Once more! Fed is blowing bubbles to cover up growing inequality

Bernanke-BubbleVivek Kaul  
The Western central banks(primarily the Federal Reserve of United States and the Bank of England) have been printing money (or quantitative easing as they like to call it) at a very rapid rate since the start of the financial crisis in late 2008. The idea is to print and pump money into the financial system and thus ensure that there is a lot of money going around, leading to low interest rates.
At low interest rates people were expected to borrow and spend more. When they did that businesses would benefit and the economic growth would improve. But this theory hasn’t really worked as well as it was expected to.
The money that was and continues to be printee, has found its way into various financial markets around the world, leading to bubbles and at the same time benefiting those it wasn’t intended to. As Albert Grice of Societe Generale writes in a report titled 
Is the Fed blowing bubbles to cover up growing inequality…again? dated September 27, 2013 “Quantitative Easing(QE) has mainly helped the rich. The Bank of England admitted as much a year ago. Specifically it said that its QE programme had boosted the value of stocks and bonds by 25%, or about $970 billion. It then calculated that about 40 percent of those gains went to the richest 5 percent of British households.”
The situation is similar in the United States as well where the Federal Reserve prints $85 billion every month to keep interest rates low. As Gary Dorsch Editor, Global Money Trends newsletter, 
writes in his later newsletter dated October 3, 2013, “The Fed has always kept its foot pressed firmly on the monetary accelerator, and thus, keeping the speculative juices flowing. Over the past 1-½ years, the Fed has increased the…money supply by +10% to an all-time high of $12-trillion. In turn, traders have bid-up the combined value of NYSE and Nasdaq listed stocks to a record $22-trillion. That’s great news for the Richest-10% of Americans that own 80% of the shares on the stock exchanges.”
Hence, it is safe to say that bubbles across various financial markets have helped the rich get richer, which wasn’t the idea in the first place. Numbers confirm this story. As Emmanuel Saez, of University of California at Berkeley, points out in a note titled 
Striking it Richer: The Evolution of Top Incomes in the United States and dated September 3, 2013 “From 2009 to 2012, average real income per family grew modestly by 6.0%…However, the gains were very uneven. Top 1% incomes grew by 31.4% while bottom 99% incomes grew only by 0.4% from 2009 to 2012. Hence, the top 1% captured 95% of the income gains in the first three years.”
This rise in income inequality might be one reason why the Federal Reserve of United States continues to print money. As Edwards writes “while governments preside over economic policies that make the very rich even richer…the middle classes also need to be thrown a sop to disguise the fact they are not benefiting at all from economic growth.”
So how is the middle class offered a sop in disguise? This is done through an easy money policy of maintaining low interest rates by printing money. In the process, the home prices continue to go up and this ensures that the home owning middle class(which forms a significant portion of both the American and the British population) feels richer.
The S&P/Case-Shiller 20 City Home Index which measures the value of residential real estate in 20 metropolitan areas of the U.S., shows precisely that. 
Overall home price rose by 12.4% in July 2013, in comparison to July 2012. Home prices were up by 27.5% in Las Vegas. They were up 24.8%, 20.8% and 20.4%, in San Francisco, Los Angeles and San Diego, respectively.
A similar scenario seems to be playing out in Great Britain as well. As Edwards wrote in a report titled 
Fools dated September 19, 2013 “Evidence is mounting that easy money …in the UK housing market is leading to another explosion of prices, with London, as always, leading the way with double-digit house price inflation.”
Edwards further points out in another report titled 
If UK Chancellor George Osborne is a moron, Fitch’s Charlene Chu is a heroine dated June 4, 2013, that people have been unable to buy homes despite interest rates being at very low levels because the prices continue to remain very high. As he wrote “Young people today haven’t got a chance of buying a house at a reasonable price, even with rock bottom interest rates. The Nationwide Building Society data shows that the average first time buyer in London is paying over 50% of their take home pay in mortgage payments – and that is when interest rates are close to zero!”
Of course people who already own homes and form a major portion of the population are feeling richer. And thus income inequality is being addressed.
This mistake of propping up housing prices to make the middle class feel rich was one of the major reasons for the real estate bubble in the United States, which burst, before the start of the current financial crisis.
The top 1% of the households accounted for only 7.9% of total American wealth in 1976. This grew to 23.5% of the income by 2007. This was because the incomes of those in the top echelons was growing at a much faster rate.
The rate of growth of income for the period for those in the top 1% was at 4.4% per year. The remaining 99% grew at 0.6% per year. What is even more interesting is the fact that the difference was even more pronounced since the 1990s.
Between 1993 and 2000, the income of the top 1% grew at the rate of 10.3% per year, and the income of the remaining 99% grew at 2.7% per year. Between 2002 and 2007, the income for the top 1% grew at the rate of 10.1% per year. For the remaining it grew at a minuscule 1.3% per year. In fact the wealthiest 0.1% of the population accounted for 2.6% of American wealth in 1976. This had gone up to 12.3% in 2007.
But it was not only the super rich who were getting richer. Even those below them were doing quite well for themselves. In 1976, the top 10% of households earned around 33% of the national income, by 2007 this had reached 50% of the national income.
American politicians addressed this inequality in their own way by making sure that money was available at low interest rates. As Raghuram Rajan writes in 
Fault Lines: How Hidden Fractures Still Threaten the World Economy “Politicians have therefore looked for other ways to improve the lives of their voters. Since the early 1980s, the most seductive answer has been easier credit. In some ways, it is the path of least resistance…Politicians love to have banks expand housing credit, for all credit achieves many goals at the same time. It pushes up house prices, making households feel wealthier, and allows them to finance more consumption. It creates more profits and jobs in the financial sector as well as in real estate brokerage and housing construction. And everything is safe – as safe as houses – at least for a while.”
Of course this is really not a solution to the problem of addressing inequality. It only makes people feel richer for a short period of time till the home prices keep rising and the bubble becomes bigger. But eventually the bubble bursts.
The irony is that people refuse to learn from their mistakes. The same mistake of propping up home prices is being made all over again.

