (as stated above) have caused the country millions in the form of Foreign Investment. Crucial projects in the pipeline (such as Posco and Vedanta) remain clogged in the pipeline for lack of political will.

So how does one take on so crippling a paralysis of this nature? The 2 known approaches are already being used.

Firstly, Big Business or Business Councils could weigh in some of their urgency on the government. In the US, the iconic conglomerate head, Donald Trump has decided to conduct a republican debate on the 27th of December with all the presidential candidates (only a few have agreed). He has been for the past few months trying to bring his own list of issues to the forefront (one of which has been taking China on head-on). In India last week, the FICCI (a leading Business Council) rapped the government’s knuckles hard for rolling back a critical reform it had already introduced on multi-brand retail that would have taken the country a step forward.

The other approach is clearly visible in makeshift tents in the cold winter outside Wall Street as self-interest groups decide that working within the system has till date brought no form of change whatsoever to their lives. Next week, post-Christmas, the Anna Hazare camp in India will enter its next phase of agitations against what it sees as the Government trying to frame anti-corruption legislation that is as fierce as a paper tiger.

When policy paralysis begins to hit the front pages of tabloids frequently and becomes the subject of dinner table discussion, one does needs to worry. The impasse does more harm in many cases than good and often yields unintended advantage to opposition parties at the ballot box.

The onus is thus on the incumbent administration to crank the engines of growth (no matter how rusty they may be) and get the economy chugging along once again. When this happens, the smoke from the engines would bring many a welcome sneeze.

First posted on technorati


Occupy Wall-Street: In the Days of Oliver

“Please sir, I want some more ..”, the young boy Oliver held his bowl up with more than a slight quiver to the Master. Fear gripped not only him but also the entire congregation of students, of what the outcome would be. The outcome, as told by Charles Dickens was indeed favorable to Oliver Twist, but not in the short term. 

Back then as well, in the days of Oliver, there existed fat cats. These were men of high standing and stature who were well out of reach of the poor. Between then and now, nothing much has changed in terms of attitudes, except for the fact that the pie has tripled or even quadrupled in size and there are more people with knives and bowls at the table.

The leftists and socialists often blame the skewed system of capitalism for not providing equal opportunity to all, while capitalists in turn consider socialists to be a bunch of lazy bums wanting to live out of taxpayer’s money in the name of social security. The truth lies of course between the melted cheddar in the middle.

What began as just an ordinary run-of-the-mill march against high prices in Israel has now turned into a full throttle drive against capitalism across the highways of the world as the segment of the seemingly deprived join hands on facebook.

The demands of the Protesters in Wall Street are by now, common knowledge. Their prime concerns revolve around the bankers who were bailed out with TARP money and are still around earning hefty bonuses. Worse still, those who invested in their schemes have gone broke. 

A CNN Contributor even suggested that the protesters align themselves with shareholders and voice their concerns in Shareholder meetings. This of course assumes that the crowd on Wall Street believes that working within the system would yield the desired results.

The only other legal option is off the table. The protesters from all the major cities cannot consider any form of Class Action lawsuit, since on all counts it was the Incumbent Administration that showered 800 Billion of Dollars on the Banks, with absolutely no conditions attached.

To be fair though, Capitalism to a large degree is more appealing that her half cousin socialism and has to a large extent many feathers in its cap. Free markets after all encourage entrepreneurship and meritocracy, and it is indeed no surprise that Silicon Valley still attracts some of the best talent in the world.

In the days of plenty, the Oliver’s were too insignificant to be heard. The fat cats were munching their exotic seafood unseen on the rooftops while the middle class were taking home a fair chunk of the pie. Everyone was content and no one wanted to rock the boat. Surprisingly though, between 1979 and 2006, the lower class saw their incomes rise by 11%, the middle class by 21% and the uber-rich by a whopping 256%!!

Despite this gross imbalance, the general public as it seemed, had absolutely no objections. Then came the Lehman Brothers collapse which was soon followed up by the plight of “Income Stagnation” heaped upon an already over-debted middle class.

Sensing danger, the chieftains of capitalism meanwhile turned their anger towards the Obama Administration and began to blame him for the countries unending woes. “Obamacare has ripped the state exchequer off its future earnings and will put millions of Americans in debt !!” has been their rallying cry till date. 

