Brandwashed: The Age of Shopping

credit card

We live in the age of shopping. And shopping ultimately creates economic growth. It is simply not enough for businesses to produce goods and services; consumers need to buy them as well. If consumers go slow on buying things, businesses don’t do well and this has an impact on economic growth.

As Yuval Noah Harari writes in Sapiens—A Brief History of Mankind: “It’s not enough just to produce. Somebody must also buy the products, or industrialists and investors alike will go bust. To prevent this catastrophe and to make sure that people will always buy whatever new stuff industry produces, a new kind of ethic appeared: consumerism.”

And how do you define consumerism? As Harari writes: “Consumerism sees the consumption of ever more products and services as a positive thing. It encourages people to treat themselves, spoil themselves and kill themselves slowly by overconsumption.”

One way in which consumerism has been pushed through into the society is through what Vance Packard called the ‘obsolescence of desirability’ in his 1960 book The Waste Makers. This was essentially marketing which was “designed to wear out a product in the owner’s mind”.

As Satyajit Das writes in his new book The Age of Stagnation: “New technologies were promoted as superior or modern, creating demand. Gramophone records were replaced successively by cassette tapes, CDs, MP3s, and digital media such as iTunes and live streaming…Although it made minimal difference to their enjoyment, people owned the same music in several different media, together with associated paraphernalia, creating a peculiar form of economic activity.”

This is an example I can relate to. I started buying cassettes in late eighties, then moved to CDs in the mid noughties and finally bought the same songs in the digital form. Now I simply listen to music on YouTube.

A similar obsolescence of desirability is visible when it comes to mobile phones. New phones give a lot of meaning to the lives of people and among the youth it’s a matter of huge pride to own the latest expensive smart phone, even if it means buying on EMIs. I have seen people give up on fully functional smart phones just because the latest version of the same or another smartphone, has hit the market.

This has been possible because of the easy availability of loans and credit cards. As Das writes: “Credit cards, which allowed individuals to buy now and pay-later, took the waiting out of wanting.”

Another way through which consumerism and buying more have been promoted is through the promotion of disposable items. As Das writes: “Re-use gave way to disposability in baby nappies, paper napkins and towels, and plastic and Styrofoam cups, bottles and containers. Kimberly-Clark promoted disposable Kleenex as a replacement for germ-filled handkerchiefs that apparently threatened public health. In a world of abundance, prolonging the useful life of products to save money was now unfashionable.”

This is something that Harari refers to as well. As he writes: “Manufacturers deliberately design short-term goods and invent new and unnecessary models of perfectly satisfactory products that we must purchase in order stay ‘in’.”

Then there are also cases of new products that try to cash in on human fear. A very good example of this is the hand sanitiser. As Martin Lindstrom writes in Brandwashed: “The idea of an unseen, potentially fatal contagion has driven us into nothing short of an antibacterial mania.”

Businesses have captured on this mania and turned it into a money making proposition. As Lindstrom put to me in an interview: “The companies have done an extraordinary job in building their brands on the back of the fear created by those global viruses – indicating that we’ll be safe using these brands…The ironic side of the story however is that the life expectancy in Japan is decreasing for the first time in history – why – because the country simply has become too clean – the Japanese have weakened their immune system as a result of overuse of hand sanitising products.”

And that is something worth thinking about.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column originally appeared in Bangalore Mirror on January 20, 2016


How Low Interest Rates Have Hurt Economic Recovery

satyajit das
In the aftermath of the financial crisis that broke out in September 2008, after the investment bank Lehman Brothers went bust, central banks all across the Western world drove interest rates close to 0%.

This was referred to as the zero interest rate policy or ZIRP. The hope was that with ZIRP the interest rates on loans offered by banks would remain very low and in that environment people would borrow and spend more.

They would buy more cars…More homes…More TVs..

And this would ensure an economic recovery. QED.

