In God We Trust

Different names, different sizes and different denominations, but the word 'money' denotes purchasing power. Sure, the value of a denomination may keep fluctuating over a period of time due to variety of causes - inflation, deflation, adjustments, corrections, and more importantly, the importing needs and the exporting capacity - but the bartering tradition of money (money for goods and vice versa) has pretty remained the same all over ever since its introduction into the economic domain. As long as context remains local, the value of money doesn't mean much. A Rs 10 back in 1900s is still a Rs 10 note, in the current age, though the purchasing power of it has changed vastly. The terms 'value' and 'purchasing power' appear synonymous at face value, and to certain extent, they are. But context is what that differentiates their true meanings. Applied locally (to transactions confined to the borders of the state), the term value is used interchangeably with the 'purchasing power' of the money and what determines the strength of it, is among other factors, inflation, chiefly. In broad terms, inflation is a situation of more money chasing fewer goods. Demand for the goods remaining the same, inflation has a twisted way of creating artificial scarcity. While elemental economics states that the demand and supply are what that drive prices, there is also that hidden component, money, whose widespread availability or the scarcity, can have a direct impact on the prices of the goods, demand and supply remaining constant. But why would there be more money in the market all of a sudden, hunting for its suitor? On the brighter side of the argument, more money is a result of a healthy economy, with more people being employed with better salaries going after commodities that are being produced at a healthy rate by the manufacturing sector. Though more of anything is a bad thing, inflation in moderation is a desirable side-effect of a burgoening economy. But what about the flip side to this scenario? One look around the stagnantion in the current climate, particularly in the Western hemisphere, inflation brought out by enormous public spending to jump start the sluggish financial proceedings, is the last thing one needs in these economies that have already been brought to their knees, by their indiscretionary spending ways, in both the public and private realms. But what has inflation got to do with the value of the money?

At this level where global fates and economies are intertwined more than ever before, the value of one's money is not upto one's policies alone, but heavily dependent on the mercy of others' whims, like a limp puppet dancing to the tunes of an unseen master. While the concept of money is pretty straightforward at the regional level, the picture gets murky when the stage shifts international, where it is traded just like any other commodity, and is subjected to the associated protectionist agendas and miscreant malpractices, all under a new moniker 'currency'. Consider the scenario right after a country has taken its first breath in the league of sovereign nations and introduced its currency to the international markets for the very first time. Now, is the decision to size up its currency against other established currencies purely arbitary, a parity value that is pulled out of a magician's hat? Well, it cannot be. Though the rate at which a currency fares against others is still determined by a federal bank, which governs its monetary policy, it has to be based upon the country's financial soundness, measured in terms of GDP, growth rate, foreign exchange and gold reserves and the like. Take the very recent example of the introduction of the Euro, which when flagged off, traded almost on par with the American dollar (a Euro for a dollar), and the rest of the international markets accepted it as a fair trade, taken into consideration the inherent financial strength of the Euro-bloc. It doesn't really matter what the value of the currency is at the beginning of the race, as it never is a sprint to the finish lane, but an unending marathon of ups and downs. Eventually every currency will settle down commensurate to its trading potential, which is a direct reflection of the country's growth and developmental outlook. But setting the value of currency is not so black and white, particularly when there are politics involved, and as is evident in the latest currency wars waged against the Chinese Yuan by the Western powers, what you see is not what you get, more so when money is involved.

A big factor that plays into the potential value of any currency is the country's Export Import (ExIm, in short) policy, playing to its strength either on its export driven measures, like China's, or on its import dependent practices, like US's. If it is the former, it wishes its currency be traded cheaper, as there would be more demand for its products in the international arena on account of its cheaper prices. If it is the latter, the currency would rather be strong, as it would fetch more goods for its money. Obviously, a currency cannot be both strong and weak at the same time to help both its exports and imports. It has to pick a side, determine whether its benefit lies in keeping its currency strong and help its importers or pare it down and help its exporters. Conventional wisdom states that a currency that is traditionally weak gives rise to inflation, as there is more money in circulation in the domestic market, driving the prices up. So usually when the economic indicators point that the inflation is on the rise, the federal bank uses its standard weapon of choice, the interest rate, the raising of which pulls the extra money out of market into the banks, creating an artificial scarcity for the currency to combat the rampant availability. And it is a sign of a good heart beat that this see-saw, of raising and lowering interest rates, happens every once in a while, assuring both the domestic and the international investors that the currency is viable and the economy vibrant. And truth be told, India is doing a good job of maintaining a healthy profile, visa vis its currency, letting the market forces rule on its value, than artificially forcing it one way or the other, which is exactly what is being accused of its neighboring nation, China.

