What is remarkable is the number of mails that I have received on this subject: I have never before had so many mails on ANY subject!
Here is one from Sumi Foley, a Japanese friend who is an artist: "So sorry about how humans are behaving in Mumbai. Until recently, many Americans who are from the 60's generation have thought of India as a land of many great spiritual traditions. It seems God gives his children too much room and time for learning and growing through ignorance and suffering. Our heart felt prayers go out to our brothers and sisters in Mumbai."
For anyone interested, Sumi-san's webpage is: http://home.earthlink.net/~sumjo
Sphere: Related Content
Saturday, November 29, 2008
Michael Shank's piece in The Guardian (London) on the Mumbai terrorist attack
Following my post on the subject, I am interested to receive from a friend a piece by Michael Shank, Communications Director at George Mason University’s Institute for Conflict Analysis and Resolution, in The Guardian.
Shank points out that nearly half (43%) of all Muslims live below the official poverty line of $1.25 a day. "This poverty rate corresponds with the Muslim workforce rate: less than 50% of the Muslim male population is employed (contrast this with Dalit male employment of 53%). Additionally, Muslims are less likely to have electricity and water than Dalits. Politically, Muslims remain unrepresented in the government (holding 5.7% of all state jobs), in the foreign, police and armed services (holding 2-3% of all jobs) and in politics (holding roughly 4-6% of all House parliamentary seats, or less than one-half of the Muslims' population share). What is noteworthy about these numbers is that while the Dalits were previously devoid of the ideological and instrumental mechanisms to respond violently to the inequity in India's democracy, the Muslim community is equipped via national and international sources (both ideological and instrumental)....ethnic and religious dominance doubles the risk of violent conflict....What tips India's increasing risk of violent conflict into reality is the shame experienced by the underclass. Shame - in the case of Indian Muslims, stemming from socio-economic and political exclusion - is a powerful motivator towards violence. ... Agent provocateurs, in response, whether native or foreign, come equipped with the ideological and instrumental means to give voice to this shame through violence....Reducing the risk of India's violent conflict, then, requires not only recognition of the culprits, national or neighborly, who wreaked havoc on Mumbai but perhaps more importantly, in an effort to curb sustained endemic violence, recognition and a willingness to remedy the root causes of conflict - that of poverty and underrepresentation, politically and economically".
I repeat what I said in my post on the subject: justice and security are necessary, not only for Mumbai, but also for Muslims in India, before we can see an end to this sort of violence. There must be, in Shank's words, "a long-term commitment to eradicating the climate in which violence grows. Until a majority of Muslims see the tangible benefits of India's democracy - socially, economically and politically - India will not only be the world's largest democracy but also the most dangerous".
Chilling words. And we should take them to heart if we don't want to see our country destroyed.
In fact, we cannot build prosperity in our country if most minorities (Muslims, Christians, Sikhs, and so on) as well as the MAJORITY (Dalits and OBCs) feel disadvantaged and alienated - even if they do NOT take to violence.
Shank points out that nearly half (43%) of all Muslims live below the official poverty line of $1.25 a day. "This poverty rate corresponds with the Muslim workforce rate: less than 50% of the Muslim male population is employed (contrast this with Dalit male employment of 53%). Additionally, Muslims are less likely to have electricity and water than Dalits. Politically, Muslims remain unrepresented in the government (holding 5.7% of all state jobs), in the foreign, police and armed services (holding 2-3% of all jobs) and in politics (holding roughly 4-6% of all House parliamentary seats, or less than one-half of the Muslims' population share). What is noteworthy about these numbers is that while the Dalits were previously devoid of the ideological and instrumental mechanisms to respond violently to the inequity in India's democracy, the Muslim community is equipped via national and international sources (both ideological and instrumental)....ethnic and religious dominance doubles the risk of violent conflict....What tips India's increasing risk of violent conflict into reality is the shame experienced by the underclass. Shame - in the case of Indian Muslims, stemming from socio-economic and political exclusion - is a powerful motivator towards violence. ... Agent provocateurs, in response, whether native or foreign, come equipped with the ideological and instrumental means to give voice to this shame through violence....Reducing the risk of India's violent conflict, then, requires not only recognition of the culprits, national or neighborly, who wreaked havoc on Mumbai but perhaps more importantly, in an effort to curb sustained endemic violence, recognition and a willingness to remedy the root causes of conflict - that of poverty and underrepresentation, politically and economically".
I repeat what I said in my post on the subject: justice and security are necessary, not only for Mumbai, but also for Muslims in India, before we can see an end to this sort of violence. There must be, in Shank's words, "a long-term commitment to eradicating the climate in which violence grows. Until a majority of Muslims see the tangible benefits of India's democracy - socially, economically and politically - India will not only be the world's largest democracy but also the most dangerous".
