“So things are getting worse in Europe,” she said.
“Let me tell you a small story I read on a blog recently,” I replied.
“Seth Godin, one of the world’s premier brand experts and famous blogger, wrote a blog on the rock band The Rolling Stones, a while back.”
“But why are we talking The Rolling Stones?” she asked. “I am talking economics, you’re talking rock.”
“Men are from Mars, Women are from Venus!”
“Never mind. So in this blog Godin writes “Keith Richards (guitarist and vocalist of The Rolling Stones) tells a great story about Charlie Watts, legendary drummer for the Stones. After a night of drinking, Mick (Jagger, the lead vocalist of The Rolling Stones) saw Charlie asleep and yelled, “Is that my drummer? Why don’t you get your arse down here?” Richards continues, “Charlie got dressed in a Savile Row suit, tie, shoes, shaved, came down, grabbed him and went boom! Don’t ever call me “your drummer” again. You’re my … singer. No drums, no Stones.”
“No drums, no Stones?” she asked. “What does that mean?”
“What I am trying to say is that at times there is a need to look at things differently.”
“Yes with all this brouhaha about Europe, people have forgotten the United States(US),” I explained.
“So you mean that there is no problem in Europe?”
“Of course not. But just because there are problems in Europe doesn’t mean things are fine in the US.”
“So what you mean is that with all the attention being paid on Europe, people are ignoring the issues in the US?”
“Right. In fact, the unfunded liabilities of the US government are huge.”
“Now what are unfunded liabilities?” she asked.
“Let us say you want to retire 10 years from now,” I started to explain.
“Ten years? Why should I retire so early?” she interrupted.
“It’s an example yaar.”
“So let us say you want to retire 10 years from now. You feel that an income of around Rs 8 lakh per year should be enough for you to sail through.”
“Bus.That’s too low an amount.”
“To earn an income of Rs 8 lakh per year you would need to build a corpus of Rs 1 crore, assuming that you manage to get an interest of 8% on the corpus you build. But this Rs 1 crore is not going to come out of thin air.”
“So you will have to save regularly to build that Rs 1 crore corpus,” I said.
“Yes. Paisa kamane ke liye bhi paisa chahiye,” she replied. “But what is all this got to do with the US government?”
“Well the logic is the same. What works for you also works for the government. The government gives a pension to people when they retire. If a certain number of people are expected to retire ten years from now, then they would have to be paid a certain amount of pension. While estimating the exact amount is difficult, estimates can be made. But what we know for sure is that money is to be saved now so that citizens can be paid pensions later.”
“Yup. So what was that part about the unfunded bit?” she asked.
“If governments don’t invest the right amount from now on, which a lot of them don’t including the US government, they will have to pay these citizens by borrowing money later. And if pensions cannot be funded through the investments already made, they are said to be ‘unfunded’.”
“I was reading this interesting book Ponzi Power by Mitch Feierstein. He writes “Using proper accounting methods…the true value of the state and municipal pension liability is at $5.2trilion. When you deduct the $1.94trillion of pension assets that have already been set aside, you get a net liability of $3.26trillion.””
“These are big numbers,” she said.
“Yes. Other than this the US government already has an existing debt of around $14.6trillion.”
“So that’s about it?”
“Feierstein also points out that the social security programme of the US government is also underfunded to the extent of $18.8trillion. The underfunding in Medicare, the health insurance programme amounts to around $38.5trillion. So if you add all of this up the number comes to a whopping $75.2trillion and that is what Feierstein feels the US government owes to others like governments and its own citizens. To give you a sense of proportion, the US yearly gross domestic product (GDP) is at $15trillion. The GDP of the entire world is around $60trillion. So these are big numbers we are talking about”
“But isn’t that an estimate?” she asked
“Yes it is. But it has been drawn partly from documents of the US government. The private estimates are worse. Economist Edward Chancellor writes in a report “One estimate of US healthcare and pension liabilities runs to 7 times the country’s GDP.” This estimate suggests that the US government owes more than $100trillion. There is no single precise measure of the indebtedness of the US government. But there are big numbers and there are bigger numbers.”
“Laurence Kotlikoff of Boston University has made a lifetime study of the present value of unfunded commitments using data from the US Congressional and Budget Office. He puts the true level of US indebtedness to around $202trillion.”
“Oh my god!”
“So what is the way out?”
“Well all these welfare schemes will have to be dramatically cut and that may not be a politically popular move. Otherwise the US debt is going to go up dramatically from its current levels.”
“But I am confused. If things are so bad, why does the US dollar continue to be seen as a safe haven?”
