You Can’t Hide The Truth For Long!!!

“Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone.”

― John Maynard Keynes

Introduction:

I see a trend in modern day writings. The author gives a teaser with a sexy title and a brief and an incomplete introduction to the contents of the article. The idea is to arouse the readers’ interest and push them to read the article. Well I seem to lack that skill, yet, decided to give a summary with an intent to entice the reader to read the full article. Apart, among my regular readers, there are a few people who question my competence to write on economics. There are so many experts and officials of the governments competent to talk on the subject. How can an engineer write about it? Someone, even suggested me to `shut up’. In this article, to answer my critics I will be quoting from the `Trade and Development Report 2020’ by the Secretariat of the United Nations Conference on Trade and Development (UNCTAD). (https://unctad.org/en/PublicationsLibrary/tdr2020_en.pdf ). The report is titled `FROM GLOBAL PANDEMIC TO PROSPERITY FOR ALL: AVOIDING ANOTHER LOST DECADE’. To begin with the report analyses the global economy in the last 4 decades, and then the effects of pandemic before finally giving suggestions for the future.

I have been writing these articles for the past 3 to 4 years. As I had mentioned earlier, I do not have the resources a university or a research organisation would possess. All my averments are based purely on my observations and common sense. Whereas the UNCTAD researchers have access to all data and based on those data they have reported their findings about the global economy. I will be quoting from this 170pages long report. They discuss about the state of the global economy and the happenings in the last 4 decades. It is not a surprise that they have come to the same conclusions on every aspect as I had averred. By the way, let the readers not get suspicious that I may be quoting selectively to justify my arguments. The report reflects my views totally. The report elaborates many points with data. I will be quoting only their statements representing the conclusion they have arrived at to each of their arguments.

I will not be discussing their suggestions for the future as I disagree with their suggestions. They too have missed the point about the impact of technology in pushing the world to a permanent deflation. Hence their future expectations are misplaced. I will give my views at the end of the article. (Please note all bold letters are quotes from the report.)

Of course! I am right. :

In many of my articles I had written that post 2008 Prime Rate crisis, a bigger crisis landed which caused the death of capitalism and that by 2015 capitalism had finally breathed it’s last. I had given my reasons for this claim. I said that reckless investments in IT by the corporate, with an intention only to make big money for the promotors and super rich as the primary reason for the death of capitalism. I had written that the corporate, to exploit the capital markets, systematically reduced wages and salaries to their employees. I had written that the promotors of corporate, sucked money out of the business through several methods including share buybacks. Including the financial transactions in calculating the GDP has been a clever ploy to show growth when actually nothing tangible had really happened.I have written about the `Valuation’ game by unscrupulous capitalists. I had also written that the corporate with never satiated greed killed the capitalism forever.

The UNCTAD report says “In April 2009, leaders of the G20 gathered in London to agree a collective response to the global financial crisis that had ambushed leaders from Tokyo to Washington and Beijing to Buenos Aires. The plan agreed in London was bold: restore confidence, growth, and jobs; repair the financial system to restart lending; strengthen financial regulation to rebuild trust; fund and reform international financial institutions to help overcome this crisis and prevent future ones; promote global trade and investment and reject protectionism; and forge an inclusive, environmentally sustainable recovery. But it didn’t happen.”

Why didn’t it happen? The report says “The inability of the international community to agree on comprehensive debt standstills and write-downs, the resistance to rapid provision of appropriate levels of emergency liquidity and the reluctance to rein in rogue bondholders in sovereign debt negotiations along with the sight of vulture capital already hovering ominously over distressed economies are early warning signs that things could get worse – far worse.”

Please mark the words used. `Rogue bond holders’ and `Vulture capital’.

To quote further “Monetary policy, more by default than design, took the lead in orchestrating recovery, and rising equity and other asset prices were taken as a measure of success and a distraction from lagging wage growth and growing inequality. Government spending did increase, but the programmes targeted large firms and financial institutions, not workers, homeowners and local communities. And once tax breaks, bailouts and cheap money had helped calm market nerves, calls for fiscal rectitude grew ever louder; a swift turn to austerity combined with “structural reforms” – often little more than a euphemism for weakening social safety nets and keeping wages in check – extinguished hopes of a demand-led growth strategy that would lead to a sustainable medium- to longer-term recovery of jobs and incomes.” In India the inequality is so pronounced that the pay ratio between the highest paid and the lowest paid in a company is as high as a vulgar 752. Over and above that, the highest paid will get stock bonuses and stock options. Ridiculous to say the least. I have been a CEO. Let me assure you that the story about CEO takes more risk than others is just a cock and bull story. He faces the minimum risk. When a company does well, irrespective of the reason, he gets rewarded. When it fails, nothing happens to him.