But things did not turn out to be as simple as that. As Satyajit Das writes in his new book The Age of Stagnation—Why Perpetual Growth is Unattainable and the Global Economy is in Peril: “Low rates also discourage savings. But sometimes, in a complex cycle of cause and effect, they may perversely reduce consumption as lower returns force people to save more for future needs.”

And in fact low interest rates may also lead to lower consumption. How is that possible? As Das writes: “Citigroup equity strategist Robert Buckland has argued that low rates and QE reduce employment and economic activity, rather than increasing them. These policies encourage a shift from bonds into equities.”

Interestingly, those who have retired from work have had to shift their money into stocks because of low interest rates. As Das writes: “In October 2014 an American retiree with US$1 million invested in secure, two-year US government bonds would have earned US$3900 in annual interest, 92 percent less than the US$48,000 they would have received in 2007. The retired and savers in advanced economies were forced to purchase riskier securities or invest in dividend-paying stocks to earn a return.”

And these investors were looking for income from the investments they had made in stocks. As Das writes: “As investors are looking for income rather than capital growth, they force companies to increase dividends and undertake share buybacks. To meet these pressures, companies must boost cash flow and earnings, by shedding workers and reducing investments to cut costs. The process increases share prices and returns for shareholders of the company, but is bad for the overall economy.”

What does this mean? With interest rates on bank deposits and other fixed income investments at very low levels, people have moved their money to equity. These investors force companies to increase dividends and at the same time buyback its own shares. When a company buys back its own shares a lesser number of shares remain in the open market, pushing up the earnings per share. With fewer shares going around, it also increases the chances of a higher dividend per share.

Interestingly, with interest rates at such low levels, companies have been borrowing money to buy back their own shares. As Albert Edwards of Societe Generale wrote in a research note in November: “The primary driver for the rapid rise in bank lending…has been borrowing by US corporates and we all know they have been using the Fed’s free money not to invest in capacity expanding expenditures, but rather to buy back mountains of their own shares…Corporate debt borrowing at an $674bn annual rate [is] closing in rapidly on the all-time borrowing splurge of 2007!

Also, in the pressure to boost earnings companies have had to fire people and at the same time reduce investments to cut costs. This has led to hire share prices but it has also led to a situation where employees have been fired from their existing jobs and new jobs haven’t been created. Any person who has been fired or is likely to be fired is unlikely to go out shopping, as the basic idea behind lower interest rates is.

This has an impact on consumption and economic growth. Hence, in a very perverse sort of way, low interest rates may have had a negative impact on consumption. And this has meant economic growth has not recovered as fast as it was expected to.

Also, the ZIRP has pushed up stock markets all over the developed world and in the process helped the rich become richer. As L Randall Wray writes in Why Minsky Matters—An introduction to the Work of a Maverick Economist: “According to a study by Pavlina Tcherneva, 95 percent of the benefits of the recovery from the global financial crisis have gone to the top 1 percent of the income distribution. Another study finds that the top one-thousandth (top 0.1 percent) of the U.S. population now owns fifth of all the wealth.”

The trouble is that the rich do not increase their consumption if they get richer. As Das writes: “Higher income households have a lower marginal propensity to consume, spending a lower portion of each incremental dollar of income than those with lower incomes. US households earning US $35,000 consume an amount from each additional dollar of income that is around three times that of a household with an income of US$200,000. Given that consumption constitutes around 60-70 percent of economic activity, concentration of income at the higher end limits growth in demand.”

And this explains why low interest rates through large parts of the Western world haven’t had the kind of impact that they were expected to. What this tells us is that there are no universal solutions to problems even though economists and politicians often sound very confident while offering them.

And this is something dear readers that you need to keep in mind the next time you hear a politician or an economist, talk about the economy, with great confidence. Economics is not an exact science.

Disclosure: Satyajit Das wrote the foreword to my book Easy Money: Evolution of Money from Robinson Crusoe to the First World War

The column appeared on the Vivek Kaul Diary on January 18, 2016

Go West at your own peril

go west(Go West) Life is peaceful there
(Go West) In the open air
(Go West) Where the skies are blue
(Go West) This is what we’re gonna do
– Pet Shop Boys, a British pop group

I heard this song sometime in the early 1990s when MTV first came to India. A few years later when words like career, job and degree first intruded into my rather peaceful middle-class existence, the lines of the Go West started to make even more sense to me.