A strange equation has emerged in last decade or so between US and China, where the seemingly have-nots (China) started dictating terms to the purported haves (US). An economy almost entirely built upon cheap manufacturing costs, China has risen to the level of becoming a global lender, propping up the economies of its customers, by snapping up their currencies. To start, trade between two nations is never an even one, exchanging goods in exactly the same values. While US consumes more of China's cheaper products (practically every small to medium household item), it doesn't export much of its high end items (cars, planes, heavy equipment and other hi-tech wares) to China , creating a lopsided balance in payments called trade deficit. As an example, say US imports a billion dollars more (though the actual figure is much much more) than it exports to China every single year, and before the turn of the decade, rings up a tab of ten billion dollars. Now, how does US propose to clear its bill? Surely, it cannot just print extra paper money, all ten billion dollars of it, and simply hand it over to China and call it even, as that measure would devalue the dollar to irreparable levels and destroy the creditworthiness of the country for a long long time. Clearly, this is an undesirable situation to not just the borrower, but the lender as well. There are only 2 options avaialable with US, neither of which are pleasant - 1. Build value in its currency over a period of time, by a combination of short term spending cuts (of money-sucking social programs and top-heavy bureaucracy) and long term modest fiscal policy 2. default on its payments in the hope of settling with its creditors and restructuring its debt. The first option, untenable, as long as there are elections, and the second, unimaginable, more to the creditor than to the borrower. China cannot have US cut down on its consumption, lest its own manufacturing sector collapse, for want of demand. So what it does completely belies the basic rules of lending, and that is, encourage the near-bankrupt borrower spend even more, by extending a greater line of credit. But what has all this lending and spending got to do with currency? On paper, what China is doing right now is bankrolling US's credit, should have happy faces on both sides of the lending equation. But why, of all countries, US is crying foul on this deal accusing China of rigging the game? And this is where currency comes back into play.

Ideally, what would happen with happening economies is, global players would rush and try to be a part of the success story so as to quickly multiply their investments. And the influx of all that foreign direct and institutional investments would automatically strengthen the country's economy, which in turn would appreciate the value of its currency, thereby making its imports cheaper and exports costlier. But an export dependent economy like China couldn't let that happen. So how does it keep its currency down, despite its stellar economic scene littered with strong global and domestic players? A three-pronged approach is how - 1. using its forex reserves' deep pockets built up over enormous trade deficits with its trading partners, to buy up the bonds and bills of its borrowers, thereby footing the bill of their exports and keeping the borrower's currency artificially inflated. 2. print more money domestically and stir up some artificial inflation floating more of its money in its own markets 3. shut down the door on its imports, or at least, make it extremely hard for other nations to export goods to China by imposing extraordinary tariffs and putting up other restrictive obstacles in the way. And more, when Western economies are trying to claw their way out of the recession by manufacturing more at home and export them to healthy states, this kind of currency manipulation ensuring that there be only one supplier in the global market, has the rest of the world up in arms. It is a dangerous game that China is engaging in, hoping for the dark clouds of recession to quickly blow over and the stagnant economies recover quickly back to their voracious consuming ways, all this before China runs out of the long credit rope that it currently is extending to its partners. And when that happens, economists have to invent a new word to describe the economic black hole that would be created, when China can no longer lend and its debtors can no longer consume, essentially collapsing every economy that matters. And getting out of such deep economic craters would require a complete change in trading and counting practices, not little relief measures and stimulus schemes. To think that all this would happen without firing a single shot or without countries waging wars (which was how it was envisioned by the doomsayers) is plain mind boggling. And at the nucleus of it all, is the currency, delicately balanced by the positive and the negative forces.

Dark Ages

It is nothing new - fundamentalism, fanaticism and ignorance taking turns plaguing the world; arts, music and literature, the cornerstones of human achievement, extricating itself from the current conditions, fear and uncertainty gripping humanity with no relief or respite in sight; occupations and invasions dominating the news; progress standing still while human race sorted out its differences, excising itself of all the sepsis built over bitter times. As said, it is nothing new, it has happened before, many many times. This cycle of developemnt giving way to doom and doom paving the path for renewed hope, perpetuated itself with varying periodicity. The historians called it the 'Dark Ages' - not just because of the fact that not much was known about it in recorded history, but chiefly because of negative improvement recorded in regard to the human condition. In astronomical speak, whenever a star exhausts all its supply of hydrogen to fuse into helium, decay begins to set in ultimately causing the massive star to collapse in itself and creating a Black Hole, the effect of which causes everything around it to be sucked in, by its gigantic gravitational field. The universe is replete with such Black Holes, just as history is peppered with Dark Ages. Dark Ages might be the historical equivalent of Black Holes, that occur when might empires collapse under the weight of their own unsustainable conditions. This phenomenon was first recorded in history at the turn of first millennium after the fall of the Roman empire, again during the 12th - 14th centuries when Islam and Christianity clashed violently in the name of Crusades, and more recently, just before the world jumped on the bandwagon of industrial revolution. It exhibited similar traits during all these eras - high unemployment, great dissatisfaction, massive unrest, simmering anger, and growing intolerance, all leading to clashes between different walks and ways of life. Sound familiar - the symptoms and the conditions? Does it seem that the Dark Ages are making a strong comeback all over again, even in this day and age of (purported) enlightenment and (perfunctory) embracing of all values humanistic?