The report confirms that fiscal policy was cleverly used to stop investment by the governments in social security schemes like health care infrastructure and so on.

On the effects of the fiscal policies, the report says, “While the withdrawal of fiscal stimulus adversely impacted growth, the continuation of quantitative easing and low interest rates propelled asset prices ever higher. At the same time, a combination of corporate rent seeking and cheap credit, in the context of weak demand, reinforced a culture of quick financial returns, with private equity, outsourcing, share buy-backs and mergers and acquisitions the instruments of choice; to take a startling example, between 2010–2019, S&P 500 companies channelled almost a trillion dollars a year in to share buy backs and dividend payments.”

Did it stop there? According to UNCTAD report, “With central banks in advanced economies sticking to an easy money policy, tighter financial conditions in developing countries opened up new investment opportunities for those with access to liquid resources and an appetite for risk. This global search for a return on invested capital has led to a rapid build-up of foreign currency denominated public and private debt in many developing countries, along with increased penetration of their financial markets by non-resident investors, foreign banks, and other more shadowy financial institutions. The greater presence of foreigners in bond and equity markets, moreover, increased the potential instability of exchange rates and further exposed domestic financial markets to the vagaries of global risk appetite and liquidity conditions”

“The massive hole in public finances caused by the financial crisis has led to endless rounds of austerity on the false promise that cutting back government spending would release productive resources for the private sector and ignite growth. This has been one important factor in the lack of preparedness to the Covid-19 shock, particularly in the area of public health infrastructure.

Growth of jobs and labour incomes was particularly slow, which reinforced the weak recovery and further depressed productivity growth. In many developing countries, high interest rates and overvalued currencies added to “premature deindustrialisation” pressures.””

Did I say so?

“Over the last four decades interdependence has given way to hyper-globalisation as the guiding narrative of international relations, in which the territorial power of strong states has become intertwined with the extra-territorial power of footloose capital. From the perspective of the less powerful, this state of affairs is more a mercantilist jungle than the open plains on which friendship, respect, justice and cooperation can flourish. Multilateralism has struggled to adapt and reforms, while regularly promised, have been resisted by the strongest players.”

“Indeed, the hyper-globalization era, despite establishing a business-friendly environment, has, in many countries, failed to deliver a fast pace of capital formation, in large part because of the spread to corporate boardrooms of an investment calculus drawn from financial markets (TDR 2017)”

“Economists refer to the transfer of private risk to the general public as moral hazard; the privatization of profits and the socialization of losses an inevitable corollary. Moral hazard was, of course, what brought the global financial system to its knees in 2008, via banks that turned their privileged position as purveyors of private credit into a gigantic speculative bubble. The hazard was a moral one because insiders knew their elite windfall would give way to economic fallout for the community at large.”

“Early analyses of specific policy responses to Covid-19 suggest an amplification, rather than dampening, of inequality. Benefits appear to be accruing disproportionately to the wealthy (JCT, 2020; Boushey and Park, 2020). The staggering increase in the wealth of the super-rich since the lockdown has been widely reported (Oxfam, 2020; Rigby, 2020) and, in many advanced economies efforts to relieve tensions in financial markets have surged ahead even as measures to help ordinary workers suffer from delay, or poor execution (Brenner, 2020)”

Disgusting.

“That research has exposed a good deal of nuance in the evolving patterns of inequality, with local circumstances and policy measures oftentimes reinforcing, but at other times counteracting, larger global economic forces. Still, broadly speaking, both in the world as a whole and within the majority of countries, income inequality is higher today than it was 40 years ago, and wealth inequality sharply higher. Moreover, despite a general recognition that heightened inequality was a contributing factor to the global financial crisis of 2008-09, the past decade has not seen any significant reversal of these trends and on some measures the situation has actually worsened. Covid-19 is likely to widen income and wealth gaps even further (Furceri et al., 2020; Boushey and Park, 2020).” (Sic)

I had written that there is no science called `Economics’. It is a contrived concoction by the super-rich to confuse the people. Obviously the UNCTAD report cant be so blunt as I do, but say the same thing in their polished language. “In a textbook world, income distribution is a well-rehearsed fiction. Wages are negotiated in markets where everyone has equal bargaining power and the outcome is a wage reflecting each worker’s productivity. Only in this narrow sense is income distribution “fair”. In the real, hyper-globalized world of austerity and depressed employment, corporations wield unique power in wage negotiations and the textbook foundations of fairness in distribution melt away.”