“Well, for the simple reason that dollar is the international reserve currency, and if things become too bad the US can always print it to repay. Hence every time there is a hint of a crisis anywhere in the world more money moves to the dollar.”
“But that’s stupid.”
“Yes it is. But remember as the economist Herbert Stein once wrote, “If something cannot go on forever, it will stop.””
“When will it stop?”
“Let me end with a line from John Maynard Keyens. As he famously said “markets can remain irrational longer than you can remain solvent!” And as the first rule of forecasting is that give them the forecast or the date, but never both!”
The article originally appeared on Rediff.com on June 28.2012
(Vivek Kaul is a writer and can be reached at [email protected])
Bruce Wiseman is a man who wears many hats. He writes detective fiction under the pseudonym of John Truman Wolfe (www.johntrumanwolfe.com). He runs a market research, survey and positioning company (www.ontargetresearch.com). He has managed money for many Hollywood stars through the investment firm Wiseman & Burke. And if all this wasn’t enough he has recently written a bestselling book on the financial crisis titled Crisis by Design, The Untold Story of the Global Financial Coup. In this interview he speaks to Vivek Kaul on how the investment Goldman Sachs rules the world.
You talk about an incestuous link between Goldman Sachs and the American government. Could you explain that to our readers?
The Rolling Stone magazine recently published an article called “The Great American Bubble Machine,” a masterful exposé by Matt Taibbi revealing Goldman’s greed and corruption in the creation of several investment “bubbles” that have made the firm and its partners—the term filthy rich comes to mind—but which have been devastating to Americans and to the U.S. economy. I have no problem with people making money—barrels of the stuff. Boatloads. But this needs to be done with some sense of ethics, some sense of morals, some sense of responsibility toward one’s fellow man.
Could you elaborate on that?
The all too coincidental participation of Goldman executives in the creation of the financial crisis is something that Machiavelli himself would be proud of. Taibbi laid bare the army of Goldman alumni that have turned up at critical decision points in the universe of credit, investment and finance. His orientation was such that he omitted a few that I will tell you about. My focus has been exposing the actual cause of the worldwide financial crisis. And our paths have crossed at a few key junctures. Junctures that bring to mind the great Gordon Gekko—Michael Douglas’s character in Oliver Stone’s Wall Street. Douglas shares the philosophy of the successful investment banker:“Greed is good. Greed is right. Greed works. Greed clarifies and cuts through and captures the essence of the evolutionary spirit.” Yeah, baby.
Could you give us an example?
I could start this part of the story with Henry Fowler, who, after serving as the 35thSecretary of the Treasury, in 1969 became a partner at Goldman after leaving office. But that’s not how things worked in the nineties and beyond. Oh no. The current sequence is very different. Pictures of Robert Rubin always remind me of the cartoon character Droopy. He seems to be in a perpetual state of sad worry. More to the point of our story, having served 26 years with Goldman Sachs, ascending to the position of co-chairman, Rubin came to Washington with the Clinton administration as the Assistant to the President for Economic Policy. Bill must have dug the Wall Street touch, because in January of 1995, he appointed Rubin the 70th United States Secretary of the Treasury. This could be called the start of what the New York Times has referred to as the modern era of “Government Sachs.”
Allow me to explain. The hallmark of Rubin’s years in Washington was deregulation—specifically, deregulation of the financial industry. Turn the financial industry loose. Let the big dogs eat. Let them earn. They have Porsche payments to make. Working with Greenspan, he kept interest rates implausibly low and ensured that regulatory safeguards were gunned down like victims in an L.A. drive-by shooting. The Glass-Steagall Act is a prime example. A piece of the Great Depression-era legislation that kept investment banks and commercial banks from committing fiscal incest, it was repealed—charged with being out of touch with the global financial structure. What it was out of touch with was an agenda to open the floodgates to unbridled speculation by banks that set the industry up for a financial Hiroshima.
Would you like to add to that?
When Rubin was co-chairman of Goldman, the firm underwrote billions of dollars in bonds for the Mexican government. When the Mexican peso tanked a few years later, Rubin, as Secretary of the Treasury, arranged a multibillion-dollar taxpayer bailout, which, according to reports, saved Goldman a cool $4 billion. Even today, Goldman’s former co-chairman is advising Obama behind the scenes and his acolyte Timothy Geithner is in charge of the U.S. Treasury.
But Geithner never worked for Goldman Sachs…
Geithner worked for Rubin at Treasury during the Clinton administration and was a Rubin favorite. He then snagged the powerful presidency of the New York Federal Reserve Bank. It was Rubin who got Geithner the gig at the New York Fed and it was Rubin who hooked him up with Obama, who appointed him as his Secretary of the Treasury. In addition to Rubin, another former Goldman chairman,the controversial Jon Corzine, has been a top economic advisor to the current American President Barack Obama.
