Looking through money
Many are still unaware of how iniquitous the world’s financial system is. The US has invested in China and India less than half of what these two countries have invested in that country, writes Paranjoy Guha Thakurta.india Updated: Apr 02, 2009 14:45 IST
Popular culture has an uncanny way of reflecting life. Coldplay is the name of an alternative British rock band. The group’s latest album that bears the unusual subtitle Death and all his friends has become a huge success. It has hit the top of the charts in no less than 28 countries. The opening lines of the title track might as well be about the current state of a mythical character named Uncle Sam on the other side of the Atlantic Ocean: “I used to rule the world/Seas would rise when I gave the word/Now in the morning I sleep alone/Sweep the streets I used to own…”
Columnist for the New York Times Roger Cohen quoted the lines of this song and evocatively wrote: “When you trade pieces of paper for other pieces of paper instead of trading them for real things, one day someone wakes up and realises the paper’s worth nothing.” Therein lies the core of the biggest crisis faced by international capitalism for the last 75 years, to be precise since the beginning of World War II.
It’s no red-rag-waving leftist scumbag who compared the present crisis in the US economy to the Great Depression that started in Wall Street in 1929 and led to a worldwide recession that lasted almost a decade. This comparison was made in April by a great friend of the US, the International Monetary Fund (IMF) that was set up in Bretton Woods the year after the War ended in 1945, ostensibly to foster global economic stability and help countries facing financial crises.
The IMF made this comparison more than four months before Black Monday (September 15) and the week that saw the Federal Reserve and Treasury Department spend close to India’s annual national income ($1 trillion) to bail out a clutch of financial bigwigs bearing now very familiar names — Freddie, Fannie, Lehman and Merrill, not to mention the world’s largest insurance company, American International Group.
A working paper published in March by Claudio Borio of the Bank for International Settlements, based in Switzerland, pointed out that the “unfolding financial turmoil in mature economies…regardless of its future evolution…already threatens to become one of the defining economic moments of the 21st century”. He added: “The turmoil is best seen as a natural result of a prolonged period of generalised and aggressive risk-taking, which happened to have the sub-prime market at its epicentre. In other words, it represents the archetypal example of financial instability with potentially serious macroeconomic consequences…”
The BIS has estimated that the derivatives trade has grown five times between 2002 and 2007 to touch a level in excess of $500 trillion — this ‘shadow’ economy is ten times larger than the ‘real’ economy of the world and five times bigger than the volume of trade in securities that are backed by tangible assets. Derivatives are financial instruments that ‘derive’ their values from other financial instruments — the classic case of paper being traded for more paper.
The US has less than five per cent of the world’s population. It consumes over a quarter of the planet’s resources. Nobel laureate Joseph Stiglitz (who was economic advisor to Bill Clinton) wrote more than a year ago that the principal reason for the underlying volatility in international capital movements is the huge deficit of the US, a country that was borrowing a stupendous amount of $3 billion (or Rs 13,500 crore at current exchange rates) from the rest of the world every day. Two-thirds of this money comes from developing countries. Simply put, the rest of the world has been saving so that American citizens can splurge beyond their means and croon: “I owe, I owe. Therefore, to work I go”.
Many are still unaware of how iniquitous the world’s financial system is. The US has invested in China and India less than half of what these two countries have invested in that country. The bubble had to burst. It has. In January 1981, in his first public speech after becoming President of the US, Ronald Reagan famously said: “…the government is not the solution to our problem; government is the problem”. His words have come back to haunt a country where home prices have crashed by a fifth over a year and job losses have mounted.
New York Governor David A. Paterson stated on September 15: “Approximately 11,000 jobs were lost in New York’s finance and insurance sectors between July 2007 and July 2008. More recent data will likely show this number continues to grow and based on past data, approximately 40,000 jobs in the financial services industry in the New York City area can be expected to be lost in the current downturn. All told, approximately 120,000 jobs may ultimately be directly and indirectly affected as a result of financial sector turmoil.”
Now that in the last few months of its existence, the George W. Bush government has ‘socialised’ the losses of many of his country’s corporate captains, it is worth wondering why the incumbent regime in India is so keen to engage with Washington. Prime Minister Manmohan Singh unlearnt his socialism after he advised Indira Gandhi. During his trip to the White House, the economist-politician may desist from offering his words of wisdom on how the US economy can be repaired, if at all.
But Coldplay would have no such hesitation telling Bush Jr: “Revolutionaries wait/For my head on a silver plate/Just a puppet on a lonely string/Oh who would ever want to be king?”
Paranjoy Guha Thakurta is an independent educator and journalist.