‘

How many experts have said, that for a strong and growing economy, strong export base is vital? Exports to where? Exports should happen to a country which does not have what we have to offer. If, on the other hand, we export materials to a country exclusively on cost considerations, exports can happen only by destroying the livelihood of the labour of the importing country. In the long run, this approach will kill both economies. The importing country can’t but compete by reducing their cost of production. That by cutting wages. On export dependent development, the UNCTAD report says “In sum, export-driven growth is not a feasible growth strategy for the world as a whole, and seldom even for individual countries in a world economy with deepening financial integration. It is a recipe for financial fragility, crises, and rising inequalities.” America, the big bully, forces other countries to import their weapons for keeping America’s economy active.

The UNCTAD report says “Pinning the blame for inequality on job-stealing robots and, more generally, technological advances, is simplistic. At least two other factors, determined by policy choices, have played significant roles. One is hyper-globalization. Research has shown that trade and investment liberalizations have adversely affected wage growth in developed and developing countries, by driving up competition for export shares and promoting cost-cutting at the expense of long-term investment. Flimsy or almost non-existent protection for millions of migrant workers also drives down wages. The other factor is a wide-ranging weakening of labor market institutions – such as unionization, minimum wage and employment protection legislation – in most developed and many developing countries.”

On one hand the earnings of the common man are reduced, on the other, citizens are coaxed to avail credit and buy. This way, making them permanently indebted. The report says, “With footloose capital holding back productive investment and extractive corporate power driving economic polarization, it is little wonder we have entered an age of deep-seated anxiety and increasing anger. With the social contract fraying, governments and households have turned to debt to keep themselves afloat and fractured communities together. But debt is as much a solvent as it is a glue. The threat of economic breakdown hangs ominously over debt-dependent economies.”

In such situations the economists come with recommendations for tighter fiscal management. Loose comments like `No populist measures’, `No Freebees’ and `Hard earned tax payers’ money should not be wasted’ are made. There is no study or proof of any truth behind such arguments. Those who make such statements have earned the title `Expert’ somehow. So, they get away with anything. Let us see what the UNCTAD report has to say on such policies. “The tendency is not only to underestimate the costs of contractionary policies but also the potential benefits from expansionary fiscal policy, in the name of preserving a market-friendly notion of financial “credibility”.

I have repeatedly been writing that India should print Helicopter money and distribute among our citizens. Contractionary fiscal policies are most flawed. I have been pointing out that inflation is not a factor anymore. The Table 1.3 of UNCTAD report gives the trend in world commodity prices since 2008 to 2020. (I have not reproduced the table as I have given the link to the report). The table clearly points out the continuous fall in the prices of all goods. In absolute terms (without adjusting for inflation) the prices have fallen steeply to levels even below what they were in 2008. Among the commodities, manufactured goods have shown the steepest fall. This is mainly due to technology.

The table 1.3 also brings out the trend of increasing prices for food items. The increase is small but, steady. UNCTAD report explains this. “Within this decline in the aggregate index, the trends observed for each commodity group diverged quite significantly. Those commodities predominantly associated with industrial production activities (industrial metals) as well as travel and transport (fuel) registered substantial drops, while those more directly associated with consumption (foodstuffs) maintained a positive trend. The resilience seen in food prices is in part a reflection of the lower income elasticity of demand for agricultural materials compared to other commodity groups, which typically makes the prices of these goods less sensitive to economic activity.” The factors that determine the food prices are different. They do not adhere to `Supply-Demand’ curve. The most important consideration for fixing prices for food items is always the perception of farmers about the money they should get for their immediate survival. It is normally said that middlemen create artificial shortages that creates `Supply-Demand’ situation. The items where middlemen do play dirty are very few to affect the overall prices of all food items put together. Therefore, today, it is not correct to decide on fiscal polies on possible inflation. The UNCTAD report says the same. “The risk of excessive inflation, were governments to supply the demand so dearly lacking in today’s global economy, is as low as it has ever been in a lifetime.” My readers should recollect, the dismay I expressed when our central bank, RBI, decided not extend the loan moratorium beyond 6 months, on concerns over possible inflation. The word inflation can be confidently removed from the dictionary for next century or so. Any policy decision with inflation control as central idea is wrong and will be counter-productive. AVOID is the operative word. Also, we can safely assume that any claim by any Statistical organisation is based on faulty calculations. UNCTAD report says “In sum, contractionary fiscal stances represent a dead end for both developed and developing economies.” “Beyond country-specific factors, the strong common forces behind the rise in inequality are fiscal austerity as the blanket policy response to macroeconomic imbalances (TDR 2017; TDR 2019) and the emergence of hyper-globalization, especially in the form of growing financialization of the world economy and rising concentration of corporate power in production, finance (TDR 2017) and international trade.”