That’s quite a link…
Yup. And there is more to come. Given that Goldman employees gave more money to Obama ($994,000) than any other commercial enterprise in the United States, and that the White House is awash in Goldmanites. Even with the White House under control, Geithner beefed up his Goldman staff at Treasury. He named yet another Goldmanite as his chief of staff. Mark Patterson was selected to help him run the government’s financial circus. Patterson gave up his plum position as the vice president for Government Relations at Goldman—meaning he was the investment bank’s chief lobbyist—to become the number two man at Treasury.
What about Henry Hank Paulson, the Treasury Secretary of the United States, when the financial crisis broke out?
Before the news of the financial crisis began to go mainline in 2007, a new Goldman CEO descended from his throne on Wall Street to come to Washington and help his government manage the nation’s financial affairs. We love you, Hank. Viewed from the board rooms of Wall Street, Henry Paulson’s blitzkrieg of the nation’s capital was nothing short of stunning: a George Patton(a famous American World War II General) in pinstripes—except Patton was fighting a real enemy, not one that he himself had created. At first, he used PR spin to calm the multitudes. As the crisis began to unravel, in August 2007 Paulson assured the American people that the subprime mortgage problems were nothing to be concerned about, that they would remain contained due to the strong global economy. The stock market peaked two months later followed by a crash that wiped out trillions. In a television interview on Meet the Press on August 10, 2008, Paulson stated that he would not be putting any capital into Fannie Mae or Freddie Mac. Three weeks later, he took them over and committed $200 billion in bailout funds. When I was growing up, we’d call this kind of guy a “bullshit artist.”
Can you get into a little more detail?
Perhaps nothing so demonstrated this scam as the government bailout of American International Group (AIG), the country’s largest insurance company. On September 16,2008, Paulson coughed up $85 billion of your tax dollars to take control of AIG. The $85 billion loan got the government 80 percent ownership of the insurance giant. Just what I always wanted from my government, a bankrupt insurance company. It turns out the $85 billion wasn’t enough. AIG has continued to hemorrhage losses and Uncle has now poured a total of $182 billion into the insurance company. Sticky constitutional issues aside, many have found it more than curious that when the government granted the loan, AIG turned right around and paid it out to the investment banks to which it owed money. The bank that got the largest payout was . . . of course, Goldman Sachs—a cool $13 billion. The money simply passed from your paycheck to the U.S. Treasury, from the Treasury to AIG and from AIG to Goldman (and other banks). Paulson made sure the transfers would occur without any objection from AIG or unseemly negotiations with the banks. To do this, he tapped Goldman Sachs board member Ed Liddy to be the new CEO of AIG. The good-hearted Mr. Liddy took the gig for a dollar a year in salary from AIG. But he held on to his $3 million in Goldman stock.
That was one round about transaction…
Yup. Goldman made billions from AIG earlier as well. AIG didn’t know this. Neither did Goldman’s clients. You see, despite the fact that they had collected enormous fees selling financial products that were “insured” by AIG, Goldman simultaneously sold AIG short. You get this? On the one hand, they sold financial instruments to their clients, which carried high investment ratings because AIG insured the buyer against loss. At the same time, they made investment “bets” for their own account against AIG. Estimates are that they made $4.7 billion betting against AIG while selling the AIG-guaranteed products to their clients.
Anything else that you would want to point out?
Paulson pushed the Troubled Asset Relief Program (TARP) through the House and Senate—winding up with a cool $700billion to “save” the banks. Congress’s actions remind me of a bad Godzilla movie, with masses of panicked Japanese citizens fleeing the fire-breathing monster, which is lumbering through the city toppling buildings and devouring cars. The legislation drafted by our elected officials sounds like something issued to Stalin by the Politburo. They granted Paulson complete dictatorial powers over the bailout money. The TARP read in part: “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.”
But where does Goldman fit in here?
Calling the multibillion-dollar bailout a “stimulus” program is but a cruel joke. This was nothing more complicated than a coup—a transfer of hundreds of billions of dollars from American taxpayers into the Armani-clad arms of major Wall Street banks. You won’t be surprised to learn, I’m sure, that Goldman Sachs got a cool $10 billion of TARP funds. And if you followed the billions pouring from your paychecks to Wall Street, you might remember that Bank of America at first received $25 billion. Then, in the midst of the chaos, they agreed to purchase Merrill Lynch. As it turned out, however, Merrill’s losses were $15 billion more than Bank of America had expected. This was due in part to $4 billion in bonuses paid out by Merrill’s CEO, John Thain, who pushed the bonuses through his books just before the Bank of America deal closed. Bank of America was taken by surprise by the losses and the purchase of Merrill Lynch started to go shaky, to which Comrade Paulson coughed up another $20 billion of your tax dollars. You guys are so cool bailing out these banks. I mean it. It brings tears to my eyes. Oh, I should mention that John Thain, the guy who pushed through the last-minute billions in bonuses, had been the president and co-chief operating officer at Goldman Sachs before becoming the president of Merrill Lynch.
