Political leaders have three disdains due to which economic growth is adversely affected.
Disdain for honest money: An article on the website oilystuffblog.com ends by saying “Honest money, the kind that cannot be created by making digital notations on a central bank’s balance sheet, is a scarce resource. It represents accumulated capital, including the time and sacrifices made to earn it. When spent, it is spent wisely.”
Fake money, not backed by any asset and hence available to be printed without restraint, is squandered in the most incredible ways.
In India, most of the NPA problems witnessed today was the result of such fake money. Banks over-lent to corporate customers, who took on such seemingly cheap loans to go on an asset buying spree. In China, real estate developers, aided by plentiful, low-cost loans, have overbuilt residential apartments. Some 50 million apartments, 20 per cent of the total, are unsold. Now the developers are offering steep discounts, under pressure to repay loans, which results in steep losses for those who bought for investment. Such sales can trigger a financial crisis in China, but the root cause was the easy money given to the builders which led to the oversupply.
Production sans cash flow
In the US the shale oil/gas industry has kept investing, and producing oil/gas despite the industry having never produced positive cash flow which covered the cost of capex required to stay in business. In fact, the US shale industry debt is more than that of Russia and Saudi Arabia combined!.
Cheap, fake money, leads to a misallocation of capital.
Disdain for free markets: Well-regulated free markets do a far better job allocating resources than centrally commanded ones. Although our polity professes a commitment to free markets, they do not heed its voice. This results in a horrendous misallocation of resources and the plethora of zombie (walking dead) companies kept artificially alive (Air India, BSNL, Hindustan Fertilizer) or inanely rescued (IDBI Bank, RECL). For over 30 years, Hindustan Fertilizer has not produced an ounce of fertiliser, following an explosion, yet its 1,450 employees continue to get salary, bonus and subsidised housing. It is not shut down or sold.
Disdain for individual investors: The Finance Minister has introduced a Bill to protect investors from being duped by scamsters in Ponzi schemes. This seems like a gesture than true concern for investors. Several Ponzi frauds have been revealed for several years but it is only when two of them, in West Bengal, had some political connection that a Bill was introduced.
Also, simply introducing a law does not end a government’s responsibility towards investors. The laws have to be adhered to. Investigation is corrupted and the judiciary is criminally slow in delivering speedy justice (just last week another adjournment was granted by the Supreme Court in the NSEL case though the NSEL lawyers have had 14 months after the Bombay High Court verdict against it, to prepare).
Since 2008, quantitative easing has created several asset bubbles. Professor Altman, an authority on distressed debt, and the creator of the Z score to predict bankruptcies, in a recent talk, predicted that when the benign interest rate cycle gets over, as it will, the world will see lots of bankruptcies.
Better to get lighter before that happens.
(The writer is India Head — Finance Asia/Haymarket. The views are personal.)