Vivek Kaul
The iconic British band Pink Floyd once sang a song called Pigs(three different ones). The song written by Roger Waters was a part of the band’s 1977 album Animals.
A part of the second paragraph of the song goes like this:
You f****d up old hag, ha ha charade you are.
You radiate cold shafts of broken glass.
You’re nearly a good laugh,
Almost worth a quick grin…
These lines ‘supposedly’ take pot-shots at Margaret Thatcher, who was then the Leader of Opposition in Great Britain. Two years later she would take over as Prime Minister and become the longest serving British prime minister of the twentieth centenary.
But the protests against her would never really die down as she went around dismantling the welfare state that Great Britain had evolved into. In the process she caused a lot of pain to the British citizens. Waters and Pink Floyd would in their 1983 album The Final Cut, take more direct pot-shots at her and sing “Oh Maggie, Maggie what have we done?”.
When Thatcher took over as the British prime minister in 1979, Great Britain was plagued with high inflation. Businesses were not doing well as unions had grown to be very strong and workers went on strikes regularly. The government itself had bloated to the extent that it determined compensation for a third of the nation’s workforce.
In the aftermath of the Second World War, British politicians had embarked on industrial nationalisation and also introduced a welfare state. As The Economist points out “To a generation of politicians scarred by the mass unemployment of the 1930s, full employment became the overriding object of political life…But to keep employment “full”, successive governments, Labour and Conservative, had to intervene ever more minutely in the economy, from setting wages to dictating prices.” When the government tries to do too many things, it inevitably ends up making a mess. And that’s what happened in Britain as well.
Thatcher went around breaking down the structure of the welfare state that had emerged. As The Economist points out “Government spending was curbed to control the money supply…Industrial subsidies were cut, sending many firms to the wall.”
This went totally against the prevailing conventional wisdom. As the Financial Times points out “Against all conventional wisdom, she took an axe to public spending. At one celebrated meeting she even demanded an extra £1bn cut in spite of warnings from those present that the country would fall apart.”
Other than cutting down on government spending she also went around limiting the role of the government in the society as an employer as well as a decision maker. “Mrs Thatcher set about reforming the inner workings of the welfare state, attempting to introduce competition among health and education “providers” and to hand day-to-day decision-making to schools, hospitals and family doctors (thereby side-lining hated local-government bureaucrats),” writes The Economist.
She also started selling shares in government companies and made it an important source of revenue for the government. “In 1980-81 more than £400m was raised from selling shares in companies such as Ferranti and Cable and Wireless. Later came North Sea oil (Britoil) and British Ports, and from late 1984 the major sales of British Telecom, British Gas and British Airways, culminating at the end of the decade in water and electricity. By this time these sales were raising more than £5bn a year,” The Guardian writes.
She also purposefully went around breaking the big unions and told the world that Britain was a great place to invest in.
But these steps had a few negative repercussions initially. As industrial subsidies were cut nearly 10,000 businesses went bankrupt and by 1981 more than 3 million Britishers were unemployed. Interest rates rose to a record 22%. The government spending cuts created further trouble for the economy.
Yet things started to improve and by 1983, inflation had fallen to under 4% from a record 22%. By 1985, for the first time since the 1960s, the British government would not run a fiscal deficit. With all these steps Margaret Thatcher was able to revive a moribund British economy, and set it back on track again. She would later say “I came to office with one deliberate intent…To change Britain from a dependent to a self-reliant society, from a give-it-to-me to a do-it-yourself nation.”
Here is something that every Indian politician can learn something from. India right now is facing problems remarkably similar to what Great Britain did when Thatcher took over as prime minister (though Britain was a developed country then and India is not).
Inflation is at more than 10%. Business confidence is low. The various unions work in the interest of the workers employed in the organised sector (like they are expected to) and this has hurt a much larger number of those working in the unorganised sector. The much touted Panchayati Raj hasn’t worked. As Gurucharan Das writes in India Grows at Night “Most states sensing a loss of power, have resisted giving financial independence to panchyats and municipalities.”
The UPA led Congress government has turned India into a welfare state by giving out subsidies. The total government expenditure for the year 2013-2014 (the period between April 1, 2013 and March 31, 2014) is projected to be at Rs 16,65,297 crore. This has increased by 134% since 2007-2008 (the period between April 1, 2007 and March 31, 2008) when it stood at Rs 7,12,671 crore.
The government is not earning enough to meet this increased expenditure. In the process its fiscal deficit, or the difference between what a government earns and what it spends, is expected to go up by around 327% to Rs 5,42,499 crore in 2013-2014 from 2007-2008.
This has meant that the government has had to borrow more and more to make up for the difference between what it earns and what it spends. Increased borrowing by the government has led to higher interest rates, as it leaves a lesser amount of money for banks and other financial institutions to borrow from. Increased government spending is in turn also responsible for high inflation and even higher food inflation. (For a more detailed argument read here).