So Goldman Sachs is everywhere?
Yup. Pretty much. Joshua Bolten, was the Chief of Staff of former President George Bush. Bolten had become Chief of Staff in April of 2006 and is credited with persuading the President to recruit Paulson as the Treasury Secretary. No surprise, since Bolten had been the executive director, Legal & Government Affairs for Goldman Sachs International before joining the Bush 2000 presidential campaign. The president of the World Bank is Robert Zoellick. Prior to joining the World Bank, Zoellick served as vice chairman, international, of the Goldman Sachs Group. Incest doesn’t begin to say it. From the White House to Treasury, from the New York Fed to AIG, from the Commodity Futures Trading Commission to the New York Stock Exchange, Goldman is there.
You talk about 19 men controlling the financial affairs of the whole world. Who are these people?
They are the Board of Directors of the Bank for International Settlements. They are listed on the Bank’s website, but Helicopter Ben Bernanke and Tim Geithner are on the Board, as was Greenspan. And it is the newly created Financial Stability Board, operating as an arm of the Bank for International Settlements, that now structures and dictates the rules and regulations to be carried out by the central banks of the world. And given the fact that central banks essentially operate independently of their national congresses or parliaments, the FSB now controls the monetary policy of the planet. It is now, for all practical purposes, the Politburo of international finance.
Where is Goldman Sachs in this?
Who is the chairman of this little known entity based in Basel, Switzerland? Mario Draghi. Draghi was a partner at Goldman Sachs until, like Henry Paulson, he left Goldman in 2006. Paulson took over the U.S. Treasury and Draghi became the governor of the Bank of Italy (Italy’s central bank) and in April of this year, chairman of the Financial Stability Board. Draghi is also a member of the board of directors of the Bank for International Settlements. In fact, the BIS board reads like a Goldman reunion committee. Mark Carney had a 13-year career with Goldman Sachs, where he became the managing director of Investment Banking before becoming the governor of the Bank of Canada and a member of the BIS board. William Dudley, president of the New York Fed and former partner at Goldman Sachs, is also a member of the board, along with Draghi.
So they are there everywhere…
Yup. Gary Gensler the current head of the Commodities and Futures Trading Commission in the United States spent 18 years at Goldman Sachs. In May of 2007, the granddaddy of stock markets, the New York Stock Exchange (NYSE), bought Euronext (a pan-European stock exchange with subsidiaries in Belgium, France, Netherlands, Portugal and the United Kingdom), which, now branded as NYSE Euronext, operates the largest securities exchange on the planet. To run the show, the newly combined entity brought in Duncan Niederauer and appointed him chief executive officer. Niederauer had been a partner and managing director at Goldman Sachs before joining NYSE Euronext. And there you have it. Complete financial control of U.S. financial policy and markets, from the White House and Treasury to the New York Fed, the New York Stock Exchange and the Commodity Futures Trading Commission (Control of the World Bank along with the most powerful member of the International Monetary Fund (the US Treasury Secretary Timothy Geithner), and at the top of the fiscal food chain, the Bank for International Settlements and its Financial Stability Board.
(The interview was originally published in the Daily News and Analysis(DNA) on June 25,2012. http://www.dnaindia.com/money/interview_how-government-sachs-rules-the-world_1706239)
(Interviewer Kaul is a writer and can be reached at [email protected])
Some eleven years back I happened to be at an event where Sri Sri Ravi Shankar was the main guest. Since he was in a hurry he came in dancing into the hall and immediately asked the audience to ask him some questions.
After a few questions came this gem “Swami ji, jeevan ka matlab kya hai?“. To which he replied “jisne jeevan ka matlab bataya usne samjha nahi, aur jisne samjha usne bataya nahi.”
This philosophical gobbledygook or to use a simpler term mumbo-jumbo, left the audience impressed, and they kept talking about for some days to come. Ravi Shankar was an upcoming guru back then who was trying to find his audience and we all know he has done rather well since then.