At the root of every unrest lies a failed economic system. The unfair taxation that triggered the American revolution, the class differences that fomented the French uprising, the economic disparities (or the excesses of the Czars) that paved the way for communism and various other social upheavals attest to the fact that economic imbalances form the breeding ground of various malaises that fester and eventually rot the system out. Call it imperialism (British), autocracy (Czars), hegemony of the monarchy (France) or dictatorship (Latin America), it is ultimately a chosen few, in whatever shape or form, ruling over a lot of have-not's, clamping down restrictions so as to fiercely protect their own self interests - power and money (depending on the era, one always begot the other). Now, with the benefit of hindsight, one would assume humanity had learned a lesson or two, about how exploitation by the ruling class would always go against those same self interests that they so savagely try to safeguard. But stretching everything till its breaking point seems to be the only way humanity learns about its blunders, and the cycle repeats with a new cast of characters, new theory to espouse, and a new brand of fascism to impose. The dawn of the new millennium has a new master - capitalism.

Who would have thought that model that is supposed to have been founded on democratic principles and meant to foster innovation through a perfect mixture of competition and motivation would turn anything but for different peoples in different pockets of the world. And the reason for the revulsion is not petty envy or just jealousy as the votaries of capitalism would have the naysayers believe. At a theoretical level no economic model - capitalism or socialism - can be faulted with, as the fundamentals and guiding principles are mainly aimed at ameliorating the status quo of the practitioners. Socialism, with public enterprise shouldering the majority of the burden by devising and implementing plans with welfare of the citizenry at its center, soon fell on the wayside, as lack of ownership failed to spark the embers of innovation and motivation, which primarily fuel progress. Sure, socialism did a whole lot of to a segment of population subsisting on meager means, by helping them move a rung up in the social ladder. That it did it merely by providing the fruits of someone else's labor, instead of making the masses work and earn the benefits, worked to its own detriment, as the economic model soon created a welfare state, where rights trumped responsibilities, and entitlements trounced entrepreneur spirit. It became only a matter of time, before the bastions of socialism - USSR, China, India, and some lesser known states from the European Eastern Block and Latin American world, shunned the idea of group welfare for good and whole-heartedly/reluctantly embraced the idea of individual ownership to keep their states from slipping into economic oblivion and becoming social pariahs. And so it was the turn of capitalism this time around, with appealing terms like individuality, enterprise, free spirit and free markets thrown around with gay abandon, to come to the rescue of the woeful world plagued with economic ills. After all, it only seemed natural that if the state caring for the individual (to a fault) didn't work for the society, then the individual looking out for himself should be the (b)right idea to save the society, at least by the converse principles of mathematics. And so the society has setup the right platform for the individual to flourish, prosper and do good for himself, in general, in the hope that what is good for one, at the individual level, should be good for all, at the collective level.

But of course, no one predicted the devastating effects of the greedy instincts in the individual, when singing paeans for capitalism. Motivation, the lack of which is what was said to have failed socialism, ran amuck in the garb of greed, under capitalism, either unwilling to slow down for its own good, or unable to shield itself from the constant clamor for the impossible growth and the resulting profits. The idea of individualism, which was supposed to be at the heart of capitalism, slowly morphed into institutionalism, better known as corporatization. The whole scenario became utterly paradoxical, when individual did not matter in the corporate setup, as long as the results were delivered, and the situation was even dire, when the results didn't meet the expectations. So the individual who deserted one system for the wont of motivation, got passed over by a new system, whose motivations for growth grew beyond, and sometimes in opposition, to the individual's interests. The economists came up with a bunch of theories, whenever the model failed (and it failed as many times as socialism) that shook and shocked the system, leaving behind deep scars and casualty scores - bubbles, market corrections, cyclical growths, bad blood and many such. If governments were ridiculed as grumpy old men, who hated change and therefore held up innovation, when criticizing socialism, corporations should equally be castigated as ravenous and animalistic in a suave appearance with lot of smooth talk, when devouring the cause of common good, as capitalism proved, time and again, to be just another master preying and enslaving the weak and the weary. Sadly, the fallouts of failed economic models have serious ramifications - revolutions, civil wars, even terrorism.

Any movement, legal or otherwise, social or otherwise, is often viewed as an effect, when it should be treated as a symptom to more a grave issue. Religious fundamentalism, presenting itself as terrorism, is the issue du jour of practically every nation in the world, wrongly dubbed by the experts as the clash of the cultures and civilizations, making it sound as though anyone who is opposed to the western liberal school of thought is fundamentally opposed to the idea of liberty and free will, conveniently ignoring that terrorism is a more radical manifestation of economic ills, that surfaces when every single avenue for reasonable protest is shut down, when every single voice rising against the establishment is squelched mercilessly. Opposition spouts out in the form of armed resistance, compelling the establishment to sit up, notice and address the same economic issues of the grieving public that they could have handled much earlier, sans the bloodshed and the heart aches. Pick up any story of armed resistance - from Palestine to Kashmir, from Basque separatists (Spain) to Uighur muslims (China), from FARC militia (Columbia) to the drug cartels (Mexico). While the upper echelon of these struggles cling on to the movement, only to retain say and sway over the masses, the foot soldiers sacrificing themselves at the altars suit up, only to bring to the fore the economic iniquities and injustices, by incentivizing their lives for the sake ideologies. As the world grows more and more competitive, by the ways of governments and corporations fighting for every inch of rich and fertile lands and resources, displacing the downtrodden from their lands, lives and livelihoods, so would be the intensity of armed resistances, the last resort of the desperate, that grows in direct proportion to the expansionist policies. Pick any resource rich country in the African continent and the number of nations that wisely use their natural gifts for the welfare of its subjects, does not exceed the number of digits on one hand. With corporations and foreign governments luring the local governance with sops and trinkets actively encouraging rampant corruption, the prosperity and progress that the explorations and excavations of the resources were supposed to bring dwarfed in comparison to disillusionment that is brewing, simmering and boiling over among the local populace.