The solutions to these problems are similar to what Margaret Thatcher did in Great Britain. One way of lesser government as well as bringing down the fiscal deficit is selling shares in public sector units. While efforts have been made on this front, the process remains remarkably slow. And on occasions the public interest in buying shares of these companies has been so low that the government has forced the Life Insurance Corporation of India to buy a bulk of these shares being sold. The government needs to be more active on this front.
Government spending needs to be cut as well and if not cut, at least controlled. The subsidies being doled out under programmes like NREGA are turning India into a give-it-to-me dependant nation. They have also fuelled high inflation. As Das writes “We need to be humbler in our ambition and our ability to re-engineer society…If the state could only enable access to good schools and health care, equity would follow.”
The government has tried to improve the education scenario by bringing in The Right to Education Act. One part of the act states that there will be no examination. This has increased the complacency among teachers and led to the learning process becoming even worse.
As Arvind Panagaria wrote in a recent edit in The Times of India “The latest Annual Status of Education Report 2012 (ASER 2012), published by NGO Pratham, documents an all-around sharp decline in student achievements from levels that were already low. In just two years between 2010 and 2012, percentage of fifth graders in public schools who can read second grade-level text has declined from 50.7% to 41.7%…Percentage of fifth graders who could do a simple two-digit subtraction with borrowing has fallen from 70.9% to 53.5% in two years.”
Why is this the case? As economist Abhijit Banerjee put it when he spoke at a literary festival in Mumbai in November 2012 “ Under the Right to Education every year you are supposed to cover the syllabus…It doesn’t matter whether the children understand anything. Think of all the class IV children who cant read. They are learning social studies and all kinds of other wonderful things except they can’t read…They are sitting in a class watching some movie in some foreign language without subtitles.”
And the solution as Banerjee pointed out is very simple. “We did one experiment in Bihar which was with the government school teachers. The teachers were asked that instead of teaching like they usually do, their job for the next six weeks was to get the children to learn some basic skills. They can’t read teach them to read. If they can’t do math teach them to do math. After end of six weeks the children had closed half the gap between the best performing children and the worst performing children. They had really improved enormously,” Banjeree pointed out.
The trouble of course is that the government is looking for perfect solutions, when it legislates. Be it the subsidies doled out under NREGA or education for all under the Right to Education. But perfect as they say is the enemy of good.
Perfect solutions also make the government bloated and turn it into a limitless state or what in more colloquial terms is known as a mai baap sarkar. Big governments and welfare states don’t work, that has proven time and again. And even western democracies which have become a welfare state have done so after nearly 100 years of economic growth.
Margaret Thatcher knew this very well and she went around systematically dismantling it. And this is something that Rahul Gandhi can learn from her. In his recent speech at the Confederation of Indian Industries, Gandhi said “A rising tide doesn’t raise people who don’t have a boat. We have to help build the boat for them.”
Very true. But what the Congress led UPA government is trying to do is exactly the opposite. Instead of helping people to build the boat. It is trying to give them free boats. And that has f****ed up the whole economy (with due apologies to Pink Floyd).
To conclude let me share a very interesting anecdote about Margaret Thatcher which I happened to read in the obituary The Economist wrote on her.
This is how it goes:
“As she(i.e. Thatcher) prepared to make her first leader’s speech to the Conservative Party conference in 1975, a speechwriter tried to gee her up by quoting Abraham Lincoln:
You cannot strengthen the weak by weakening the strong.
You cannot bring about prosperity by discouraging thrift.
You cannot help the wage-earner by pulling down the wage-payer.
When he had finished, Mrs Thatcher fished into her handbag to extract a piec of ageing newspaper with the same lines on it. “It goes wherever I go,” she told him.”
This is something that Rahul Gandhi should really think about.
The article originally appeared on www.firstpost.com on April 10, 2013.
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Month: April 2013
What have we done, Maggie what have we done?
John Maynard Keynes, the greatest economist of the twentieth century, had a line for most occasions. In his magnum opus The General Theory of Employment, Interest and Money, publishedin 1936, Keynes wrote: “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”
Margaret Thatcher, more popularly known as “Maggie”, the longest serving British Prime Minister of the twentieth century, who died of a stroke yesterday, was no different on this front. As an obituary in The New York Times points out “Mrs. Thatcher’s prescription for change was based on the ideas of the conservative economists Friedrich von Hayek and Milton Friedman. Hayek believed that political and economic freedom were inseparable; Friedman argued that economic productivity and inflation were determined by the amount of money the government put into the economy, and that the heavy government spending advocated by Keynesian economics distorted the natural strength of the marketplace.”
When Thatcher first took over as the Prime Minister in 1979, Great Britain had become the sick man of Europe ( a tag which was usually used for Turkey). To revive the moribund economy Thatcher fell back on the ideas of von Hayek and Friedman. Thatcher went after the trade unions which had a stranglehold on the British industry. She sold off government firms, cut subsidies to the the firms which were piling on losses (in the process many of them went bankrupt) and resisted suggestions that the government should carry out more social spending and create jobs. She introduced both tax and spending cuts.
