Mahatma Gandhi’s famous quote stating that there are enough resources to meet human needs, but not enough to meet human greed, was never more true. Globally, in their quest for money, political leaders have wrecked up the financial system, destroyed the value of money, which is the foundation of a capitalist society, and created innumerable conflicts which have displaced millions and generated hatred. Some things must change.
So far ,economic problems were solved by creating fiat money and throwing it into the world. The central banks, egged on by political leaders, keep trying this remedy despite an unproven link to desired results, viz, economic growth and job creation. Their behaviour is reminiscent of the professor throwing peanuts out of a train window in order, said he, to keep elephants away. When he was told that there were no elephants, he triumphantly claimed that the peanuts worked.
The Incremental Capital Output Ratio (ICOR), or the amount of money needed to produce an extra unit of GDP growth, is rising, indicating the need of ever larger investment to produce growth. Much of the extra investment is borrowed, resulting in an unsustainable level of global debt. Global debt today, is around $250 trillion, three times global Inc which is broke.
Interest rates are pushed down so that this debt can be serviced and new debt taken. This has beggared pension funds, which are unable to meet their obligations to retirees, who are living longer and need healthcare. Attempts to reform the unviable pension systems result in public protests, as witnessed in France last week. Low, even negative, interest rates have resulted in diversion of savings from banks to riskier, equity, investments. A lot of the money flow into equity is via mutual funds, generally through systematic investment plans (SIP s) and a fund manager getting the inflow, is obligated by law, to invest it, irrespective of his views on the market. This serves to push up a handful of preferred stocks. Since these comprise the indices, the market seems to be bullish even though the majority of small- and mid-cap stocks have fallen to belie that claim.
Some $17 trillion is invested in negative interest instruments. There is a Belgian bank lending money to a citizen to buy a house, and paying him interest (not charging him) on the loan! Access to cheap money is, however, available to those who have it, not to those who need it. Large companies borrow at low cost to buy back their stock, driving prices up and benefiting their option-entitled to managements. This increases inequality and has led to the Occupy Wall Street protest. Cheap money leads to a misallocation of capital, on ‘vanity’ projects and in the arms race to develop technologies for destruction.
In India, too, there is an insatiable need for resources. This ends up with un-thought of consequences. Two sectors, thought to be sunrise sectors, have been destroyed, viz, civil aviation and telecom. Aviation fuel was over-taxed, cross-subsidising kerosene and diesel, but ruining the sector.
One player, Air India, had access to tax-payer money, others didn’t. So two airlines turned sick, Kingfisher and Jet, not only due to these but also other factors such as poor governance.
The burden of ₹93,000 crore on the telecom companies is likely to drive Vodafone Idea into bankruptcy and create a duopoly. When introduced in 1995, each telecom circle was a duopoly, but the high charges on calls (₹16/minute, payable by caller and receiver) rendered the sector dead on arrival.
We learn nothing from history. Now, GST rates are being revised, in order to fetch an additional ₹2-lakh crore in revenue. This would, without purchasing power, lead to a drop in demand, and worsen the economic problem.
The writer is India Head — Finance Asia/Haymarket. The views are personal.