If these are the findings of UNCTAD research, what were the economists discussing, at Davos at their annual World Economic Forum meetings? All their recommendations, hitherto have been completely at variance with these findings. I would urge my readers to do a small research and find out as to who funds the activities of the World Economic Forum. They will get the answer to the question. By the way, let us see what UNCTAD research says about such fora. “With inequality emerging as a major political concern, international policy discussions have made appeals to “leave no one behind” (United Nations, 2019) but have lacked a convincing narrative linking the rise of inequality to the challenges of growth and development.”

“Institutional factors and policy choices certainly have a determining influence over the distribution of income. However, this view misses a crucial point. Most of those who have experienced absolute or relative declines in economic well-being have not been excluded from the processes of hyper-globalization. But their inclusion in it involves playing by a set of rules and norms that by design exclude them from the benefits while subjecting them to many of its costs.” 

In other words, what they are saying is that all appeals for fair play by organizations like UN are like speeches by Michele Obama. High on vocabulary, tear jerking, full of rhetoric but nothing to operationalise. The result is policies for the `Rich Only’.

The father of `Capitalism’, Adam Smith, when he propounded his theory of free enterprise, did have apprehensions. He apprehended the collision between the businessmen and those in government. To quote him, “In any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public … The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.” Are the capitalists proving Adam Smith’s apprehension right? Are our so-called expert economists abetting the capitalists in selling the lies and destroying the truths?

UNCTAD research have in this report have gone on to list the effect of Covid 19 on the global economy. As a part of the report, they have given their suggestions to revive the economies. Unfortunately, their suggestions are also rhetorical and pregnant with several thoughts which are wishful thinking in nature. No process for operationalising their suggestions are there. I realised that they too have missed the impact of technology on prices.

I own a petrol car. Last week I replaced the battery for my car at a cost of RS.3500. In 2008, for similar capacity car, I paid Rs.9000 for the replacement battery.

One month ago, I had a casual chat with a 40 years old young man and asked if he will buy a new car now, because his present car is 6 years old. He said, ‘Sir, as it is, I feel like an idiot, because with the price I paid 6 years ago for this car, I can buy a Mercedes at today. No way I will be stupid again’.

These are examples for the effect of technology on prices. The data are there in front of us, in every walk of our lives. We should just observe them. This trend is, only, going to increase. That is why I keep saying that IT is the only reason for the deflationary economy. Issues mentioned in the UNCTAD report can be addressed, at least for a temporary period. No way can we reverse the impact of IT. It has come to stay. Stay forever.

People do ask questions like, `If machines are going to do everything, what will humans do?’ and `If every good is going to be available free, what will the rich people do with all the money that they are accumulating?’. Very relevant questions. Yes, people are going to get everything free. Yes, there will be no difference among people either in status or in income. Prof. Hariri says people will become lazy and obese. My take is that people will be more wellness oriented and would be indulging in spiritual and cultural activities.

As for the money amassed by the rich, yes, they can use it while playing `Monopoly’ with their children.

In fact, the prophetic Keynes had predicted in 1930, as to how the world will be in 2030 in his book `Ethics 0f Capitalism’. He says, “When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals. We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues. We shall be able to afford to dare to assess the money-motive at its true value. The love of money as a possession — as distinguished from the love of money as a means to the enjoyments and realities of life — will be recognised for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease ... But beware! The time for all this is not yet. For at least another hundred years we must pretend to ourselves and to everyone that fair is foul and foul is fair; for foul is useful and fair is not. Avarice and usury and precaution must be our gods for a little longer still. For only they can lead us out of the tunnel of economic necessity into daylight.” Does it appear like a summary of all that I have written?

Let us face it, the economic situation that obtains now can be classified neither as recession nor as depression. This is deflation. Similar situation was never encountered earlier. Reversal of this not possible at all. We must begin to live as per the changed situation. Unfortunately, the world is ruled by leaders who are over 70 years old. Many of the 70 and above leaders of today, do not exhibit the capacity to understand the reality. They still believe in expansionism. Believe in inciting wars. Believe in selling arms to keep the country’s economy active. Can these people please step aside and let the relevant people take over? Millennials do not accept any of these. They believe in countries without borders. They believe in Co-operation. Not Competition.

Interestingly, Nordic countries are providing examples for the direction of movement towards future. Even their models are only work in progress. They are part of a whole where other countries are yet to come to terms with the truth. Hence the movement can only be gradual. The Prime Minister of Finland is a 34year old young woman. Apart from her, she has 3 other ministers in her cabinet who are 30years old. Millennials are the relevant people today. They should be allowed to course their lives. Others guide them, if asked and if you can.

Ellorum Inbutru Iruppadhuve Alladhu Verondrum Ariyen Paraparame. (Tamil Saint Ramalinga Adigalar)

( Oh. God! I know nothing other than seeking happiness for all.)

J Prakash

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