Like her intellectual gurus Hayek and Friedman, Thatcher was a firm believer in the “free market”, over and above everything else. As The Economist writes in an obituary of her: “Mrs Thatcher believed that societies have to encourage and reward the risk-takers, the entrepreneurs, who alone create the wealth without which governments cannot do anything, let alone help the weak.”
Thatcher was not the only politician at that point of time who believed in the primacy of the market. Ronald Reagan, who was the President of the United States at almost the same point of time, also shared her belief.
And this unleashed an era of market triumphalism. As Michael Sandel, one of the greatest living philosophers, who works at the Harvard University, writes in What Money Can’t Buy – The Moral Limits of Markets “The era (of market triumphalism) began in the early 1980s, when Ronald Reagan and Margaret Thatcher proclaimed their conviction that markets, not government, held the key to prosperity and freedom. And it continued in the 1990s, with the market-friendly liberalism of Bill Clinton and Tony Blair, who moderated but consolidated the faith that markets are the primary means for achieving public good.”
And this belief in the markets led to the proliferation of market values into spheres of life where they don’t belong, feels Sandel. As he writes in a piece in The Atlantic “We live in a time when almost everything can be bought and sold. Over the past three decades, markets—and market values—have come to govern our lives as never before. We did not arrive at this condition through any deliberate choice. It is almost as if it came upon us.”
This led to ‘market values’ playing a bigger role in social life. As Sandel writes “Economics was becoming an imperial domain. Today, the logic of buying and selling no longer applies to material goods alone. It increasingly governs the whole of life.”
Sandel provides many examples of the same. There were more private contractors fighting the war in Afghanistan and Iraq, than American military troops. In fact, an individual can fight in Afghanistan or Somalia for as much as $1000 a day. “The pay varies according to qualifications, experience, and nationality,” points out Sandal. At $2,50,000 you can shoot an endangered black rhino in South Africa. Western couples can pay as little as $8000 to hire the service of an Indian surrogate mother. You can sell space to display advertising on your forehead for $10,000. Becoming a guinea pig for the big pharma companies in their drug trials can pay as much as $7,500. “The pay can be higher or lower, depending on the invasiveness of the procedure used to test the drug’s effect and the discomfort involved,” writes Sandal.
In the Great Britain and United States public safety has been taken over by private security firms. The number of private guards is nearly double the number of police officers. When Pope Benedict XVI, who recently retired, first visited America, tickets for his stadium masses were distributed for free. Soon they were selling on the internet for more than $200. Even religious goods have been turned into instruments of profits (On a different note this has been a great business model for all the babas and gurus who have popped up all over India).
As the above examples show profits could be made on almost anything, including death. And in her death even Margaret Thatcher became a part of the market triumphalism that she helped unleash.
Death pool is a popular game on the internet where people bet on celebrities they think will die by the end of the year. “Serious players do not make their picks lightly; they scour entertainment magazines and tabloids for news and ailing stars…popular pool choices are Kirk Douglas, Margaret Thatcher, Nancy Reagan, Muhammed Ali…Stephen Hawking, Aretha Franklin, and Ariel Sharon,” writes Sandel in What Money Can’t Buy. People who would have bet on Thatcher dying before the end of 2013, would have won some money by now.
While market values have grown into the western society steadily over the last three decades, they have grown much more faster in the financial sector where a price tag has been put on almost everything. Two particular concepts that were widely used to do this were securitisation and credit default swaps.
Around 2002, American banks (and even banks in Europe) started giving out subprime home loans. The best customers of the bank were prime customers. Those who did not fall into the category and were seen as not good enough to be lend to, were known as subprime customers.
Those were days that anybody and everybody got a home loan including subprime customers. This was primarily because banks did not keep loans on their books. They securitised them away. They bundled these loans together and sold bonds against them. The interest paid on these bonds was lower than the interest the bank was charging on the home loan. The difference in interest was the money made by the bank. This process was referred to as securitisation.
This process worked not only on home loans but it also worked on auto loans, consumer loans, credit card receivables, student loans, and what not.
The bonds were bought by investors of various kinds. When the borrowers of loans paid interest on their loans that interest was pooled together and used to pay interest to those investors who had bought these bonds. The same thing happened with the principal on the loan that was repaid by the borrowers. It was pooled together and used to pay off the investors who had bought these bonds.
By doing this banks no longer carried the risk of the borrower defaulting. It was passed onto the investor buying the bonds. Also the bank securitising the loan got back its money immediately and could thus give out fresh loans. And the more fresh loans banks made, the more bonds they could securitise. And they more bonds they securitised, the more bonds they could sell and charge commissions on that. Given this the banks were more interested in giving out more and more loans, securitising them and making commission on selling them, instead of checking the credibility of the borrower and whether he would be in a position to repay the loan.
Investors were not borrowed about the quality of the borrowers because the rating agencies had given AAA or the best ratings to these bonds. More than that they had also managed to buy insurance on these bonds. In 1997, JP Morgan had developed a financial instrument known as the credit default swap (CDS).