The article originally appeared on www.firstpost.com on October 3, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek) 

More trouble for Chidu: Fiscal deficit hits 75% of target in first 5 months

The finance minister P Chidambaram has reiterated time and again that the government will adhere to the fiscal deficit target of Rs 5,42,499
 crore or 4.8% of the GDP(gross domestic product) that it has set for itself. On September 5, 2013, he had said that the fiscal deficit target of 4.8% of GDP was a “red line and the red line will not be crossed.” Fiscal deficit is the difference between what a government earns and what it spends.
But the latest data released by the Controller General of Accounts (CGA) on September 30, 2013, shows that fiscal deficit has already reached 74.6%(or Rs 4,04,651 crore of the targeted Rs 5,42,499 crore) of the full year target, as on August 31, 2013. Hence, three fourth of the fiscal deficit target has been reached during the first five months of the financial year (i.e. the period between April 1, 2013 and August 31, 2013).
Now how does the situation look in comparison to the past data? For a period of 16 years since 1998-1999 (for which the data is publicly available on the CGA website), the average fiscal deficit for the first five months of the financial year stands at 54.2% of the annual target.
During the period of the Congress led UPA government has been in power (i.e. Since 2004-2005), the average fiscal deficit for the first five months of the financial year has been 60.4% of the annual target. Last year it was 65.7% of the annual target.
In fact, only in 2008-2009 was the number greater than this year. As on August 31, 2008, the fiscal deficit for the first five months of the financial year had already reached 87.7% of the annual target. This was the year when the Congress led UPA government was getting ready for the Lok Sabha elections which happened in April-May 2009, and hence, had gone overboard on the spending front.
The fiscal deficit in 2008-2009 was estimated to be at Rs 1,33,287 crore or 2.5% of the GDP. It finally came in at Rs 3,36,992 crore or 6% of the GDP. The point being that when the Lok Sabha elections are scheduled to happen next year, the initial estimates of the fiscal deficit can be way off the mark. Lok Sabha elections are due in May 2014 as well. Before that there are several state assembly elections as well. So, it remains to be seen whether the Congress led UPA government sticks to the fiscal deficit target of 4.8% of the GDP or goes overboard with the expenditure as it did last time when the elections were due.
What also does not help the government is a slowdown in tax revenues. As Sonal Varma of Nomura points out in a note dated September 30, 2013, “Fiscal year to date (FYTD), net tax revenue growth was muted at 4.9% year on year (versus the budget target of 19.3% year on year) due to weak indirect tax collections (excise, services, customs), while government expenditure rose 17.3% year on year FYTD, within the budget target of 18.2% year on year.”
When the revenue is growing at around one fourth of the expected rate, meeting the revenue target will be very difficult. Expenditure on the other hand continues to rise more or less at the rate assumed in the annual budget.
Given this, the government will have to make a significantly greater effort to control its expenditure, if it has to get anywhere close to meeting its fiscal deficit target. As Varma puts it “In our view, the government will have to announce another round of spending cuts to offset the fiscal slippage from slowing revenue collections and to meet its financial year 2013-2014 budgeted fiscal deficit target of 4.8% of GDP.”
The government had announced some measures to cut expenditure on September 18, 2013. A mandatory cut of 10% in non plan expenditure of all departments was announced. This did not include expenditure on interest and debt repayment, defence capital, salary, pension and grants to states. Over and above this, restrictions have been put on holding seminars/conferences as well as air travel. These measures will not be enough and more expenditure cuts will have to be put in place. In fact, when the government was in a similar but slightly better scenario last year, it simply froze spending, during the last few months of the year.
As Ruchir Sharma, head of emerging markets and global macro at Morgan Stanley, said