The Middle class gradually hollowed themselves out and joined the ranks of the Oliver’s on the table with knives and spoons. Like an angry bunch of kids, they are fed up with the administration. They know that Big Government is not the solution because it ends up borrowing more than it has, but they don’t understand why an elite group of individuals should still take home bonuses when thousands are unemployed.  

Elsewhere the man who promised Change in Washington has abandoned the senate to its own devices and has limited himself to making targeted statements against Congress whenever he gets a chance. The Republicans have mastered the art of Brinkmanship and are determined to use any future exigency to extract the last drop of blood from an already divided Congress!!

Outside in the cold, as winter sets in, the obstinate protesters vehemently brave the cold and claim that they represent the 99%. As their numbers swell and the government continues to blink, the din will grow louder. The crisis continues on its downward spiral as capitalism’s moment of reckoning has finally arrived.

Article first published as Occupy Wal-Street: In the Days of Oliver on Technorati.

Donald Trump Goes to China

A couple of months ago one of America’s most successful billionaires, Donald Trump, nearly ran for President. The fact that he eventually didn’t, may have been caused on a multiplicity of factors upon which this fictional interview is based (and the assumption that Premier Wen Jiabao doesn’t need an Interpreter).

The date is March 2013; President Donald Trump (assuming he swept to victory in the 2012 elections) is in Beijing with his contingent to conduct high level talks with the Chinese Premier Wen Jiabao. The banquet hall is well illuminated; the leaders of both nations are seated face-to-face across a lavishly spread dinner table to discuss strategic relations and a host of other contentious issues.

(Donald bangs on his glass with a spoon, to get everyone’s attention)

Donald: Mr.Wen, thank you for having me and my contingent over today. I am here today to take our strategic relationship to the next level.

Wen Jiabao: (Smiles and Nods).

Donald: Before that, Mister Wen, I think you and I need to do a little bit of plain talk!! Things are really not going as well as they should be Mr. Wen, and I am here to address that.

(Some whispering is seen among the Chinese contingent)

Wen Jiabao: What are your concerns President Trump?

Donald: The United States of America, Mr.Wen is not only the largest democracy in the world but also the world’s biggest economy. We need to be treated with a little respect!!

(More shuffling continues, and this time Premier Wen Jiabao has a puzzled look)

Wen Jiabao: Well, President Trump, I am truly sorry that you are not happy with the 21 Gun salute that our Military had given you nor the red carpet welcome that you have been given ..

Donald Trump: (Interjects) NO NO NO! Mr. Wen, This is about the larger picture, or should I say, the Global Imbalance that exists in the system. The fact is that you guys have been undervaluing your currency for the last generation or so, and so you now have a China with a huge surplus and an America with an even Larger Deficit. 

Wen Jiabao: Well of course President Trump, that’s common knowledge to anyone these days.

Donald Trump: (leans back with folded arms) So tell me then, how do we fix this?

Wen Jiabao: (leans forward, takes of his spectacles) You see Mister President, a very famous American Senator once said “IF IT AIN’T BROKE .. DON’T FIX IT!!”.

Donald Trump: This is precisely what I am talking about!! As the top two economies in the world, we should be setting an example of how economies do business together effectively.

Wen Jiabao: Hold on a second, President Trump. 

(Wen Jiabao hands out a copy of the Central Bank of China Report to Trump, who glances through it ..) 

Wen Jiabao: As you can see, President Trump we hold approximately $1 Trillion of your treasuries, which is almost close to half if not 40% of the total worth of treasuries issued. Moreover, as the world’s second largest economy we kept buying your bonds to support the dollar despite your slugfest in Congress last summer. 

Donald Trump:  Okay .. Okay

Wen Jiabao: Oh!! and here is something else for you to see. Look!! Our Forex reserves are presently at $3 Trillion dollars while your nation has a staggering debt of $14.5 Trillion. So with all due respect President Trump, we are certainly not equals!!  

Donald Trump (frowns): That’s why we need to address this, Mister Wen.

Wen Jiabao: That may be how you see it, but It’s working perfectly fine for China and for Asia as well. Our reserves are high and our workers are efficient. This is capitalism, for there to be winners, there have to be losers too. You of all people should know this.

Donald Trump: Let the renminbi appreciate by 5%. Relax your controls and give the US Premium Goods Export access to this market in China.

(Wen Jiabao leans backwards and consults with his team and then gets back to the table .. )

Wen Jiabao: If we agree to do this, what would you give China in return? 

Donald Trump: Well, what would you want?