Over the years I have thought a lot about the statement that he made on that given day. Why did he say what he did? I guess those were the days when he was trying to build a story around what he stood for. He was trying to create an image of himself in the minds of people, which was significantly different from the gurus already present and doing roaring business in the market for ‘spirituality’. And his story had to be different from them.
The story that Ravi Shankar perfected and spread over years is that of spreading happiness and peace, targeted at the upper middle class segment of the society with a dash of yoga and music thrown in for good measure. He supports this story with a bit of philosophical gobbledygook at times. The fact that his rise coincided with the so called India growth story is no coincidence. People worked longer hours under a whole lot more stress. They also made a lot of money, something which they could use to be spiritual on weekends and seek peace, a few times a year.
Ravi Shankar is not a mass market guru like Sai Baba of Puttparthi was or Baba Ramdev is, these days. He does not hold his sessions in open grounds like Baba Ramdev does. He holds them in air-conditioned halls. And he makes sure that he stays true to the story he stands for. Recently when Baba Ramdev went on a fast against corruption in the country, Ravi Shankar was asked, why doesn’t he go on a fast like Ramdev had? To which his reply was “I have so many followers outside the country. If I go on a fast, it will become an international issue. This is our problem and it should remain in India.”
So even though Sri Sri thinly associated himself with Ramdev’s campaign against corruption, he didn’t go all the way with it. Associating himself with a mass market guru on a mass market issue would have spoilt his story of being an international guru promoting peace and happiness through yoga, music and mumbo-jumbo, to the upper middle class. He had modeled himself along the lines of Osho Rajneesh (though Ravi Shankar is nowhere as radical as Rajneesh was), who was also a rich man’s international guru and he stayed that way till his death.
Spiritual gurus in India are big brands and big brands over a period time build stories around them. These are stories that help the mass market to relate to them. And when it comes to big brands, they don’t make bigger brands than film stars.
Dilip Kumar was the brooding lover. Raj Kapoor was the Indian Charlie Chaplin who got lost in the big bad city. Dev Anand was the gunda with a noble heart. Rajesh Khanna was the boy next door who got the girl in the end with some hiccups thrown in between for good measure.
As times changed, people forgot Khanna rather quickly, and Amitabh Bachchan became the angry young man. Bachchan tried to do something different now and then, but was unsuccessful at it during his hey days. Chupke Chupke and Alaap, two of his best performances during his hey days didn’t set the box office on fire. In the late 1980s he played the man with no name in the superb Main Azad Hoon (inspired by the great Hollywood flick Meet John Doe) directed by Tinnu Anand, who had also directed the Bachchan comeback movie Shahenshah. Main Azad Hoon tanked at the box office.
In the next generation, Salman Khan became the bhai next door. Shahrukh Khan became the new Rajesh Khanna, the sophisticated guy next door, who gets the girl in the end, after singing a few songs in between. This story became attached to Shahrukh Khan since Dilwale Dulhaniya Le Jayenge(DDLJ) released in October 1995. His anti hero movies of Darr, Anjam and Ram Jaane all came before DDLJ.
Almost all of his biggest hits after DDLJ have had Shahrukh playing the sophisticated guy next door, who usually gets the girl in the end. Be it Kuch Kuch Hota Hai, Kabhi Khushi Kabhi Gum, Dil to Pagal Hai, Chalte Chalte, Main Hoon Na, Veer Zaara etc
Whenever he is tried to go against this, be it Swades, Paheli, Kabhi Alvida Na Kahna or for that matter My Name is Khan it hasn’t worked for him. And most recently that assault on the senses called Ra.One.
In the recent past Chak De India has been the only Shahrukh movie that has worked where Shahrukh did not play the guy next door. The reason the movie worked was that it had a strong story line, which isn’t a characteristic of most Shahrukh movies, and had a fairly limited budget.
So that leaves us with Aamir Khan the other big star of the generation. What is his story? His story can be expressed in that old Maggi Tomato Ketchup line “It’s Different”. Aamir Khan over the last ten to twelve years has been associated with movies which do not fall under the ambit of conventional Bollywood cinema. Be it as an actor or even as a producer.
As an actor he has done movies like Lagaan, Dil Chahta Hai, Mangal Pande, Rang De Basanti, Taare Zameen Par, 3 Idiots and Dhobi Ghat – Mumbai Diaries. These are movies which would be categorized as “different” in the scheme of Hindi cinema. Almost all of these movies come with an overt social message as well, something that Bollywood isn’t really known for. His next release Talaash, looks like what crime writers call a “police-procedural”. It is a sub-genre of detective novels where a murder or murders for that matter, are investigated painstakingly by normal police detectives, who are not as smart as Arthur Conan Doyle’s Sherlock Holmes or Agatha Christie’s Hercule Poirot.