 in a recent interview to the Forbes India magazine “We achieved the [fiscal deficit] target last year, but you have to understand how that was done. The government will have to really freeze spending, and that in turn will compress consumer demand. The issue is whether they have the political appetite to do that…So can the government meet its fiscal deficit target? Of course it can. But the price in this case will be economic growth.”
Varma had written along similar lines in a note titled 
Government Announces Austerity Measures and dated September 18, 2013. As she wrote “The spending cuts will adversely impact growth. High government spending was one of the main drivers of real GDP growth of 4.4% year on year in Q2 2013. With spending likely to be slashed and financial conditions much tighter starting July, we expect private demand to slow down further.” And this will impact economic growth.
The other option before the government is to raise diesel prices. 
The under-recovery on diesel being sold by oil marketing companies(OMCs) for the fortnight starting October 1, 2013 is at Rs 10.51 litre. In the previous fortnight the under-recovery on diesel stood at Rs 14.50 litre. This fall has been primarily on account of the rupee rallying against the dollar, leading to the price of oil falling in rupee terms. Despite the fall, at Rs 10.51 per litre, the under-recovery on diesel continues to be substantially high.
The government compensates the oil marketing companies for a part of this under-recovery and this means higher expenditure for the government. The oil producing companies like ONGC and Oil India Ltd, compensate the oil marketing companies for the remaining part of the under-recovery.
If the government has to meet its fiscal deficit target it needs to bring down the under-recovery on diesel. And this can only be done by raising diesel prices significantly. Currently, the oil marketing companies increase the price of diesel by 50 paisa every month, which is clearly not enough, given that the under-recovery is greater than Rs 10 per litre.
As Sharma put it “The government will have to raise diesel prices. Currently, they are Rs 9-10 behind on under-recoveries. They need to raise diesel prices by such a massive amount to stick to the fiscal deficit target.”
Other than diesel, there are significant under-recoveries on cooking gas as well as kerosene. The under-recovery on cooking gas for the week starting October 1, 2013, stands at Rs 532.86 per cylinder whereas the under-recovery on kerosene is at Rs 38.32 per litre.
The government is essentially in a situation where it has to decide between either meeting the fiscal deficit target or sacrificing economic growth. If it looks like that the government will be unable to meet its fiscal deficit target then India is likely to be downgraded by rating agencies.
A sovereign downgrade will see India’s rating being reduced to ‘junk’ status. This would lead to many foreign investors like pension funds having to sell out of the Indian stock market as well as the bond market, given that they are not allowed to invest in countries which have a “junk” status.
When they sell out, they will will be paid in rupees. In order to repatriate this money, they will have to sell rupees and buy dollars. This will increase the demand for dollars and put further pressure on the rupee, in the process undoing all the damage control carried out by the RBI to prevent the rupee from falling.
A weaker rupee will mean that our oil import bill will shoot up further. We will also have to pay more for the import of coal, fertilizer etc. This will put further pressure on the fiscal deficit as the government expenditure will increase given that it currently offers subsidies on oil as well as fertilizer.
To conclude, in order to meet its fiscal deficit target the government will have to raise diesel prices and at the same time cut its expenditure dramatically, which will have an impact on economic growth. As things currently stand, it looks like the government will have to sacrifice economic growth on the altar of the fiscal deficit.
If the government does not meet its fiscal deficit target then the repercussions of that will also have a huge impact on economic growth. Hence, the choice is between the devil and the deep sea. As Franklin Roosevelt, the President of America between 1933 and 1945, put it “Any government, like any family, can, for a year, spend a little more than it earns. But you know and I know that a continuation of that habit means the poorhouse.” The Congress led UPA government has been running high fiscal deficits for way too long and the negative consequences of that have started to catch up.
The article originally appeared on www.firstpost.com on October 2, 2013