Wen Jiabao: Access to American High Technology Defense and Warfare Equipment. The ability to …

Donald Trump (snaps): Mister Wen, let me warn you that I can drive a hard bargain. Let me put it this way; we feel that as a nation, China should give the US access to its growing market. Otherwise, my contingent and I would be compelled to make an official statement recognizing the “Dalai Lama” as the rightful leader of Tibet.

(Donald Trump now leans backwards, cross his hands and sports a broad grin on his face. The Chinese contingent is now nervously deliberating amongst themselves)

Wen Jiabao (leans forward): You are making this political.

Donald Trump (chuckling): Mister Wen, your government’s record for human rights rivals only North Korea and Burma!! Anyway, here is a list of things we would like. Firstly, the renmimbi should appreciate by around 8% over the next 6 months. Secondly, tariff free market access should be given to all US firms in accordance with WTO norms

(The Chinese Contingent is still deliberating now nervously and louder, finally Wen Jiabao restrains them)

Wen Jiabao: President Trump, If we were to allow the renminbi to appreciate, our exports would be less competitive in the global market, which is not in line with our present economic policy. I am sorry. Moreover, as far as your request for market access goes, I would request you raise your concerns through the proper channels (WTO). 

(Donald Trump’s face is boiling with anger – HE BANGS THE TABLE !!)

Donald Trump: This is unacceptable to the United States of America!! We will now have to take unilateral action against what we feel as a violation of human rights and a suppression of self-expression of democracy in Taiwan. In the interests of democracy, we may need to supply Taiwan with further weapons.

Wen Jiabao (smiling): Mister President, in that case, we would need to boost our military capability to handle any secessionary threats that may result from this weaponization of our renegade province. We may therefore decide to sell (or dump) a sizeable proportion of our holdings of US treasuries into the Open market in order to meet this objective. 

Donald Trump: Haaaah !! Gotcha there Wen. You cannot do that without burning your own fingers, we are all in the same boat here you see.

Wen Jiabao (gets up to leave): President Trump, I am sure that you are aware that we just need to dump more than a handful of these Dollar bonds into the market to do the job. The sentiment itself would be enough to sink the dollar. Dollar bond yields will sky-rocket and your government with its 14.5 Trillion debt will be will be forced to service them. Today, Europe borrows from us, Africa’s reserves are all tied up to us, to whom will you go to service your debt? 

(Donald Trump stares at Premier Wen)

Wen Jiabao (continues): So politics aside, Mister President .. as they used to say in your national media before the last election… “It’s still the economy stupid…” Now if you’ll excuse me. I have a meeting with the Venezuelan ambassador

First posted on:

The Clueless Commander

President Barack Obama has a tough job on his hands!! This is probably one of the most used cliché’s across the media for the past 2 years or so. His toughest job is actually not fixing the economy. At least not yet, for before he attempts to do that, he needs to surmount an even bigger obstacle called “Economic Theory“. If history has taught us anything, it is that this is probably unending!!

Since the dawn of his presidency he has been thrust into the middle of the age old debate of Classical Economics vs. Keynesian Economics. Of course this debate has raged over time and played itself out in different countries with different governments and under different circumstances.

John Maynard Keynes was in fact credited with rocking the boat of the neo-classists when he first arrived on the scene in the early days of the great depression (1929 – 1940) with his seemingly hair brained idea of deficit spending. It was then; out of sheer desperation that President Franklin Roosevelt launched his “New Deal“. This gush of government money that was hurtling towards a starved economy also came with a lot of legislation to prevent the occurred from re-occurring. It is however noteworthy to mention that this new deal did spawn a recovery (25% unemployment down to 15%). However, once the economy seemed steady in a comfort zone, President Roosevelt raised taxes in order to balance the budget. No sooner had he done that did the economy (almost as if it was on pills) went into a tizzy and almost collapsed yet again.

Through the ages we have had different Presidencies borrowing more than they can afford, only to leave it to future generations to pay back. In the 80’s, President Ronald Reagan whose ideology of Reaganomics could almost resonate with a majority of Republicans in fact turned the US from being the world’s largest creditor to the world’s largest debtor nation in his tenure. His policies of de-regulation, cutting taxes across the board and controlled government spending, meant that the US had to borrow to finance its military cold war spending.