Back then, in the small town that I come from, a person was deemed to be successful, if he completed his engineering degree, perhaps did an MBA to follow it up, got married and then went to work in the United States of America. If not the United States, the United Kingdom was just about fine.

Parents beamed in pride if their sons (yes, primarily sons) went to work in the West. But all that was nearly two decades back. Ironically, I still see the same story playing out with many parents and their sons (yes, still sons). There is still great pressure from parents to Go West. Parents still take great pleasure in telling others if their sons are going abroad to work, even for a few days.

But this fascination to Go West may no longer be a formula for success. Between the early 1980s and 2008, the Western countries, in particular the United States, did reasonably well on the economic front.

All this changed in mid-September 2008, when the investment bank Lehman Brothers went bust, and the current financial crisis started. Since then, the Western countries have taken various measures to tackle the low economic growth, but they have been unsuccessful at it.

As Satyajit Das writes in his new book The Age of Stagnation—Why Perpetual Growth is Unattainable and the Global Economy is in Peril: “The assumption was that government spending, lower interest rates, and the supply of liquidity (or cash) to money markets would create growth…But activity did not respond to these traditional measures.”

In fact, conditions in the economy haven’t returned to the way they were before the crisis started. As Das writes: “Conditions in the real economy have not returned to normal. Must- have latest electronic gadgets cannot obscure the fact that living standards for most people are stagnant. Job insecurity has risen. Wages are static, when they are not falling. Accepted perquisites of life in developed countries, such as education, houses, health services, aged care, savings and retirement, are increasingly unattainable. Future generations may have fewer opportunities and lower living standards than their parents.”

The basic problem is that the Western countries are not making ‘enough’ things. As Raghuram Rajan and Luigi Zingales write in Saving Capitalism from the Capitalists: “For decades before the financial crisis in 2008, advanced econo­mies were losing their ability to grow by making useful things.”

Further, as Thomas Piketty points out in Capital in the Twenty First Century, between 1900 and 1980, 70–80 percent of the glo­bal production of goods happened in the United States and Europe. By 2010, this share had declined to around 50 percent, around the same level it was at in 1860. This has led to loss of jobs and a slow economic growth through much of the Western world.

The politicians tried to correct for this by encouraging easy credit. As Rajan and Zingales write: “They needed to somehow replace the jobs that had been lost to technology and foreign competition… So in an effort to pump up growth, governments spent more than they could afford and promoted easy credit to get households to do the same. The growth that these countries engineered, with its dependence on borrow­ing, proved unsustainable.”

This formula is being repeated by the Western countries, in the aftermath of the financial crisis. Nevertheless, this time around easy credit hasn’t led to economic growth and like it had in the past, this will also end badly.

Hence, Go West at your own peril.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared in the Bangalore Mirror on December 23, 2015