(Vivek Kaul is a writer. He tweets @kaul_vivek)

US shutdown no big deal, expect bigger crisis on 17 October

platinum_coinVivek Kaul
 Starting today nearly 800,000 of the 2.1 million people that work directly for the government of the United States of America, have been asked to go on an unpaid leave, leading to non essential services from national parks to museums to libraries being shut down temporarily. The call centres of the Internal Revenue Service(IRS or the equivalent of the income tax department in India) won’t work and nearly 90% of the workers of the Environmental Protection Agency, won’t be at work either. NASA or the National Aeronautics and Space Administration has also more or less been shut down, except its mission control centre at Houston, Texas. Services like rubbish collection and street cleaning stand suspended as well.
Nearly a million workers have been asked to work without pay. This will ensure the continuation of essential services like military, postal service and police. Airport security and air traffic control will also carry on their work as usual.
So what is happening here? The US budget year ends on September 30 every year. A ‘shutdown’ comes into the picture when the American Congress (the equivalent of what we call the Parliament in India) does not pass appropriation bills to fund the ‘discretionary’ spending programmes. The discretionary spending programmes need to be funded every year.
As Matthew Yglesias writes on www.slate.com “Discretionary spending…is money that Congress appropriates on what’s traditionally been an annual cycle. A law is passed saying that such-and-such agency has X amount of money to spend over such-and-such amount of time on this or that.” What is not categorised as discretionary spending is ‘mandatory’ spending. This includes social security, medicare (a form of medical insurance) and some farm subsidies. This spending continues as usual.
The two houses of the American Congress are currently in a logjam. The House of Representatives is dominated by the Republican Party and the Senate is dominated by the Democratic Party. The Republicans want the Affordable Care Act (better known as Obamacare, and an Act which aims to improve the quality of health insurance, at the same time making it more affordable ) to be pushed forward by a period of one year. They have made this a condition for passing a temporary budget to fund the ‘discretionary’ spending of government.
The Democrats on the other hand are in no mood to relent given that the Affordable Care Act is something that President Barack Obama has been closely associated with. Hence, the two political parties have been at loggerheads. As Yglesias writes “When the parties in Congress can’t come together on appropriations bills, they often pass what’s known as a continuing resolution that essentially instructs the government to extend the last appropriations bill forward in time…House Republicans keep writing new continuing resolutions that fund the government while simultaneously delaying or repealing key elements of the Affordable Care Act. Senate Democrats keep taking those provisions out and sending the “clean” continuing resolution back to the House. Absent a continuing resolution, the discretionary portions of the federal government lack funding to continue their work and the government goes into “shutdown.””
With no money coming in the non-essential services are being shutdown. As The New York Times reports “The Office of Management and Budget issued orders that “agencies should now execute plans for an orderly shutdown due to the absence of appropriations” because Congress had failed to act to keep the federal government financed.”
The shutdown will impact the American economy depending on how long it continues. Estimates made Goldman Sachs suggest that a two day shutdown could slowdown the economic growth rate during the period October-December 2013 by 0.1%. A longer shutdown of a week could shave of 0.3% from the economic growth.
Nevertheless, the American government partially shutting down should not be seen as a big worry. The bigger worry is set to come on October 17, later this month. On that day the American government is expected to hit its debt ceiling. The American government spends more than what it earns. In order to make up for the difference it sells bonds and takes on debt. There is a maximum amount of debt that it is allowed to take on, and which currently stands at $16.69 trillion. This limit is likely to be exhausted by October 17, 2013.
If the debt ceiling is not raised the American government will have to stop borrowing and start cutting its expenditure. AsEric Posner writes on Slate.com “If the debt ceiling is not raised, and the executive branch stops borrowing, the government will need to cut spending by about 15 to 20 percent—or almost 40 percent of spending on everything (yes, Medicare and defense) other than the interest on the debt.”
The impact of the cut in expenditure will be immediate. As Henry J Aaron writes in The New York Times “A decision to cut spending enough to avoid borrowing would instantaneously slash outlays by approximately $600 billion a year. Cutting payments to veterans, Social Security benefits and interest on the national debt by half would just about do the job. But such cuts would not only illegally betray promises to veterans, the elderly and disabled and bondholders.”
Also, the American government has reached a stage where it pays the interest on past debt by selling new bonds and taking on more debt. Any decision to stop paying interest on bonds will lead to a global financial crisis. As Posner writes “ If he(i.e Obama) stops interest payments, the United States will default. This will not only raise interest payments—costing taxpayers hundreds of billions of dollars—but could spark a financial panic like the meltdown of 2008.”
If this situation arises, there is not much that President Obama will be able to do. He will basically have three options. “One is President Obama could decide that the government’s legal obligation to spend (and certain elements of the 14thAmendment) trump the statutory debt ceiling, and just order the Treasury to sell more bonds. The second option is Obama could instruct the Treasury to pay some of the government’s bills and just not pay the rest. The third option is to pay nobody. All three of these options face the same basic problem of seeming to be illegal. (The second one also faces the problem that Treasury says it lacks the logistical capacity to do it),” writes Yglesias.
Also, there are no legal provisions to decide which expenditure should be cut first. “There is no clear legal basis for deciding what programs to cut. Defense contractors, or Medicare payments to doctors? Education grants, or the F.B.I.? Endless litigation would follow. No matter how the cuts might be distributed, they would, if sustained for more than a very brief period, kill the economic recovery and cause unemployment to return quickly to double digits,” Aaron points out.
Given this, the Republicans and the Democrats need to start talking pretty soon, or we will have another crisis on our hands pretty soon.
The article originally appeared on www.firstpost.com on October 1, 2013

 (Vivek Kaul is a writer. He tweets @kaul_vivek)

“ India should have been after Pakistan to start talking after 26/11”

Stuart DiamondVivek Kaul

Stuart Diamond has taught and advised on negotiation and cultural diversity to corporate and government leaders in more than 40 countries. For more than 90% of the semesters over the past 15 years his negotiation course has been the most popular at the Wharton Business School, based on the course auction. He is also the author of Getting More – How You Can Negotiate to Succeed in Work and Life. In this interview he speaks to Firstpost on why India and Pakistan need to negotiate, how the soldiers negotiate with tribal leaders in Afghanistan and why the lack of people skills is proving costly for technology firms.