Investors who bought securitised bonds also bought a CDS against those bonds. They paid an insurance premium to the firm selling the CDS. And in case the underlying borrowers of the bonds that investors had bought defaulted, the investors got compensated for the losses by the firm selling the CDS. It worked like any other insurance contract would.
But over a period of time investors could buy a CDS even on a bond they did not own. In simple English this is what it meant. I can go and buy a life insurance on my life or for my car. If I die then my nominee gets paid by the life insurance company. If my car is damaged then the insurance company pays me the cost of getting the car repaired.
The CDS version of the same would be that anyone could go and buy life insurance on me or an insurance on my car for that matter. And as long as they paid their premiums if I died or my car was damaged they would be compensated.
The primarily player in the CDS market was the financial products divisions of the insurance major AIG, which was based out of London. So everybody thought they would live happily ever after because they had paid a ‘market price’ for being adequately protected. But that was not to be.
The borrowers started defaulting and this finally led to the financial crisis, the aftermaths of which are still on. All this could have been avoided if a ‘market price’ had not been put on everything and banks would have checked the credibility of the borrower before lending them money. But that was not to be as good old fashioned banking had been destroyed. And it all started with Ronald Reagan and Margaret Thatcher believing that markets were over everything else.
Let me conclude with some lines Roger Waters, that other Great Brit, once wrote:
What have we done, Maggie what have we done?
What have we done to England?
Should we shout, should we scream
“What happened to the post war dream?”
Oh Maggie, Maggie what have we done? – The Post War Dream – Pink Floyd.
The article originally appeared on www.firstpost.com on April 9,2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
As yen nears 100 to a dollar, Mrs Watanabe is back in business
Vivek Kaul
The Japanese yen has gone on a free fall against the dollar. As I write this one dollar is worth around 98.5 yen. Five days back on April 5, 2013, one dollar was worth around 93 yen. In between the Japanese central bank announced that it is going to double money supply by simply printing more yen.
The hope is that more yen in the financial system will chase the same amount of goods and services, and thus manage to create some inflation. Japan has been facing a scenario of falling prices for a while now. During 2013, the average inflation has stood at -0.45%.
And this is not a recent phenomenon. In 2012, the average inflation for the year was 0%. In fact, in each of the three years for the period between 2009 and 2011, prices fell on the whole.
When prices fall, people tend to postpone consumption, in the hope that they will get a better deal in the days to come. This impacts businesses and thus slows down the overall economy. Business tackle this scenario by further cutting down prices of goods and services they are trying to sell, so that people are encouraged to buy. But the trouble is that people see prices cuts as an evidence of further price cuts in the offing. This impacts sales.
Businesses also cut salaries or keep them stagnant in order to maintain profits. As The Economist reports “A survey by Reuters in February found that 85% of companies planned to keep wages static or cut them this year. Bonuses, a crucial part of take-home pay, are at the lowest since records began in 1990.”
In this scenario where salaries are being cut and bonuses are at an all time low, people will stay away from spending. And this slows down the overall economy.
For the period of three months ending December 2012, the Japanese economy grew by a minuscule 0.5%. In three out of the four years for the period between 2008 and 2011, the Japanese economy has contracted.
The hope is to break this economic contraction by printing money and creating inflation. When people see prices going up or expect prices to go up, they generally tend to start purchasing things to avoid paying more for them in the days to come. This spending helps businesses and in turn the overall economy. So the idea is to create inflationary expectations to get people to start spending money and help Japan come out of a more than two decade old recession.
The other impact of the prospective increase in the total number of yen is that the currency has been rapidly falling in value against other international currencies. It has fallen by 5.9% against the dollar since April 4, 2013. And by around 26.5% since the beginning of October, 2012. The yen has fallen faster against the euro. As I write this one euro is worth 128.5 yen. The yen has fallen 7.5% against the euro since April 4, 2013, and nearly 28% since the beginning of October, 2012.
As the yen gets ready to touch 100 to a dollar and 130 to a euro, this makes the situation a mouthwatering investment prospect for a certain Mrs Watanabe. Allow me to explain.
In the late 1980s, Japan had a huge bubble in real estate as well a stock market bubble. The Bank of Japan managed to burst the stock market bubble by rapidly raising interest rates. The real estate bubble also popped gradually over a period of time.
After the bubbles burst, the Bank of Japan, started cutting interest rates. And soon they were close to 0%. This meant that Japanese investors had to start looking for returns outside Japan. This led to a certain section of Tokyo housewives staying awake at night to invest in the American and the European markets. They used to borrow money in yen at close to zero percent interest rates and invest it abroad with the hope of making a higher return than what was available in Japan.
Over a period of time these housewives came to be known as Mrs Watanabes (Watanabe is the fifth most common Japanese surname) and at their peak accounted for around 30 percent of the foreign exchange market in Tokyo. The trading strategy of Mrs Watanabes came to be known as the yen-carry trade and was soon being adopted by some of the biggest financial institutions in the world.