Getting back to the point, during this period Aamir has also done an out an out masala flick like Ghajini, where his role required him to shave off his hair, something that no other Hindi film super start would have agreed to do. The only normal masala film that he has done in the last few years is Fanaa. And that is the exception that proves the rule. Aamir Khan likes to do movies that are different from the usual and have an overt social message.
Even his films as a producer, Lagaan, Taare Zameen Par, Peepli Live, Dhobi Ghat and Delhi Belly, fall into the “it’s different” category. And other than Delhi Belly which was an out and out zany adult comedy, the other movies had an overt social message.
So that brings us to Satyamev Jayate, Aamir Khan’s latest big hit. As Aamir has repeated in many interviews around four years back he was approached by Uday Shankar, CEO of Star India, with an idea of doing a game show. This Aamir rejected, as the Open magazine reports, saying “I don’t want to do a game show. I want to do something dynamically different”.
There you have it from the star’s mouth himself. He wanted to do something that was “different”. Aamir Khan probably understood much better than the people who wanted him to do a game show that the image he had built over the years wouldn’t allow him to do a game show. A game show required a star who didn’t really have a “serious-thinking” sort of an image that Aamir has. A Salman Khan could pull off a Dus Ka Dum. But an Aamir couldn’t. A Shahrukh could do Zor Ka Jhatka in his informal sort of way. But couldn’t pull off a Kaun Banega Crorepati which required the gravitas of an Amitabh Bachchan.
Media reports suggest that Aamir Khan and Star TV’s CEO Uday Shankar did not leave it at that. As Business Standard reports “It started some sort of engagement between the two to leverage the power of television. After over one-and-a-half years Khan, who undertook extensive research with his creative team, hit upon the idea of Satyamev Jayate.”
So convinced was Aamir about the idea that other than hosting the show he even decided to produce it under his banner Aamir Khan Productions, which will get paid a whopping Rs 45 crore for the 13episodes planned.
The entire concept of the show jelled with Aamir Khan’s image of being associated with work that is “different” and has an overt social message to it, though the social message in Satyamev Jayate is much more than any of his movies.
Aamir Khan went looking for an idea like Satyamev Jayate and found it. But it can also be safely said that an idea like Satyamev Jayate needed a presenter like Aamir Khan. They are “made for each other”, as the old Wills cigarette ad went.
(The article originally appeared on www.firstpost.com on June 23,2012. http://www.firstpost.com/living/why-aamir-khan-and-sj-were-made-for-each-other-354892.html)
(Vivek Kaul is a writer and can be reached at [email protected])
Decisions are of two kinds. The right one. And the one your boss wants you to make. The twain does not always meet.
Duvvuri Subbarao, the governor of the Reserve Bank of India(RBI), earlier this week, showed us what a right decision is. He decided to hold the repo rate at 8%. Repo rate is the interest rate at which RBI lends to banks. There was great pressure on the RBI governor to cut the repo rate, after the gross domestic product (GDP) growth for the period between January and March 2012 came in at a very low 5.3%.
The Finance Minister, Pranab Mukherjee, declared openly that he was “confident that they (the RBI) will adjust the monetary policy,” which basically meant that he was ordering the RBI to cut the repo rate. The idea was that once the RBI cut the repo rate, banks would also cut interest rates leading to consumers borrowing more to buy homes, cars and durables. Businesses would borrow more to expand and in turn push up economic growth.
But economic theory and practice are not always in line. Subbarao, probably understands this much better than others, though until very recently he had largely stuck to doing what his boss the Finance Minister, wanted him to do. For the first time he has shown signs of breaking free.
The credibility of a repo rate cut
By cutting the repo rate the Reserve Bank essentially tries to send out a signal to banks that it expects interest rates to come down in the days to come. If banks think the signal is credible enough then they cut the interest rates they pay on their deposits as well as the interest rates they charge on their long term loans like home loans, car loans and loans to businesses. But the trouble is that even if the RBI cut the repo rate, the credibility of the signal would be under doubt, and banks wouldn’t have been able to cut interest rates.
Between the six month period of December 2, 2011, and June 1, 2012, banks have given loans amounting to Rs 4,46,563 crore and have borrowed Rs 4,27,709 crore. Hence for every Rs 100 that the banks have borrowed they have lent out Rs 104, which means they have not been able to raise enough deposits during to match their loans. So their ability to cut interest rates is limited. The question is why is the money situation so tight?