Of course, with unemployment well below the 10% mark, no one was ready to blow the whistle on what seemed to be a bad precedent being set. Successive governments after that had no qualms about deficit spending since there were always national interests at stake (wars in Iraq, AfPak). There was a brief period in between when President Bill Clinton balanced the Budget with the help of Congress

What followed soon after was history in the making. What began with an unnecessary war acted upon unilaterally led to a burgeoning deficit, and when Lehman Brothers collapsed the entire nation went into shock. An already swollen deficit had to further carry the weight of the TARP so that the system would not shut down. Since then, as far as the deficit goes, we really have not looked back.

However, as they always say “this time it’s different”, this time it truely is different. Never before has any American President ever had to preside over a sovereign default for reasons that cannot entirely be attributed to him.

Of course, being the incumbent for 3 years now, there is a limit to the extent that one can indiscriminately use the line “these problems were inherited from the previous administration” though by and large, many analysts acknowledge this fact. From the Roosevelt days of the Great Depression to the promises of Universal Obamacare, opinions continue to pour in and newer angles of thought keep curling out of everywhere.  

Classical economists would point out to the thriving America that led the world in the last half century or so was made possible by the absence of strangling government regulation. Needless to say, this same unchecked profligate capitalism collapsed on its own greed and had to rely on a government bailout instead.

Now a few years down the line to what seemed like only yesterday, the Tea Party voices have risen from the dust. Their absolute Classical doctrine can be heard by the sound bytes of their torchbearers. Michelle Bachmann in her recent “let the nation default” statement to the press caused a lot of annoyance among her republican candidates, keen to distance themselves from her.

One can clearly see the dangerous path that the extreme right is treading on these days as the republican Right makes a return to extreme neo-classicalism. The Liberals on the other hand have headed for their safe havens in the Unions trying as hard as they can to make their case for controlled spending.

The Commander in Chief looks helplessly on as the battle between these 2 economic Ideas plays itself out relentlessly on Prime Time, Talk Shows, Rallies and now maybe even household dinner tables. The Great Depression cost the incumbent President, (Prez. Herbert Hoover) his job, with almost a year to go .. history may repeat itself.

First posted on:

There has Never Been a Better Time

… to be an Economist .. of course. This is apart from the fact that a recent study conducted by the University of Arkansas showed that the job market for economists in Developed Countries has been on the wane. These statistics can however afford to be ignored since related research also does show that jobs for Economists in Developing Countries are on the rise.

Whether its the media savvy Ben Bernanke (Federal Reserve Chairman), the inconspicuous Jean Claude Trichet (ECB Chairman) or even the bespectacled Dr. Subba Rao (Reserve Bank of India Chairman), the press seem to be hounding their every turn each time a new statistic is broadcasted.

From the Private Sector, you have the globally renowned experts such as Nouriel Roubini who shot to fame after he predicted the 2008 crash. Marc Faber with his Doom and Gloom report follows closely behind. Mark Mobius, (Fund Manager at Franklin Templeton Investments) is another renowned figure who specialized more on Emerging markets. Then of course you have a whole host of Economists who work at various Financial Institutions across the globe who also get their share of screen time every time there is a rally.

An interesting point to note is in almost all of the recent crises till date, there were forewarnings issued by noted economists. In 1994, Paul Krugman published an article about the “Asian Economic Miracle” thereby predicting the South East Asian crisis 2 years before it would happen. Mark Mobius was one of the first in line to predict the Dot Com crash of 2001. Most recently however, it could so easily have been Nouriel Roubini who should have been credited for calling out the 2008 Financial Meltdown, except for the fact that there is now a queue of such candidates with similar claims.

Given the highly coupled age that we live in, the equations can really go haywire. A live example of this can be seen by how helpless Emerging Markets are in reining in inflation. When prices of global commodities can indirectly affect inflation, interest rates and consumption power of global citizens, the usual weaponry that these Central Bank Governors could wield to control their systems are rendered ineffective. Moreover, Central Bank Governors around the world are slowly discovering that Economics in a Free Globalized Market is a lot more unpredictable than how they imagined it to be.

Between periods of meltdown, or boom and bust cycles, economists always seem to take their place in the background, their opinion sought after now and then or when matters reach the hilt. Till then however, the spotlight would turn to Industry leaders such as Steve Jobs, Bill Gates, Jack Welch, Carlos Slim and many of the other Industrialists for their soundbytes. Someone once said, when Economists become highly sought after and gain in pre-eminence, then markets, nations and netizens have a lot to worry about.

First Published at Technorati :