Progress cannot be for a chosen few and prosperity can't be hogged by those who can. Devoid of them both, struggle becomes the purpose of the suppressed. Once this purpose is set in stone, no amount of talks, compromises and middle ground ideas can bring them back on the path of least resistance. And this is exactly what is happening around the world. With media, another corporate entity craving for constant profits, hand in glove with the establishment, turning away from its responsibility of portraying the right picture of the prevailing conditions, for the fear of reprisals by the influential, the words 'truth', 'fairness' and 'justice' are held hostage by vested interests. In effect, what should have been an enriching economic model soon improverished an already distraught class, what should have been a free and fair media, thanks to the technological revolutions, became anything but, following the footsteps of the establishment faithfully like a house dog, in the pursuit of profits. And the dark clouds on the future does not seem to be floating away anytime soon. What has been a two-class struggle, between the have's and the have-not's, in the previous collapses of mighty empires, turned into a tug of war, this time around, with the middle class struggling to choose between the have's and have-not's, caught in the middle, trying to gain a foot hold in the upper class, while clinging on to its position in the have-not's. And the onset of the next Dark Age is determined by how soon the middle class gets disillusioned and ultimately defeated (an inevitability) in its purpose of becoming a part of the ruling club, and throws itself back with the lower strata, revolting for a better system, fairer standards and equal treatment.

Thus would start the search for the next -ism, and next -cracy. It has happened before, many times over. And with all the signs pointing in the right condition, there is no reason why it wouldn't happen again. It is time for the historians to add a new chapter to the ongoing saga of 'Dark Ages', with the title reading - 'Greedy times'.

The curious case of capitalism

'It's hard out here for a pimp' goes a very infectious Academy award winning rap lyric from an equally gritty and charming movie - Hustle & Flow - from a few years ago. It is about how the good times have fallen on the way side in the oldest profession known to mankind and how the days of easy money are a thing of the past. Replace the word 'pimp' with a 'capitalist' and every word of that profane lyric rings true with everybody on the street, Wall Street that is, to everyone in every plush board room. The kind of economic setup that was hailed by many as the true representation of free will and individual liberty has been taking quite a bad beating, not to mention an even worse p.r. since most of the past decade. The terms prosperity and wealth are no longer free floating terms that exist in their own individual worlds. They have been dragged into the real world with a lasso of personal responsibility and corporate regulation. Amid the howls of pure capitalists that the bedrock of capitalism is being broken up with the sledgehammer of socialism, and the seeds of collective spirit are being sown in the hallowed grounds of individualism, the question remains to be answered, in the ever-changing dynamic of global interaction, can any financial theory/form/practice remain in its truest and purest shape without getting mixed up with or influenced by other -isms lurking around? In other words is the capitalism of today ( as practiced by the US) the socialism of tomorrow, or the socialism of yesterday (China, Russia, Cuba) the capitalism of tomorrow? Who would have guessed in less than a couple of decades, China would become the capitalists haven and US would take its first baby steps towards socialism? All it took was the phenomenon of globalization to take root, and a jolt or two to global economies to shake up the foundations of capitalism. It is not just globalization, the population explosion or the financial sector implosion that caused the experts and otherwise to sit up and take notice of the tectonic shift that is reshaping the economic landscape.

Every -ism, on its face value, sounds genuine and seems to have been designed with all the good intentions at heart. And the statement can be applied to practically any theory proposed by man that intended to serve a greater good - from capitalism to communism, and yes, even from naxalism to terrorism. The Al-Qaeda mission statement most certainly would not read 'we hate people, let's kill them all'. It most probably would go along the lines of 'To protect the cause of the muslims and serve the will of Allah by resisting oppression and tyranny of any kind, even if it means self sacrifice'. Which, on its face value, sounds logical. After all, who would want a different culture dictating terms to his, in terms of his ways and means of living? But how they go about accomplishing it is a different matter altogether. Same is the case with naxalism, communism or any other humanism. Lofty ideals, but most of the times, lousy execution. This is not to say that capitalism is comparable or should even be mentioned in the same breath as terrorism, but the relevance is more to how ideas can never remain the same in the face of ever-changing variables in the equation. True, capitalism at its best reflects the human pursuit of freedom and happiness. If one were to work hard and smart, luck willing, he should be entitled to benefit from the fruits of his labor. There is not one contentious word in that statement. If I work hard, I reap the rewards. If I put the capital, take all the risk, I should stand to profit from it. Sounds valid and deserving. Then why this bad rap of late on a philosophy that is single-mindedly devoted to the creation of wealth and thereby sustained prosperity? There are 2 ways of attempting to answer that question - 1. from an individualistic sense 2. from an institutional stand point