What is the most important point in any negotiation?
Almost any negotiation worth doing with anybody, whether its a billion dollar deal, diplomacy or my kid wants an ice cream cone, is a high stakes negotiation to that person. So almost every negotiation that is done in the world begins as an emotional negotiation. When stakes are high people get emotional and listen less.
That’s a very perceptive point you make….
Hence, unless you deal with that in the beginning you are not going to get the response you like. Also, I’d like to point out that we have begun to study the cost of conflict i.e. the cost of not collaborating. It turns out that India is in a fair amount of trouble when it comes to this. Only 20% of the people in India, trust each other, 80% don’t. If India had the same amount of trust as Sweden, its GDP would be $95 billion higher, which is twice as much as the defence budget, ten times the education budget, fourteen times the health budget and equal to the entire budget shortfall. In addition to that it would have 38 million more jobs, which is twice the population of Mumbai. Therefore the lack of trust in this country is a significant social and economic issue.
Why would that be? Isn’t trust also a function the amount of equality in the country? Like you gave the example of Sweden. Sweden has one of the highest equality levels in the world…
I would phrase it differently. I would say that trust occurs when someone thinks you want to do something for them, even if you are unequal. It begins with the notion of do I care about them? For example, when we had terrorist attacks in Mumbai around five years back, that’s when India and Pakistan should have started talking non stop. That’s part and parcel of the problem, which is even if Pakistan wanted to stop talking, India should have been after Pakistan to start talking, because you cannot solve a problem by not talking. In other words, if we mistrust each other, that’s the time to start talking. So this is counter-intuitive to many people because it says that the less I trust you the more I need to talk to you.
Can you elaborate on that?
For example, instead of India threatening to clean out terrorist cells in Pakistan, and instead of Pakistan putting people on the border, India should say to Pakistan, do you like terrorism? If you don’t like terrorism, we don’t. You want us to be able to do something about it? Let’s start small. What’s the worse problem we can solve in the easiest way? How do we start? Have a discussion about it. As opposed to do it my way. Or I demand this. There needs to be discussion. Even my 11 year old son, when he breaks something on the floor, I don’t blame the floor, I say Alexander how can you prevent this from happening again? Even a 11 year old kid understands that. How do we fix the process?
Not many people would buy that argument these days…
So much time is being spent arguing over yesterday instead of fixing the process for tomorrow. Yesterday adds no value. It is done and you can’t fix it and you can’t do anything about it. Tomorrow is what we can add value to. Too many people are backward facing when they should be forward facing.
One of the interesting examples that I came across was where you allowed your son to watch Scooby Doo for every minute that he played the piano. What was that all about?
It was a trade. First of all life is about a trade. Even a relationship. Quid pro quo. If you don’t need each others needs, soon you won’t have a relationship. And parents expect kids to do things for nothing, when they themselves would never do things for nothing. I wanted to teach my child the value of the trade. I paid money for the piano. I knew he would grow out of Scooby Doo, but he still plays the piano.
What is the lesson?
I wanted to know what do we trade. It teaches people to be responsible. That’s a really good thing to be thinking about with kids and others. What do they value? It doesn’t have to be monetary. It can be something intangible. It can be a letter of reference.
Letter of reference? 