Other than low interest rates at which Mrs Watanabes could borrow the other important part of the equation was the depreciating yen. Japan has had low interest rates for a while now, but the yen has been broadly been appreciating against the dollar over the period of last five years. This is primarily because the Federal Reserve of United States has been printing money big time, something that Japan has also done, but not on a similar scale.
Now the situation has been reversed and the yen has been rapidly losing value against the dollar since October 2012. And this makes the yen carry trade a viable proposition for Mrs Watanabes. In early October a dollar was worth around 78 yen. Lets say at this price a certain Mrs Watanabe decided to invest 780,000 yen in a debt security internationally which guaranteed a return of 3% in dollar terms over a period of six months.
The first thing she would have had to do is to convert her yen to dollars. She would get $10,000 (780,000 yen/78) in return. A 3% return on it would mean that the investment would grow to $10,300 at the end of six months.
This money now when converted back to yen now when one dollar is worth 98.5 yen, would amount to around 10,14,550 yen ($10,300 x 98.5). This means an absolute gain of 234,550 yen (10,14,550 yen minus 780,000 yen) or 30% (234,550 expressed as a percentage of 780,000 yen). So a gain of 3% in dollar terms would be converted into a gain of 30% in yen terms, as the yen has depreciated against the dollar.
This depreciation is now expected to continue and hence expected to revive the prospects of the yen carry trade. As Ambrose Evans-Pritchard writes in The Daily Telegraph “The blast of money is expected to reignite the yen “carry trade” and flood global markets with up to $2 trillion (£1.3 trillion) of pent-up savings, giving the entire world a shot in the arm.”
This money is expected to go into all kinds of investment avenues including stock markets. As Garsh Dorsh, an investment letter writer, writes in his latest column “Most recently, the key driver that’s lifting stock markets higher around the world is the massive flow of liquidity via the infamous Japanese “Yen Carry” trade.”
Over a period of time the yen carry trade feeds on itself further driving down the value of yen against the dollar. As one set of investors make money from the carry trade it influences more people to get into it. These people sell yen to buy dollars leading to a situation where there is a surfeit of yen in the market in comparison to dollars. This further drives down the price of yen against the dollar. The more the yen falls against the dollar, the higher the return that a carry trade investor makes. This in turn would mean even more money entering the yen carry trade. And so the cycle, which tends to get vicious, works.
As George Soros, the hedge fund manager, told CNBC: “If what they’re doing gets something started, they may not be able to stop it. If the yen starts to fall, which it has done, and people in Japan realise that it’s liable to continue and want to put their money abroad, then the fall may become like an avalanche.” And this can only mean more and more yen chasing various investment avenues around the world and leading to more bubbles.
But that’s just one part of the story. The Japanese yen has been depreciating against the euro as well. This has made Japanese exports more competitive. A Japanese exporter selling a product for $10,000 per unit would have made 780,000 yen ($10,000 x 78 yen) in early October. Now he would make 10,14,550 yen ($10,300 x 98.5) for the same product. In October one dollar was worth 78 yen. Now it is worth 98.5 yen.
A depreciating yen means higher profits for Japanese exporters. It also means that the exporter can cut price in dollar terms and make his product more competitive. A 20% cut would mean the Japanese 788,000 yen ($8000 x 98.5 yen), which is as good as the 780,000 yen he was making in October 2012.
This increased price competitiveness has already started to reflect in numbers. Japan reported a current account surplus of 637.4 billion yen ($6.5 billion), for the month of February 2013. This was the first surplus in four months and was primarily driven by increased export earnings.
The trouble of course as Japanese exports get more competitive on the price front it hurts other export oriented countries. The yen has lost nearly 28% against the euro since October. This has had a negative impact on countries in the euro zone countries which use euro as their currency. For January 2013, seventeen countries which use the euro as their currency, in total logged a trade deficit (the difference between exports and imports) of 3.9 billion euros.
Japan also competes with South Korea primarily in the area automobile and electronics exports. Hyun Oh Seok, the finance minister of South Korea, said last month that the yen was “flashing a red light” for his nation’s exports.
Of course if Japan can resort to money printing, so can other nations in-order to devalue their currency and ensure that their exports do not fall. It could lead to a race to the bottom. As James Rickards author of Currency Wars: The Making of the Next Global Crisisputs it “we are well into the third currency war of the past 100 years….I am certain that we are closer to the critical state than we ever have been before ”
The article originally appeared on www.firstpost.com on April 8,2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Holier-than-thou Rahul and the end of Silent Movie
Vivek Kaul
Silent Movie is a wonderful Hollywood comedy which released in 1976. The movie has no audible lines spoken by its characters, except one. Marcel Marceau, who was a noted mime artist of that era has the only speaking line in the movie: “Non!”.
Due to this the movie is listed in the Guiness Book of World Records and holds the record for having the fewest spoken lines of any movie which has sound. The irony of course was that the only character in the movie who spoke was the one who was not expected to speak at all, given that he was a mime artist.