1. Individual - in this scenario, capitalism makes perfect sense. Have a great idea for a longer lasting light bulb or a longer running car for the same amount of fuel? Great. Have the wherewithal to translate the idea into a workable solution? Perfect. Then technically, you should be rewarded for your ingenuity. The society should step out of your way, even clear all the obstacles in your path and should help you realize your dream, as it also gets benefited in the due process. It becomes a true win-win situation which several successful individual entrepreneurs would attest to, patting the society for allowing them what they did best and stepped in only when they need an extra hand. There is no argument here. The point of contention, however, is with institutional capitalism. I have a great idea for setting up a solar cell manufacturing plant in the current context of environmental consciousness. I approach my local state government, submit all the paperwork, show them how many jobs it is going to generate in the local economy and elaborate on my plans of further expansion in different parts of the state, should this unit take off as I planned. The government welcomes my idea and reciprocates my gesture of job generation for my state, by offering subsidies in my power consumption, selling me government land for far less than the market price and promising me tax holidays for the first few years. My unit takes off well, starts making profit for me and my investors, creates enough jobs to jump start a satellite economy around the area. The theory of non-interfering state works perfectly until here. It is only when the first signs of trouble surface - slowing down of the economy, or a better product surfacing somewhere else, or worse, a cheaper product of similar quality luring my customers away - that the original capitalist mission statement begs for a revision. The original theory states that any floundering business should be left alone to fail under its own weight. No exceptions. But since my business has served a community for a substantial period of time, raising the general standards of living for a generation or two, not to mention, an ancillary economy subsisting on my survival, should I be left alone without a helping hand from my government in my time of need, even if it means flouting the principal tenets of capitalism?

The reasons for my failure might not be of my making alone. My competitor might be making a similar product by manufacturing it where the costs are low, labor is cheap and the oversight on general standards are amiss, each of which is costing money at my current place. Since the playing field is not leveled between the two of us, with my competitor enjoying an unfair advantage over me, which the capitalism precept didn't accommodate for, does the government's intervention into the matter, either by means of levying extra duty on my competitor's product or by directly taking a stake in my company to provide me a steady stream of investment money to see me through my tough times, constitute a fundamental abandonment of the capitalist principles? The above scenario is what is currently happening with the economies - capitalist and socialist alike - the world over. The theories that held steadfast for a good 50 years found to be wanting amidst increasing globalization. If the basic tenet of capitalism is generation of profit for an invested capital, conventional wisdom dictates that a manufacturer should be allowed to make his product where the labor costs are low, regardless of the prevailing working conditions at the place of production. Consequently, China with its dirt cheap labor, and lax standards in working conditions would become the de-facto destination for manufacturing firms all over. But here is where capitalism fails to address the repercussions of such gross disparities in trans-continental trade practices. It always assumed that all things being equal, the players in the field would slug it out with invention, innovation and imagination to emerge on the top. It never came across the current situation that trade practices can be unfair and playing field to be seriously lopsided. Sure, I too can shift my unit to another labor rich, standards insensitive, dirt poor country and gain an upper hand over my competitor. But what becomes of the people, the economy and revenue to my state that went beyond its call of duty to accommodate me in the fair agreement, that I would keep my firm's root firmly entrenched in my place of domicile.

At the root of it all, the purpose of any -ism is to improve the current conditions in the promise of a better tomorrow. While capitalism does it in a top-down approach, wherein, the wealth generated by thriving businesses would trickle down into the society whereby everyone benefits, socialism takes a more bottoms-up approach, with a strong working class shaping a strong economy. What capitalism has created in the latter half of the last millennium is a voracious consumer class, whose appetite sustained solely on credit. In a bid to sustain everlasting profits, it wiped out an entire generation of working class by shifting out the hard labor jobs, that is very much needed for the sustenance of the economy, and replaced it with a couch potato consumer strata. But then, if there is no real wealth being generated within a system, where does it find the means to even consume? Enter the highly addictive world of borrowing. Easy money, by the way of credit cards for everyday people, and foreign credit for everyday government, has become the modus operandi of everyday life. What is interesting here is how both ends of the supply chain - production and consumption - are facilitated by the same creditors. China, which has become the sole manufacturer for the entire world, whets the credit appetite of capitalism by buying into the countries' future (Treasury bonds and securities). How far can this cycle of 'take credit and purchase from the same' perpetuate, is a nightmarish question that keeps the expert awake during the night.