Let me tell you an interesting story. About three months ago one of Google’s senior negotiators went to do a deal in the Southern United States where they doubled the fibre optics capacity. The first tranche cost $6 million and it closed two years ago. The vendor wanted $6 million for the second tranche. Instead of asking for a discount this Google negotiator said what can Google do for you? And the vendor said you can write us a letter of reference, so we could build our business.
That’s interesting…
The Google negotiator said fine we will do that. And then he said, what can you do for Google? The vendor decided to offer a discount to Google. And the vendor charged Google $6000 for an installation of $6 million, a 99.9% discount. This happened because they made the human connection and it wasn’t just about the money.
Can you give us another example of where an intangible played an important part in a negotiation?
My models are not only used by Google but by Special Operations in Afghanistan. If they make a connection with the tribal leaders, which may be something as simple as praising the fact that he(i.e. the tribal leader) was a war hero against the Soviets, the tribal leader will tell them where the bombs are buried and where the Taliban are. People say negotiations are complicated. No they are that simple. I like to watch kids negotiate. Kids are very simple. I am happy. I am sad. I am hungry. We are not getting along. A lot of what passes for negotiation is too complicated. Its just a conversation about what’s going on. The thing is it is not rocket science. But unless you know how to do it, it’s completely invisible. These tools are obvious when you see them, but are invisible unless you know them.
The Afghanistan example was interesting..
Let me give you another example. In Afghanistan, you have got tribal leaders interested in co-operating with the Allies. So, I teach the soldiers to say, think your kid is going to be sick next year? It takes some months to get medicines in Afghanistan. Your kid might die. We can get the medicine the same day. Who cares about that in your village? Whether they are a hard bargainer or a soft bargainer, it will be very hard for them(i.e. the tribal leaders) to turn down the alliance. So the more you can create a vision for someone, the more they are likely to buy in.
Any other example?
Here is one. Google wanted to put cigarette advertising and liquor advertising on cell phones. The legal department of Google did not want to do this because there was danger of kids getting access to it. We realised that whenever people think this is risky if you are more incremental you can be more persuasive. So then what was proposed was a limited experiment. We try with cigarette advertising in Britain and liquor advertising in the US for a small portion of the market and see if it can protected from under age people. Google would use that as a test to see how people self regulate. Google would be a leader in the industry as opposed to someone trying to get a heads up. So you can completely turn something around by being more incremental and by re-framing it in a way to capture the imagination of people.
In complicated situations do outsiders tend to be the best negotiators?
In fact, somebody without an emotional history is often the right negotiator. There are times when you can do it yourself but by the time it gets to a situation where the husband and wife are fighting with each other, you need a marriage counsellor. Before that point you can often do it yourself. But it is also true that sometimes the best negotiator with my wife is my son. So the right negotiator is the person who can make the best connection with the other side. The right negotiator is not the smartest, the most skilled and the most experienced. It might be the weakest member of your team.
That’s interesting. Can you give us an example?
I told this to the senior management of Morgan Stanley last month and they said that this flies in the face of a 100 years of investment banking experience. They are going to think of changing this. For 100 years, the most senior person did the negotiation. And that’s not often the right negotiator.
Because he has got too many things to do anyway. You need someone who does not come with a baggage…
Yes. Exactly.

