Pushing On A String

The covert ‘financial oppression’ by central banks is creating a inegalitarian society

Commentary on Britain’s vote to oust itself from the European Union has all pervasively glossed global media recently. Perhaps there could be longer-lasting ramifications than what meets the eye immediately. Enough has been said and therefore I shall not delve into the reasons and pros and cons of this decision. However, I wish to highlight only one point, i.e. London (City) overwhelmingly voted for BrexIn though Britain (as a country) voted for Brexit. This is a reflection of the deep-rooted malaise that has engulfed policy-making which in turn has perhaps gone too far in the name of capitalism and has thus sown the seeds of disgruntlement deep into the psyche of the larger sections of society.

If we look back at the financial shenanigans in the western world over the last decade or so, it seems outright absurd. A housing bubble fueled by cheap money and exotic financial products led to a financial crisis. The financial ‘masters’ created hype, volatility and panic which led to the  eventual and inevitable crash; and then the same ‘masters’ rushed to provide anti-dotes. The implication has been that since the crisis, the real economy doesn’t seem to need money, which in turn implies that the banks don’t know where to lend. Because they don’t have lending avenues, they have deprived the layman of the basic interest on his savings. And now the same bankers to cover their overhead costs and shore-up their dwindling business income are offering riskier products to even pensioners and charging them a fee thereon.

Moreover, recently I was told that they have significantly hiked the annual custody fee on the entire portfolio of financial assets that one may have and creating an annuity income for themselves. The absurdity is that on one hand, the pensioner is forced to buy financial products, on which he is charged a one-time fee and a recurring fee on the already meager returns he gets, and on the other hand the unduly over-compensated bankers splurge their fee income on all sorts of fancy commode.

In other words, the pensioner is paying an upfront fee to undertake risk. Its like the late Jaspal Bhatti-style halwai having captured the entire foods market, robbing people of choice of all other foods and forcing down their throats only mithai and then offering them friendly advice to visit the chemist next door (also owned by Halwai) to remedy their sickness. This absurdity gains prominence in the light of the fact that the baby-boomer generation has now started to retire and this shall only gather pace in the not-so-distant future.

New rules

As Søren Kierkegaard wisely put it – Life can only be understood backwards; but it must be lived forwards. So, these days my son and I are discussing the higher education choices available to him. One option is a program in Economics and Business. I have studied these subjects during my academic years. However, what I studied and what my son might study could be quite different. In the new form of capitalism, growth is the only thing that matters. The mystic financial world becomes the catalyst for artificial growth. Laws governing factors of production change where there is no value of money (zero interest rates) but strangely still money is the most powerful concept that makes the world go round. Definition of capitalism changes where losers are bailed-out. All such changes put to shame all the work done by the great economists over the centuries, and its courtesy the powers that be, which twist, corrupt and connive with people in fiduciary positions to deceptively dupe the largest sections of the society, be it the consumers, the savers or just the ordinary man on the street. And this covert ‘oppression’ is creating a largely inegalitarian society, leading to unrest even in the civilized world.

Real growth happens with more people joining the labour force and gains in productivity (including technological advancement). Once this saturates with a large base, artificial growth substitutes it. It can take various forms. It could be nudging customers into buying an unnecessary whopper meal, or needlessly making them replace a perfectly well functioning and a great looking car every 2-3 years or simply inducing them to buy anything which ultimately goes to trash or just oversizing products (Have you ever wondered why urinals are so huge relative to the size of the ‘thing’ which use them!)

The tradition concept of gadde khodo gadde bharo (dig holes and fill holes) for kickstarting an ailing economy has now been refined to produce and waste/throw just about everything so that the artificial growth can chug along. Broadly speaking, if India starts to waste as much as Americans do and if we account for our (thankfully/hopefully shrinking) parallel economy, perhaps India’s GDP would be double of what is reported. Another way to induce growth has been a combination of cooking-up a jack-and-the-beanstalk story and fuelling it with infinite credit. The oil demand increased annually by a little over 1% and the cost of a marginal barrel from traditional sources of exploration went to a maximum of $30 during the period when the oil price went from $10/barrel to $150/barrel! Nature tells us that in the life-cycle of any species, there is a high-growth phase after which it plateaus. We have to wait for the next generation to see the same phase again. But we have not learnt our lessons from Nature. In our pursuit of continuous and endless growth, we are going to leave behind for the next generation an unsustainable environment. It’s a disaster waiting to happen, not just environmentally, but financially and eventually socially.

However, with developed economies like the US and Europe suffering from myopia of convenience, the most opportune strategy is to kick the can down the road. Therefore to minimize the immediate damage of the disaster, the central banks have bloated their balance sheet to absorb all the muck that is created. And in the garb of reviving elusive and unachievable high growth, interest rates have been set at an abysmally low 0.5% for large borrowers. In such cases, the capital structure can be as skewed as Santa Claus makes it to be (theoretically the debt: equity ratio could be 20:1 even if the project generates a 1% yield) and therefore all sorts of projects become viable, which in the traditional sense would be unviable ab initio.

The caveat though is that these super-fine rates are only for large borrowers (including governments with an infinite authority to print), even if they are already sitting on hoards of cash, or are desirous of putting-up some whimsical project. So far as small businesses or individuals are concerned, they get nothing on their deposits while having to shell out 3-4% for any of their borrowing needs. This is a new kind of discrimination between big and small borrowers regardless of their creditworthiness (one could easily argue that individuals and small businesses are more creditworthy since they can be arm-twisted) which is sowing the seeds of discontent amongst a vast majority of voters. This strong brew has manifested itself in uprising such as Occupy Wall Street etc. with the latest one being Brexit.

This is the first of a two-part series. You can read the second part here