At this current juncture, when global recession has put an end to the ever consuming disorder, the production cycles have taken a hit too unable to find buyers for its products. And the big question looms, who should take the initiative to kick start the stagnant economy and clear out the tightly coupled deadlocks? While the rules of capitalism cry hoarse that it is the ultimately the market forces that dictate and resolve its inherent inconsistencies, and not government intervention, it has been proved beyond doubt that the profit motive can only take the economy so far and that it can never a be-all-and-end-all magic elixir that can cure-all. So, when economies from the far east to out west are being defibrillated with trillions of dollars of government investment into massive infrastructure projects, the scale of which can never be undertaken by private enterprises, the equations of capitalism are being rewritten with the introduction of a constant (government investment, regulation and oversight) this time around, so as to even out the unruliness that might creep up in the future from unforeseen quarters. Call it capito-socialism or socio-capitalism, one thing is certain, the capitalism of yester years is gone forever.

Show me the money - 2

Leave the finger pointing, the who did what and the blame games asides for a second. It doesn't matter how the collective greed brewed this financial mess. The issue is pretty simple. People who could afford mortgage payments on their homes, walked away from them for a variety of reasons - loss of employment, sudden increase in the monthly payments (following the end of their adjustable rate term), or for something as cold and calculated as, better business sense (money already poured into the house by means of down payment and monthly installments not adding up to the equity built on it, because of the real estate collapse, at which time it becomes a negative investment, like, investing $100 to get a $50 return). This collective abnegation of financial responsibilities by a small percentage of home owners (as per the reports last year, as less as 8%) held the whole system all over the world at ransom. That means, no monthly payments coming in on the loans made out by the banks (causing them to foreclose the loan and assume the responsibility of selling it in the future, and till then incur maintenance expenses), no dividends going out on the investments made by the public (and other institutions) who bought those loans that are packaged are securities, and no payments by the insurance companies who insured those securities (meaning, if the loan is defaulted by the borrower, the insurance company would make the payments, just like any other policy). The crisis successfully managed to create an economic gridlock - nothing coming in, nothing going out, and the active players staying put, either because of fear, or just playing the wait game. The net result is capital crunch. All the imaginary wealth created during the real estate bubble vanished in the valuation magic trick, and the ones (banks) that have real money (cash) refuse to lend it out, lest it too disappears in the financial black hole. So, there, that, in short, is where it stands, as the whole world is crying in unison SHOW ME THE MONEY!

The issue, though fostered and fanned by them, is beyond even the far reach of the banks. It is time for the Big Brother, the government, to step in and try to stem the hemorrhage first and infuse some life in the moribund system. It is a common misconception that the government 'owns' the money in its coffers and it is its to spend any which way it likes. Like any other institution (well, any other non-profit institution), it receives money and it spends money. The annual budget lays out in great detail the ways and means of its spending. So in a crisis like this, how can the government intervene when it has a fixed revenue (assuming no new taxes) and fixed costs? Like it is with everyone else looking for some extra cash at the end of the month to meet the obligations, government depends on borrowing - from its own citizens and from the international community - by issuing what are known as treasury securities. To put it simply, people loan the government a certain amount of money (for which the government writes a promissory note, of sorts), which it repays after an agreed upon term with interest. Treasury bills, bonds and securities are the most popular ways governments all over the world raise cash to fund their projects (war efforts, infrastructure improvement etc). Obviously credit worthiness of the borrower pays a major role. After all, why would anyone want to lend a known defaulter/bad borrower who doesn't keep his promises and his end of the payment deal? It is here that the solidity of the economy (the capitalist fundamentals of the economy) and the stability of the political setup are looked at, and for countries like US with virtually no political turmoil and non-existent security threats, investors don't even bat an eyelid before lapping up the government bonds.

But these are unusual times, and this is no ordinary crisis. For the kind of massive infusion that the government is looking for to defibrillate the economy to its senses, a few wealthy individuals with a few millions to spare buying up the treasuries alone, isn't just enough. The issue has gotten way too big for the millions and billions. Only trillions can come to the rescue. And who, not individuals, not foreign governments, would have that kind of spare cash lying around? As a matter of fact, no one, not even the usually uber-wealthy states in the oil rich lands, would have (and want to loan) those kinds of numbers. Enter the Federal Reserve (the institution that, among other things, is entrusted with keeping an eye on the cash flow in the country) steps in and PRINTS those trillions of dollars in paper money. It then uses that money to buy up those treasuries, which has the same effect of handing the government the cash its needs. The government then pumps that money into the economy through a variety of ways - taking up infrastructure projects (which is the fastest way to create jobs), taking the bad debts off the banks' books by buying those toxic mortgages, tax cuts to the people and the companies etc. However this new infusion into the system is not without any serious ramifications.

Inflation. In its simplest definition, inflation is a situation where there is more money chasing fewer goods. If at one point of time, there are $100 in the market, say with 2 people $50 a piece, trying to buy a TV, and after the tax cut, 4 more got $50 a piece, trying to buy the same TV, the demand and supply law states that the price of the TV shoot up. The immediate fall out of more money in the system in the reactionary rise in the prices. Everyone has more money for the same amount of goods. But since the market is suffering with the 'cash-strap' bacteria, the antidote of infusion would first get the economy on its legs. Inflation, at this stage is a welcome headache, but in fact is another battle for another day. But there is also an unwanted side-effect with more cash in the system - devaluation of the currency.