In India, the Congress party works in exactly the opposite way as the Silent Movie. Its top two functionaries, Sonia Gandhi and Rahul Gandhi, rarely open their mouths, whereas the other leaders of the party speak all the time, speaking much more than they should, more often than not.
Rahul Gandhi ended his Silent Movie yesterday when he addressed the Confederation of Indian Industries (CII), a lobby for big business in India, and spoke for 75 minutes straight. And from the various accounts that have appeared in the media today, he had them floored.
As far as first major stage performances go it wasn’t a bad act. While he wasn’t in the same league as Amjad Khan was in the 1975 mega hit Sholay he was not as bad as Armaan Kohli was in the 1992 mega dud Virodhi. He was somewhere in between. While he might have got his audience to laugh and clap, there wasn’t much substance or vision for that matter, in what he said.
His speech had a a holier than thou attitude, blamed everybody except the Congress party for the mess that India is today and had a very simplistic way of looking at things. Let me to elaborate.
At the beginning of his speech Rahul baba talked about the journey he made a few years back on the Lokmanya Tilak express from Gorakhpur to Mumbai (Lokmanya Tilak is a station in Mumbai at which many long distance trains coming from the Eastern part of the country terminate). “I spent a large part of the Thirty Six hour journey moving across the train and talking to travellers – youngsters, weary families, and migrants moving from the dust of Gorakhpur to the glitter of Mumbai. Took us Thirty Six hours. It is called an Express!”
Yes, the train takes 36 hours and is still called an Express. But the question is who is to be blamed for this? Between 1947 and 2013, the Congress Party has ruled India uninterrupted, for long periods of time. Gandhi’s great grandfather, grandmother and father were Prime Ministers of this country. His mother came close to being one, and still is the defacto prime minister of this country. So if an express takes 36 hours to complete a journey, I am sure we cannot blame Kapil Dev for it.
The fault lies with the Congress party, of which Rahul Gandhi is now the Vice President.
On a slightly different note, The Deccan Queen, a train that runs between Mumbai and Pune, now takes more time to complete the journey, than when it started in 1929.
Rahul baba’s blame game did not stop at this. Some time later in the speech he said: “I am a pilot. I learnt to fly in the United States, I came back. I wanted to convert my license. So I went to the DGCA and I asked what do I have to do. They gave me the curriculum, I opened the book. A large section in the book talks about how to drop mail from aero-planes. How many of you are getting your mail dropped from airplanes in the sky?…And it’s not only in pilot training, it’s everywhere. Look at our text books, open them out. Most of the stuff is not really relevant to what they are going to do.”
This is very true. Our education system sucks. It doesn’t encourage people to think. It encourages them to ratta maar (i.e. mug up) and go vomit it in the exams. It doesn’t make them employable. But the question, as earlier is, who is to be blamed for this? In case of Railways one can at least partly excuse the Congress party that given the compulsion of coalition politics the ministry has not been with the party for a while now. But what about the human resources development ministry which overlooks the education scenario in this country. That has always been with the Congress.
So was Rahul effectively trying to tell us that various human resources development ministers that the Congress has had over the years have been sitting on their asses doing nothing?
Rahul baba then went onto to dismiss China as a simplistic place. This was a very stupid thing to say. China has a history and a culture which is as old as India’s. Paper, ink, printing and paper money, things we take for granted now, where all invented in China. And such a country can be anything but simplistic.
He cited the example of a Chinese bus driver who ran over a pedestrian and then drove away immediately. The idea was to show the lack of accountability that prevails in China. I guess he has a very selective memory to say the least. Incidents like this happen regularly in India. And since he has chosen to forget let me remind him about what happened on December 16, 2012, in the city of New Delhi, where he lives. A twenty three year old woman was trying to get home but since the autorickshaw drivers of Delhi wouldn’t drop her, she along with a friend chose to take a bus. We all know what happened after that.
Since Rahul baba will be performing more and more in the run up to the 2014 Lok Sabha elections it is important he remembers a line written by Akhtar-Ul-Iman and spoken by Raj Kumar in the 1965 superhit Waqt, which goes like this: “Chinoi Seth…jinke apne ghar sheeshe ke hon, wo dusron par pathar nahi feka karte(Chinoi Seth…those who live in glass houses don’t throw stones at others).”
Rahul baba did not stop at this and he went onto further criticise China. China applies power in a blunt, obvious way, he said. On the other hand India applies power in a gentle, soft and supportive way, which works better in the long run.
But what he forgot to tell his esteemed audience was that since 1978, over the last 35 years, China has pulled out millions of its people out of poverty. This has been done at a very fast rate which has never been seen before in the history of mankind. As The Economist put it “In all it was Mr Gandhi who sounded rather simplistic about China. Anyone in the room might have pointed out China’s stunning successes in cutting poverty, improving health, promoting manufacturing and jobs, building infrastructure, and so on.” Also, it is important to remind Rahul baba here of a statement that John Maynard Keynes, the greatest economist of all time, once made: “In the long run we are all dead”. And that includes Rahul Gandhi as well.