High fiscal deficit
The government of India has been running a very high fiscal deficit. For the financial year 2007-2008, the fiscal deficit stood at Rs 1,26,912 crore. It shot up to Rs 5,21,980 crore for 2011-2012. In a time frame of five years the fiscal deficit is up nearly 312%. The income earned by the government has gone up by only 36% to Rs 7,96,740 crore, during the same period. The huge increase in fiscal deficit has primarily happened because of the subsidy on food, fertilizer and petroleum. For the current financial year, the fiscal deficit is projected to be at Rs 5,13,590 crore, which is likely to be missed as has been the case in the last few years. The oil subsidy targets have regularly been overshot. This year the government might even overshoot the food subsidy target of Rs 75,000 crore.
The government finances its fiscal deficit by borrowing. When a government borrows more, as has been the case for the last few years, it ‘crowds out’ the other big borrowers like banks and corporates. This means that the ‘pool of money’ from which banks and companies have to borrow comes down. Hence, they have to offer a higher rate of interest. This is the situation which prevails now. So banks will continue in the high interest rate mode.
What must have also influenced Subbarao’s decision is the high inflationary which prevails. The consumer price inflation for the month of May stood at 10.36%. This is likely to go up even further in the days to come given that the government recently increased the minimum support price(MSP) on khareef crops from anywhere between 15-53%. These are crops which are typically sown around this time of the year for harvesting after the rains. The MSP for paddy (rice) has been increased from Rs 1,080 per quintal to Rs 1,250 per quintal. Other major products like bajra, ragi, jowar, soybean etc, have seen similar increases. This will further fuel food inflation. Also, after dramatically increasing prices for khareef crops, the government will have to follow up the same for rabi crops like wheat. Rabi crops are planted in the autumn season and harvested in winter. Economists expect higher MSP on agriculture products to push up the food subsidy bill by Rs 40,000 crore from its current level of Rs 75,000 crore. This means a higher fiscal deficit and in turn higher interest rates.
In a scenario where the inflation is over 10%, cutting interest rates can fuel further inflation, which isn’t good for anyone. The RBI in a release said that the inflation is “driven mainly by food and fuel prices.” That’s something Subbarao cannot do anything about and is for the government to sort out.
“In the absence of pass-through from international crude oil prices to domestic prices, the consumption of petroleum products remains strong…preventing the much needed adjustment in aggregate demand,” the RBI release said. The Subbarao led RBI seems to be clearing telling the government here to cut down on oil subsidies by increasing fuel prices as and when necessary.
In fact in a rare admission Subbarao even said that the last cut in the repo rate in April may have been a mistake. “The Reserve Bank had frontloaded the policy rate reduction in April with a cut of 50 basis points. This decision was based on the premise that the process of fiscal consolidation critical for inflation management would get under way, along with other supply-side initiatives,” the RBI release said.
What this means in simple English is that the RBI may have been led to believe by the finance ministry that if they went ahead and cut the repo rate in April, the government would follow up by taking emasures to cut the fiscal deficit. But that hasn’t happened. RBI kept its part of the deal. The government did not.
The article originally appeared in the Times of India Crest Edition on June 23,2012.
(Vivek Kaul is a writer and can be reached at [email protected])
Who is Sonia Gandhi?
Do we the citizens of this country really know her?
What are her views on various things?
What does she think about the current state of the Indian economy?
What does she think of the government which she runs on “remote control”, like Balasaheb Thackeray once did?
When she went abroad recently for medical treatment, what is it that she is suffering from? Does it bother her that her only son Rahul is in his forties now and is still unmarried?
Does she find time to be with her two grandsons?
Are her Hindi speeches written in Roman script?
Pardon me for being rhetorical, but I am just trying to make a broader point. The citizens of India don’t have answers for any of the questions asked above. They need not have answers for every question. But they definitely need to know her views on the Indian economy, the government she runs on remote control and the medical illness that plagues her.
The other questions are personal and answering them would just satisfy some curiosity and nothing else.
The fundamental question that arises here is why is there so much mystery surrounding Sonia Gandhi? Nobody currently influences the economics and politics of India more than she does. But when was the last time you read an interview with her and heard her interacting with the media?
The answer behind all her mystery might very well lie in the art of branding a product. As brand guru Martin Lindstrom writes in Buyology – Truth and Lies About Why We Buy “Mystery is a fascinating component as many brands leverage this in order to make us pay more for a brand.”
And so many big brands make mystery their selling point.
“Ye PSPO nahi jaanta,” went the catch line of an advertisement of Orient Fans. Towards the end of the advertisement it was revealed that PSPO stands for “Peak Speed Performance Output.” Now what does that mean?
Or take the case of “ZPTO yukt naya clinic All Clear.” What does ZPTO stand for?