Currency, in the international markets, is traded just like any other commodity. And the value of it (usually with respect to other standard currencies as Euro, British Pounds, Swiss Francs etc) is backed by the vitality of the country's economy, meaning, if the US economy is sound stable and humming along nicely, people would like to stock up on the dollars, since the purchasing power of the dollar is more. But if the flood of the currency causes the prices to go up, it simply means it takes more money now, than it had before, to purchase the same commodity, which in turn spurns the prices of the imports, which again impacts the prices of the commodities, and the situation would soon spiral to its eventual doom (much like how the system in Zimbabwe has been decimated by thoughtless and mindless printing of more currency (it even has a billion dollar note)). So the tight rope walk of the government (and the Federal Reserve) remains deciding when to pull back all the extra cash in the system, without triggering another cash collapse. Since the first order of duty is to get the economy humming, let's restrict our scope to pre-inflation measures.

OK. So the government has got its trillions in its coffers handed down by the Federal Reserve. Now what? There are varying schools of thought here as to what constitutes the fastest way of jump starting the troubled economy. 1. the simplest - hand out an equal share of the total amount to each resident of the country and let them pour it back in the economy (in the process, by paying off some of their debt) and unleashing the collective purchasing power of colossal proportions. 2. the most convoluted - buy all the toxic mortgages from the banks, that locked up the system, by plunking down the cash, thus making the cash readily available to the banks to start lending once again, greasing up the system and resuscitating it back to life, in a top-down approach. And all the bad mortgages that the government bought would be sold back to the banks at a later point of time (hopefully for a tidy profit), when the economy turns around, and the values of the homes are back to decent levels. And if everything works as per the plan, the government pays back the Federal Reserve, effectively pulling back all that printed cash out of circulation, staving off inflation and devaluation at just the right time. In short, the immediate financial future of the country (and the world) hinges on that one conditional - IF everything works as per the plan.

To Krishna Devaraya's court came 3 brothers one day with a unique problem in their inheritance will. Their father decreed that the 17 elephants in their heirloom be divided in such a way that the elder gets half of the total, the middle gets a third and the last, a third of the second's. Obviously the individual fractions do not add up 1, and the animals were not to be sliced up (and killed) as per the will. A tough problem. Enter Tenali Ramakrishna with his inimitable wit. He adds another elephant from the king's stable to the equation, making it 18 in all. The first one's share - 1/2 = 9, the second one's - 1/3 - 6, and the third's - 1/3rd of the second - 2. 17 divided though not evenly, but humanely, and the king's elephant goes back to the stable. Problem solved. Hopefully, same is expected with the Federal Reserve and its trillions. Cash comes out, solves the crises, and cash goes back in.

That is the funny and frustrating part with the economy. As much as the experts try to force their theories as next to salvation, the truth is, NOBODY KNOWS - no one knows whether it would work, or wouldn't, and if doesn't work, what next? There are way too many moving parts in this complex global financial machine, that probability and predictability of an outcome is near impossibility. Just as the experts don't know why something didn't work, despite everything going for it, they don't have a slightest clue why something worked, when it worked. Every situation, meltdown, crisis, has its set of variables, conditions and platforms, that trying to learn from it in order to predict/avoid a future collapse is an exercise in futility. It is like that philosopher's saying - you can't take a dip in the same river twice, meaning at every unit of time, a new variable is introduced into the system changing some/whole complexion of the game. No two crises are (will ever be) the same, and consequently, the lessons learned from them, as history showed over and over again, are purely for academic purposes. The current financial experts quote the example of the Great Depression of 1929, when the Federal government simply stood aside and did nothing, as the unregulated market and the banking industry went down in flames, and it took a good 6 years to recover from it. Now, with the government so deeply involved in the mess and committed to turning the tide around, only history will decide if this indeed the cure for such ills, not just the dressing/treatment. As they say, peace is just a brief respite between two wars. May be, prosperity too might be a passing phase between two meltdowns. Like everyone and everything, who knows?

End.

Show me the money

The case of the missing money remains an intriguing one to every one, from the uninitiated to omniscient. First, the puzzle. 3 people went to a restaurant and ordered something to ring up the register to $30, $10 a piece. Taking into account the group's frequency of visit, the owner of the place discounts the bill by $5 and orders his server to split it up evenly among the three. Not known for his modular division skills, the server could not figure out a way to evenly distribute the 5 note among the 3, and so pockets $2 and gives back 3, amounting to $1 a piece. And now the question, if the patrons paid 9 each (with the discount) and the server pocketed 2, where did the $1 go, from the $30 that they initially shelled down? The question is not so much about problem solving skills as it is about teaching perspective. The original problem lies in trying to solve the problem from both the ends, the payer and the paid. At the owner level, he received $30, kept $25 and returned $5. At the server level, he kept $2 and returned $3. From that paid end, owner received 25, server got 2 and the group got 3. From the payer's side, they paid 27 (with the discount), server got 2 and the owner got 25. Call it Creative Accounting 101. If only things were this simple in the real world, particularly in the current economic context, where simple mathematics is making absolutely no sense, and economics, pandits and analysts are trying to balance an equation where the LHS and the RHS appear to be loggerheads and at each others throats. First of all, I am not an economist and don't claim to be any sort of an expert on matters relating to economics, accounting practices and balance sheets, not to mention, trade imbalances, stock markets and market corrections. I am just an average person trying to wrap my mind around the current economic quicksand, that is just sucking in/out the steam in the financial system.