Oil in the 40s: Falling oil price has several negative effects as well


Vivek Kaul

The price of brent crude oil fell by 5.65% yesterday (January 12, 2015) to close at $47.43 per barrel. Many experts who follow oil closely have talked about how a fall in the price of oil will be beneficial for the world at large. The logic is straightforward.
Most countries do not produce all the oil that they consume. Hence, they need to import oil. A fall in the price of oil means that these countries will pay a lower price for oil and in turn petroleum products like petrol, diesel etc.,will become cheaper. This means that citizens of these countries will have more money to spend on other things, which, in turn, will benefit businesses.
There are various estimates about how much this benefit will amount to for oil consuming countries. As Niels Jensen writes in
The Absolute Return Letter for the month of November 2014, titled Snail Trail Vortex: “A $20-per-barrel drop in oil prices transfers $6-700 billion from oil producing nations to consumers worldwide or nearly 1% of world GDP. Assuming consumers will spend about half of that on consumption, which historically has been a fair assumption, the positive effect on GDP in consumer countries is c. 0.5%.”
Author Satyajit Das in a recent research note titled
The Reverse Oil Shock makes a similar assessment, when he writes: “A US$ 40 fall in oil prices equates to an income transfer of around US$1.3 trillion (around 2 percent of global GDP) from oil producers to oil consumers. A sustained 10 percent cut in the oil price is generally assumed to increase global GDP by 0.20 percent per annum.”
The price of oil has fallen by around $60 per barrel since end of May 2014. Using the numbers provided by Jensen and Das, we can conclude that an income transfer of around $2 trillion will happen from oil producers to oil consumers.
This money when spent by citizens of oil consuming countries will lead to economic growth. This is a straightforward conclusion that can be drawn from this data to the condition that governments of oil consuming countries pass on the benefits of low oil prices to their citizens.
But this hasn’t happened everywhere in the world. As Das writes: “A number of governments, such as Indonesia and India, have taken the opportunity presented by low prices to reduce fuel subsidies. While positive for public finances and economic efficiency, the diversion of the benefits from consumers to the government is contractionary, reducing the effect on growth.”
The Indian government has increased the excise duty on petrol and diesel thrice since October 2014, in order to shore up its revenues. There are several other negative effects of a low oil price. The world at large is still in the process of coming out of a huge debt binge and hence, will use the money saved from the low oil price to repay debt. As Das writes: “A significant overhang of debt, employment uncertainty and weak income growth may result in the transfer being saved or applied to reducing borrowings, reducing the boost to consumption and growth.”
Further, with falling oil prices the amount of money being spent on “energy exploration, development and production,” will come down. “One estimate puts the decrease in investment spending as a result of the fall in prices at almost US$1 trillion. This entails the deferral or cancellation of deep water, arctic oil, tar sands and shale projects as well as further investment in mature fields such as the North Sea projects, which require high prices to be economically viable,” writes Das.
This can’t be good for energy security over the long term.
A newsreport suggests that there has already been a drop of  “almost 40% in new well permits issued across the United States in November.”
A major reason for a fall in oil prices has been the massive amount of shale oil being produced in the United States. Oil production in the United States has jumped by 4 million barrels per day since 2008. Almost all of this increase in production has come from an increase in production of shale oil.
Shale oil is expensive to produce and much of it is only viable if oil prices remain higher than $70 per barrel. As Jensen puts it: “A high percentage of the industry breaks even with an oil price in the $55-65 range…With an oil price around $50, oil producers could go belly up, left right and centre.” This can’t be good news for the United States because shale oil companies have been a major reason behind the job boom in the United States. And if they start shutting down, this will have an impact on job creation, which will in turn have an impact on consumer spending and US economic growth.
The United States is the shopping mall of the whole world and if consumer spending slows down, it will have an impact on many exports of many countries.
Further, the oil exporting countries are losing out because of lower oil prices. “Many oil producers are now fiscally profligate, using strong oil revenues to finance ambitious public spending programs or heavily subsidise domestic energy costs. Lower oil prices will force these governments to curtail programs and subsidies or increase debt, which might reduce the positive effects on growth,” writes Das.
These countries are now in a major problem. Saudi Arabia leads this pack and is now forecasting the biggest fiscal deficit in its history. Fiscal deficit is the difference between what a government earns and what it spends. The deficit for 2015 is expected to amount to $38.6 billion and
was recently announced on state television. The Saudis can ride through this because they have a huge amount of foreign exchange reserves amounting to over $700 billion. Other oil exporters are not so lucky.
Nevertheless Saudi Arabia has plans to limit wage growth.
As a Bloomberg report points out: “The Finance Ministry said the government will continue to invest in areas such as education and health care, while exerting “more efforts” to curb spending on wages and allowances, which make up about 50 percent of spending.” This can’t be good for global economic growth.
What all these points suggest is that there are many negative impacts of falling oil prices, which are not being highlighted at all.

The article originally appeared on on Jan 13, 2015

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)