RAIS AHMAD KHAN
ARTICLE (October 11 2008): That ship has sunk:The ship of Wall Street has sunk, and no even the massive $700 billion bail-out by the US Treasury and Fed will find it extremely difficult, if not impossible, to successfully salvage her. The stock markets and commodities around the globe have gone into a slide in some cases, and a free fall in others. Currencies are also staggering, in a see-saw fashion.
Liquidity crunch has caught the world economies in a vice-like grip. The governments and central banks in most countries have tried to stem the rot, by injecting funds at an unprecedented scale, but after only a very brief respite, things have gone back to their own topsy-turvy style, and the equity and commodity markets are again headed south, at varying pace.
EU, at first, was gloating at the discomfiture of their cousins across the Atlantic, and some Germans could not conceal their "schadenfreude", but soon the reality set in, when their own backyard din aroused them from their siestas of complacency. The contagion spread, and soon even the Asian Tigers, the emerging industrial giants - China and India - and even the underdeveloped countries in Asia, Africa and Latin America felt the looming disaster.
Not even the giant oil producers, only recently awash in a deluge of petro-dollars, were immune. The fall in value of the greenback (although this currency has shown muscle if one takes into account the intensity of the calamity), the major currency of intervention, dwindled their hoards of reserves overnight, compounded by the fall in price of oil, at a much more precipitous scale than the preceding relentless upward march!
So the whole world is caught in a whirlwind, where nothing is in control, till the storm passes. And that will be a long time before it happens. Meanwhile, the hurricane! tornado!! tsunami!!! (call it what you will) rages in full fury, and no amount of paper money floating around can solve the basic problem.
Before proceeding further, let us look at the causes of the catastrophe, and how it compares with other disasters of comparable significance in recent history. By recent, I mean within the living memory of persons who are still around in some small numbers. Let us take the "Great Depression" of 1930s for instance.
The recession following the First World War (WWI) shackled the globe the United States in particular, and literally millions were devastated. There simply was no money, except in the hands of a very few. Hunger, starvation, and crimes were all the rage. However, there was one big difference between then and now.
Things were much cheaper as there were no buyers - and that because there was no money to go around, unlike the present time when the world is awash with limitless paper money, and unstoppable inflation.
The reason was that the world currencies then were still on a gold standard, and the economic wizards had not yet caught on to print bills and quasi-currency notes and other instruments (with no backing or convertibility to gold or other precious metals or goods of intrinsic value). It may be noted that these days the central banks or other authorities (that have the monopoly to put paper money in circulation) do so on the artificial holdings of government borrowings, promissory notes, Treasury Bills, or whatever - the so-called sovereign guarantees.
This sovereign credit has no substance in reality, except a government's authority to collect taxes, and replace one set of borrowing on maturity with another for a later date. This pile-up of 'national debt' - domestic or foreign - passes on the burden of repayment to future generations, long after the culprits who squandered the money are gone.
The system of checks and balances termed budget passed by legislatures, is itself a fiction, based on estimates which are miles away from actuals, needing supplementary budgets, grants, or as a last resort, borrowings to meet the day-to-day expenses of administration. Escalating costs, a necessary component of inflation make a mockery of the concept of a balanced budget in the public sector.
On the other hand, the private sector, run strictly on a capitalist dogma, is adept at passing costs on to the ultimate consumers - the hoi-polloi, so no matter what excesses the businesses - big or small - commit either through neglect, lack of foresight or simple greed - the ultimate burden falls on the consumers and ordinary folks, who are already under the yoke of state taxation - direct or indirect. Even so-called wealth tax or other direct taxes on the wealthy sectors of population, are ultimately passed on to the poorer sections of society, where the 'buck stops', as they cannot pass it on to others.
Coming back to our original theme, and looking for consequences of the present turmoil, the question arises - how to solve the quandary, and get the world out of the mess it finds itself in.
There are no simple answers, and little hope of an immediate recovery. However, a change of tracks can ultimately lead to a better world economic order. First of all, it must be understood that the capitalist system of economy has arguably failed and despite the tall claims of superiority vis-à-vis socialism or communism only a few years back (the break-up of Soviet Union and failure of Communist ideology in its mother-country), the world events have proved that the grand masters of capitalism - the USA and West Europeans - have been wrong and have no clue to solve the current problems. That citadel of capitalism - the world banking system - has failed due to inherent avarice of the top orders, and built-in philosophy of 'dog-eat-dog'.
Ideas of Fabians, Socialists or those in favour of a welfare state found some adherents in Europe and elsewhere, but soon turned their backs on the ideals and reverted to so-called 'conservatism'. Another failure!
In a following article, we will discuss ways to overcome the present difficulties in a sober manner, and later, on how to lay foundations of a sound, secure and sympathetic world order that does not divide the globe into 'haves' and 'have nots'.
(The writer is Business Recorder's Senior Sub-Editor. He has previously worked on various senior positionsin the financial sector.)
To be continued