First, the broad statement. X BILLION DOLLARS HAVE VANISHED FROM THE MARKET. This was the statement that had me digging the rabbit hole in the first place. Does that mean that in addition to whatever amounted to economy, the hard cash in circulation in the whole world, an extra X billion dollars are missing from the market? Where did they go? Or the other fundamental question, how did those extra dollars come into being? In a simple transaction involving 2 people, if one sells the other a product at a value greater/lesser to what he got, he is said to have made a profit/loss. So A bought something for $10 and sold it for $11. The profit is clear as a daylight. And A has with him the $1 to show for (the Tax Man). And same goes for a loss transaction. Now when a newspaper report claims that the market sustained X billions in loss, the common sense question would immediately be, who profited by just that much standing on the other side of the transaction equation. There has to be someone balancing the equation out, else the natural laws governing the universe, not just the economics, are at fault, and everybody from Archimedes, with his water displacement theory, and Einstein, with his conservation principle, had it all wrong all this while. So, where did the money go, the billions and trillions all over the world? It is here that the missing dollar puzzle above hits us on the head, reminding that current crisis, like the puzzle, is never about the numbers, it is all about perspective. So, let's look at the question again - where did all the money go - from a different angle, the bank's, the ground zero of the implosion. Banks' operational philosophy is quite simple. Start with a certain capital, lend it out, earn the interest, subtract the costs, and announce the profit/loss for a given financial year. So if a bank A lends $10, from its working capital of $100, to B to buy a house, and as long as B keeps servicing the loan with the prompt payments, at the end of the term, the bank stands to gain on its investment. There are no tricks here, no illusions, no rabbits out of the hat. The working capital is real, the payments are real, and the profit is real. If the loan is defaulted, the bank has $10 of house in its possession to make up to its initial $100 capital. So, technically, if all the banks have in their assets column all the foreclosed homes, adding up to the loans they have disbursed, why are the banks striking out the game left and right? Don't they still have all their capital (assets + currency) in tact? Well, not quite. Because of a little thing called valuation.

That seems to the difference between a tangible value like currency's and a surreal one, like valuation's. Say, a new home was bought for $100. That means, $100 have changed hands between the builder and the buyer. As long as the home never changes hands again, ever, it becomes immaterial what the value of the home, very much like how people buy gold more as an ornamental addition, than as an investment opportunity. The real trouble starts when reality gives way to apparent, perceived and purported "value". Say, the owner wants to take out a loan on his home and approaches the bank. The bank sends an assessor to the place, who valuates it for $200. This is creationism at its best, from here on. The apparent jump in the value from 100 - 200, attributed to several legitimate factors, like demand, growth and neighborhood, is still an apparition. Suddenly an extra $100 has breathed a new life. Say, the bank lends $100 on the $200 property, hoping that even if the loan is defaulted, the bank stands to gain an extra $100 on its investment. And if lent out 10 such loans of $100, depleting its reserves by $1000, waging on a bet that pays of $2000 in the worst case of a default or anything over a $1000 in interest accrued, the business plan sounds solid on paper. When the worst case is indeed realized on all those loans, the bank is now in possession of $2000 worth of assets. Or is it? When one (or the market forces) can decide that a property that was worth 100 before is now worth 200, then it can equally dictate that what was $200 once is 0 zero. So the investment of $100 on the part of the bank has disappeared, with no one to profit from that loss and balance out the equation on the other end. Until the property gets auctioned off at a later point of time for a higher (or, just any) value, the money is stuck in a limbo. So technically all those X billions made by the banks on foreclosed homes are in the twilight zone between the reality and apparentness.

This valuation system has always been the bane of financial industry, where the demarcation between money and wealth is drawn in the sand - clear at times and hazy at some other. In this system, nothing is created, there are no goods (or even services) to show for, just some one sticking their hand in the wind and bringing bastard wealth into circulation. The same thing happened during the internet bubble, when crazy ideas were (over-)valuated and rewarded with ridiculous money, and when the dust settled, there was nothing to show for, but empty promises and unrealized dreams. So how much money is actually in the system, in the wallets, changing hands, and in the bank vaults? Surprisingly far less than one might think. So what does it mean when the government is going to pump in a few trillion dollars into the system - print that much more money? operate on 'I owe you' credit? or creative accounting again? And the answer, a hidden one, is all of the above. So if the there are already $100 in the market, and the government promises to provide a stimulus for another $100, does that mean that there is more money circulating in the market, changing hands. And the mischievous smile on the lips of missing dollar puzzle creeps up again.

Cont'd.