And if all this wasn’t enough he assured Indian businessmen who had gathered in droves to listen to him speak that if a person could succeed in doing business in India, he could run a business “even on the moon”. Isn’t that a matter of shame that it is so difficult to do business in India? The Rahul Gandhi led Congress party has presided over the total loss of governance in this country.
Even with all this, lets give Rahul baba the benefit of doubt and believe that he is ready to cut himself out from the misdeeds of his ancestors and his party. He is ready to make a fresh start. So given that what are his ideas for India?
It is one thing hiring a good speech writer and making motherhood and apple-pie kind of statements like “A rising tide doesn’t raise people who don’t have a boat. We have to help build the boat for them.” It is another thing spelling out specifically how does he plan to go around building boats for people, so that they can use that and flow with the tide. And if he can’t do that in a speech and performance which lasted all of 75 minutes when else will he do it?
As The Economist puts it “Mr Gandhi could have spelled out two or three specific measures, ideally in some detail, that he would support—for example, getting an Indian-wide goods-and-services tax accepted; promoting investment in retail or other industries; or devising a means by which infrastructure could be built much quicker. If he were really brave, he might have set out thoughts on ending bureaucratic uncertainty over corruption, or on land reform.”
Rahul Baba was very emphatic in saying that “one man on a horse” cannot save India. That is definitely true. And even if one man on a horse could have saved India, Rahul baba wouldn’t have been riding it. That is for sure.
The article originally appeared on www.firstpost.com on April 5, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Japan is getting into money printing party too
Vivek Kaul
In India we have been dealing with very high rates of consumer price inflation in excess of 10%. On the other hand Japan has been dealing with exactly the opposite thing. The country has no inflation. During 2013, the average inflation has stood at -0.45%. This scenario where prices are falling is specifically referred to as deflation.
And this is not a recent phenomenon. In 2012, the average inflation for the year was 0%, which meant that prices neither rose nor they fell. In fact, in each of the three years for the period between 2009 and 2011, prices fell on the whole.
This has had a huge impact on the economic growth in Japan. For the period of three months ending December 2012, the Japanese economy grew by a minuscule 0.5%. In three out of the four years for the period between 2008 and 2011, the Japanese economy has contracted.
To get over this Japanese politicians have been wanting to create some inflation so that people will start spending again. The Bank of Japan, the Japanese central bank, in a statement released on April 4, 2013, said “The Bank will achieve the price stability target of 2 percent in terms of the year-on-year rate of change in the consumer price index (CPI) at the earliest possible time, with a time horizon of about two years. It will double the monetary base.”
In simple English what the statement means is that the Bank of Japan will try and create an inflation of 2% in the earliest possible time with an overall limit of two years.
The question is how will this inflation be created? The Bank of Japan plans to print yen and double the money supply in the country. This money will be pumped into the financial system by the Bank of Japan buying various kinds of bonds including government bonds and exchange traded funds from Japanese banks and other financial institutions.
When the Bank of Japan buys bonds from banks it will pay for it in the newly printed yen. Thus newly printed yen will land up with banks. Banks can then go ahead and lend this money. As an increased amount of money chases the same amount of goods and services, the hope is that prices will rise and some inflation will be created. And this will put an end to the deflationary scenario that has prevailed over the last few years.
When prices are flat or are falling or are expected to fall, consumers generally tend to postpone consumption (i.e. buying goods and services) in the hope that they will get a better deal in the future. This impacts businesses as their earnings either remain flat or fall. This slows down economic growth.
On the other hand, if people see prices going up or expect prices to go up, they generally tend to start purchasing things to avoid paying more for them in the days to come. This helps businesses as well as the overall economy. So by trying to create some inflationary expectations in Japan the idea is to get consumption going again and help the country come out of a more than two decade old recession. With prices of things going up people are more likely to buy now than later and thus economic growth can be revived.
There is another angle to this entire idea of doubling money supply and that is to cheapen the yen against the dollar. The Japanese refer to a strong yen as Endaka. Hans Redeker, from Morgan Stanley told Ambrose Evans-Pritchard of The Daily Telegraph that the package was dramatic enough to break “Endaka” – strong yen – once and for all.
On April 3, 2013, one dollar was worth around 93 yen. As I write this piece on April 4, 2013, one dollar is now worth 95.5 yen. Hence for anyone looking to convert dollars into yen would have got more yen if he had converted on April 4 rather than April 3.
As the Bank of Japan starts printing yen to create inflation, there will be more yen in the market than before. And this will lead to a fall in the value of the yen against other currencies. That’s the theory behind the yen cheapening against the dollar.
But the market does not wait for things to happen it starts to react to things it expects to happen. Given this, the Japanese yen has been losing value against the dollar.
In early November 2012, one dollar was worth 79.4 yen and now it is worth around 95.5 yen. A cheaper yen will help Japanese exporters as it makes them more competitive in the international market.