Men better do better at negotiations than women” you point out. Why is that?
And that’s only because men practice more. Women are instinctively better negotiators than men. They listen more. But they don’t practice enough and so they are not trained enough. And some training is better than no training. As soon as they get trained at negotiations they do very very well. In fact, 30% of the people in my classes are women and they get more than half the highest marks.
One of the things that you write about is that the lack of people skills is proving costly to technology firms…
Absolutely. I gave a talk four years ago to 400 people from Microsoft from the business development and legal departments. I started the talk by saying that this morning I googled Microsoft. I typed “Europe hates Microsoft”. Why did I get 10 million hits in a tenth of a second? I said you are thinking it costs you money because people don’t like you. People investigate you because they don’t like you. The notion is that it is not just about the technology, if people don’t like you they will find a way not to buy your products and services.
Hmmm. And that’s impacting technology firms?
The FBI in Washington tells me that they use Oracle. They hate Larry Ellison and they are trying to find a way to use something else. And of course if you have got $12 billion like Larry Ellison has, you can be an SOB, but the problem is when you get to an America’s Cup race, only two people show up, including you. So there are costs to that even if you can get away with it for a short period of time.
Around 25 years ago I read a really an interesting quote from a treatise called The Myth of US Industrial Supremacy. though I am not sure of it.“There is no human organisation, institution or civilization, that cannot given enough time be ruined”. So I worry about it. However, powerful I am, if I make myself the issue over and over again, people are going to run away. The lack of people skills is the Achilles’ heal for the technology industry because it is not just about the technology. It is about how people feel about the technology.
The interview originally appeared on www.firstpost.com on October 1, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)