Thinking ahead

Every day, we are all engrossed in crystal-grazing and making prognoses about the economic future of the world. The last few years have been quite turbulent for the Indian economy and with each passing day the future looks bleaker than before. The trinity of 5% GDP growth, 5% fiscal deficit and 5% current account deficit makes me wonder whether we are entering a lost decade, with massive wealth destruction for Indian households. 

In his maiden book, Spot the Next Economic Bubble, author Saurabh Thirani tries to demystify what lies ahead for all of us, backing his thesis with a strong conceptual framework and a comparison of different economic thoughts. 

Monetary intervention has led to printing of money at unprecedented levels, triggering speculation in select asset prices.  The seeds of coming crises are sown in the resolution of the current crisis. The misguided resolution of the technology bubble gifted the world the US housing bubble. 

Thirani believes that the US’ prescription of averting financial crises by quantitative easing is unsustainable and is another financial disaster in the making. He says we can put the global financial market back in order by following the Austrian School of Economics’ business cycle theory (ABCT), where the government keeps its intervention to a minimum and lets business run its course. This helps in smooth clearing of inventory and deadwood without triggering another crisis. As the ABCT suggests, spending should be backed by saving rather than money-printing or public debt. The ABCT was able to predict the Great Depression in 1929, the dotcom bubble and the US housing crisis. 

In India, the Reserve Bank of India has expanded the monetary base at unprecedented levels. Its balance sheet grew by more than 16% yearly during 1997-2013, while expanding 50% in the last three years, more than warranted. The public debt during this period has also gone up on the back of fiscal expansion by the central government. This has resulted in high inflation, general slowdown and a housing bubble in India. Factors like public finances being a shambles, withdrawal of investors, and high persistent inflation have resulted in the depreciation of the national currency and the condition seems ripe for another financial crisis. Thirani’s book is a must-read for entrepreneurs, wealth managers, students of economics, capital market participants and anyone who wants an insight into how to avert the financial disaster that awaits us.