Let us say a Japanese exporter sells a product at a price of $1million. Earlier when he converted dollars into yen he would have got 79.4 million yen. Now with the yen losing value against the dollar he will get 95.5 million yen. Since the exporter’s cost in yen remains the same, he makes a higher profit.
The exporter can also cut prices in dollar terms and thus make his product more competitive against competitors from other countries. If he cuts prices by 15% to $850,000 in the international market, he still makes around 81.2 million yen ($850,000 x 95.5 yen), which is better than the 79.4 million yen he was making when one dollar was worth 79.4 yen and the product cost $1 million. A greater price competitiveness will ensure that exports pick up and that in turn will help revive economic growth. At least that’s how things are supposed to work in theory.
In fact Germany, one of the world’s biggest exporters is already feeling the heat. One euro was worth around 101 yen in the second week of November. As I write this one euro is worth around 125 yen. This has made Japanese exports more competitive against that of Germany.
And by wanting to double money supply by printing yen, the Bank of Japan is only doing what various other central banks around the world have already been up to. The Federal Reserve of United States has expanded its balance sheet by 220% since early 2008. The Bank of England has done even better at 350%. The European Central Bank came to the party a little late and has expanded its balance sheet by around 98%. The Bank of Japan has been rather subdued in its money printing efforts and has expanded its balance sheet only by 30% over the last four years. But since late December 2012, Bank of Japan has also been getting ready to enter the money printing party. This was after Shinzo Abe took over as the Prime Minister of the country on December 26, 2012. He promised to end Japan’s more than two decade old recession by creating inflation and reviving economic growth. The new Bank of Japan governor Haruhiko Kuroda is only following the path that has already been laid up by Prime Minister Abe and other central banks all around the world.
The trouble is that central banks which have tried this path have managed to create very little inflation and economic growth The reason for it is simple. The western world is still feeling the negative effects of the borrowing binge it went into between the turn of the century and 2008. So people don’t want to borrow. The money that central banks have been printing is being borrowed by large institutional investors at close to zero percent interest rates and being invested in all kinds of assets all over the world.
With the Bank of Japan expected to buy all kinds of bonds from banks and other financial institutions, it means that the financial system will be flush with money. This along with a depreciating yen is expected to unleash a massive yen carry trade. “The blast of money is expected to reignite the yen “carry trade” and flood global markets with up to $2 trillion (£1.3 trillion) of pent-up savings, giving the entire world a shot in the arm,” writes Ambrose Evans-Pritchard.
Investors will borrow in yen at very low interest rates and invest it in various kinds of financial assets all over the world. This is called the carry trade because investors make the carry – i.e. the difference between the returns they make on their investment (in bonds or even in stocks for that matter) and the interest they pay on their borrowings in yen. This money will be invested in all kinds of financial assets around the world. Whether it will come to India, remains to be seen. (For a more detailed argument on the yen carry trade read Why Mrs Watanabe can now drive the Sensex higher.)
As Ruchir Sharma writes in Breakout Nations – In Pursuit of the Next Economic Miracles:
“What is apparent that central banks can print all the money they want, they can’t dictate where it goes. This time around, much of that money has flown into speculative oil futures, luxury real estate in major financial capitals, and other non productive investments…The hype has created a new industry that turns commodities into financial products that can be traded like stocks. Oil, wheat, and platinum used to be sold primarily as raw materials, and now they are sold largely as speculative investments.”
So the question is what stops all the money that will be printed in Japan from meeting the same fate, as the money that was printed by other central banks? Nothing.
The other thing that central bank governors haven’t been able to answer is what will they do once inflation does start to appear, which it eventually will. How will Haruhiko Kuroda ensure that all the money that he plans to print creates just 2% inflation and not more?
Also money printing is an idea which every country can implement. And with Japan betting big on it, other export oriented countries(like South Korea with which Japan primarily competes in automobiles and electronic exports) will also have to resort to it to protect their exports.
Central bank governors have used the excuse of money printing not leading to much inflation as an excuse for printing more and more money. Mervyn King, the Governor of the Bank of England, has said in the past that“those people who said that asset purchases would lead us down the path of Weimar Republic and Zimbabwe I think have been proved wrong ,” he has said. King implies that excess money printing will not lead to the kind of high inflation that it did in Germany in the early 1920s and Zimbabwe a few years back.
Just because money printing hasn’t led to inflation now, doesn’t mean that can be totally ruled out in the days to come. As Albert Edwards of Societe Generale writes in a report titled Is Mark Carney the next Alan Greenspan “King’s assertion that because the quantitative easing(another term for money printing) to date has not yet produced rapid inflation must mean that it will never produce rapid inflation is just plain wrong. He simply cannot know.”
And that is something that every central bank governor who chooses to print money is ignoring right now. They really can’t know what the future holds.
The article originally appeared on www.firstpost.com on April 5, 2013.
(Vivek Kaul is a writer. He tweets @kaul_vivek)