Or take the case of Tata Xenon XT, the new car from Tata Motors. What does XT stand for?
Or Johnson’s natural baby oil with aloe vera? What is aloe vera?
Or products like Ariel Oxyblue and Opti-ThickTM Harpic?
All these abbreviations and terms stand for something. PSPO is a technology that uses lesser electricity to deliver more air, over a larger area. ZPTO is a microbiocide, which is supposed to kill microbes which cause dandruff. But dandruff can happen for a lot of other reasons as well.
The XT in Xenon XT stands for Cross Terrain. Aloe Vera is a plant with supposed medicinal qualities and has been often cited as being used in herbal medicines. It is even mentioned in the New Testament ((John 19:39–40))
Do most consumers understand what do these terms mean? The answer in most cases would be no. But do these terms matter to consumers when they make a buying a decision? Yes, they do. The mystery associated with such terms, makes the product more appealing to consumers. “Take the Sony Trintron TV for example. What is Trintron? No idea. It’s some technical mystery, which claims that the TV is better – it sounds technical and fancy and seduces us to believe this is something very special. This is mystery in action,” says Lindstrom
The case with Sonia Gandhi is very similar. The “mystery” associated with her along with her foreign origin makes her very appealing to the Indian voter.
And she goes out of her way to maintain the mystery. The recent “circus” in the run up to the Presidential election is a good case in point. Mamata Banerjee, the Chief Minister of West Bengal, went to meet her to discuss who would be the Presidential candidate of the United Progressive Alliance (UPA). Banerjee came out and told the waiting press that the finance minister, Pranab Mukherjee, and the vice president Hamid Ansari, were the two candidates on Sonia’s mind. No one officially knew till then what was Sonia Gandhi’s take on the issue. The cat was suddenly out of the bag.
Banerjee then went to meet Mulayam Singh Yadav and put out three candidates of her own, the former President, APJ Abdul Kalam, the current Prime Minister, and suspended CPI(M) member and former speaker of the Lok Sabha, Somnath Chatterjee.
But pretty soon Yadav had backed out of the so called deal he had struck with Mamata. It is said that Sonia Gandhi had secret meetings with Mulayam Singh Yadav, and soon he was ready to support the UPA’s candidate for the President.
There are couple of interesting points that come out here. One is of course that you don’t play games with the President of the Congress party, who comes from the Nehru-Gandhi family. But more importantly it was a lesson to everyone about what happens when you talk to the press about what Sonia Gandhi is thinking on a particularly important issue. The “mystery” is important to her being and it must be maintained.
Maintaining the mystery behind a good brand goes a long way in maintain their selling point. Lindstrom provides a very good example of a shampoo launch to explain what happens when the mystery associated with a brand goes.
“When Unilever was getting to launch a shampoo in Asia, a mischievous employee with time on his hands wrote on the label, just for the hell of it, Contains the X9 Factor. This last minute addition went undetected by Unilever, and soon millions and millions of bottles of the shampoo were shipped to stores with those four words inscribed on the label. It would have cost too much to recall all the shampoo, so Unilever simply let it be. Six months later, when the shampoo had sold out, the company reprinted the label, this time leaving out the reference to the nonexistent “X9 Factor.””
The company was in for a surprise. “None of the customers had any idea of what the X9 Factor was, but were indignant that Unilever had dared to get rid of it. In fact, many people claimed that their shampoo wasn’t working anymore, and that their hair had lost its luster, all because the company had dropped the elusive X9 Factor,” writes Lindstrom.
With the mystery gone consumers thought that the brand wasn’t simply good enough as its earlier version. Sonia Gandhi seems to be working on the same principle in keeping her mystery going and keeping her publicity to the minimum.
She is rarely seen speaking unless it’s an election meeting, where her speeches are largely prepared in advance, unlike Atal Behari Vajpayee who spoke impromptu on a lot of occasions. I don’t remember ever reading and interview of hers. Even the few biographies written on her are largely about the days when she first came to India and was put up at the house of Teji and Harivansh Rai Bachchan. Her initial struggle to adjust to Indians ways. Her strong relationship with her mother-in-law Indira Gandhi. Her reluctance at Rajiv Gandhi entering politics, after the death of his brother Sanjay. And so on. None of them get into the political side of Sonia Gandhi.
And so the mystery continues. That’s what great brands are all about. If that means that Indian democracy is run out of a ‘backroom’ with a ‘remote-control’, then so be it.
(The article originally appeared on www.firstpost.com on June 21,2012. http://www.firstpost.com/politics/sonia-gandhi-and-the-art-of-mystery-branding-352184.html)
(Vivek Kaul is a writer and can be reached at [email protected])