Chilling words. And we should take them to heart if we don't want to see our country destroyed.
In fact, we cannot build prosperity in our country if most minorities (Muslims, Christians, Sikhs, and so on) as well as the MAJORITY (Dalits and OBCs) feel disadvantaged and alienated - even if they do NOT take to violence.
Thursday, November 27, 2008
Oil below 50, above 55, now at 53.... is the crisis over?
ON the 20th of November, a friend wrote: "20th September does not seem that far away, and 50$/barrel seemed at that date way beyond the horizon, and in 2 little months, here we are, below 50$/barrel. I have quite a few discussions based on your thoughts, and we are going through yet another weekend of semi panic....Keep me on you mailing list, and I will keep having a look at your blog. Thanks for your insights !!"
Since then, oil made a 10% jump to $55 in one day and is now, as far as I can see, trading at around $53.
The question arises: are we now past the worst, considering that I had said oil at $50 was one sign of the bottom?
Well, we may be at or near the bottom but sadlywe are certainly not on our way up. Expect volatility (and you can even make money on it) but do not expect any sustained rally at present.
You may recollect that I had actually given two signs, the first was oild at $50 - but that was only one sign. The second was whether the governments of the world (specifically at the last G20 conference) were going to start tackling the fundamental issues facing the world economy (as outlined, for example, in my Open Letter to President-elect Obama, which also available on this Blog).
The G20 meeting did nothing significant, even though it made some encouraging noises, and may yet produce some surprises.
However, I see no signs right now that any government is prepared to act on any of the key issues. What I see are governments trying to restore consumption so that the unreal balloon can continue inflating.
If the current attempts succeed, they will simply lead to another bubble - which will be great fun for the playiers involved in that bubble, but will simply lead to a worse global crash in a short while. Sphere: Related Content
Since then, oil made a 10% jump to $55 in one day and is now, as far as I can see, trading at around $53.
The question arises: are we now past the worst, considering that I had said oil at $50 was one sign of the bottom?
Well, we may be at or near the bottom but sadlywe are certainly not on our way up. Expect volatility (and you can even make money on it) but do not expect any sustained rally at present.
You may recollect that I had actually given two signs, the first was oild at $50 - but that was only one sign. The second was whether the governments of the world (specifically at the last G20 conference) were going to start tackling the fundamental issues facing the world economy (as outlined, for example, in my Open Letter to President-elect Obama, which also available on this Blog).
The G20 meeting did nothing significant, even though it made some encouraging noises, and may yet produce some surprises.
However, I see no signs right now that any government is prepared to act on any of the key issues. What I see are governments trying to restore consumption so that the unreal balloon can continue inflating.
If the current attempts succeed, they will simply lead to another bubble - which will be great fun for the playiers involved in that bubble, but will simply lead to a worse global crash in a short while. Sphere: Related Content
The Mumbai violence - Muslim terrorism a direct consequence of incompetent government and Hindu terrorism
The terrible events in Mumbai over the last day and more will have consequences not only for the individuals and families directly affected but also for the whole country.
My heart goes out to the families of those killed and hurt, and I pray for solace and healing for them.
But my heart goes out even more for our country as a whole.
At a time when the global economic crisis is already causing problems for our country, this event will add further economic challenges. Foreign investment will continue to be withdrawn, and the rupee will continue to fall in value. Various countries and major companies have already placed India on the "Alert" list against travel to the country. All this will cause even more unemployment, and thrust even more people into poverty, ironically including millions of poor Muslims.
The tragedy is that we have increasing terrorism in our country: think of Gauhati last month, Delhi the month before that, Bangalore in July, Jaipur in May, Hyderabad in August last year, the bombing of the train from India to Pakistan in February last year, Bombay in July 2006, Varanasi in March 2006, Delhi in December 2005....
Sadly, there is probably an even bigger tragedy that is yet to unfold because no one in our culture looks at history, only at immediate events.
In order to understand the current terrorist attacks, we need to remember two things:
(a) our government has mis-managed the Kashmir issue (just as it has mismanaged the Naga and Mizo issues, which are still festering, and have not produced parallel results only because Nagas and Mizos lack a support structure similar to Muslims both abroad and within India, in spite of consistently and massively repeated lies by the VHP to the contrary). Blaming "outside forces" is all very well, and may have some truth to it, but we cannot control what is happening in other countries. Let us not fool ourselves by talking about Al-Qaeda and Islamic terrorism. If we had acted justly and wisely in our own country, we would not have created the problem in the first place, and since we continue to act unjustly and foolishly, it is we who continue to nourish the problem.
(b) this Muslim terrorism is part of the reaction to Hindu terrorism in Ayodhya and Vadodra, and the failure of the government to bring the culprits to book, just as the government has failed to get at the culprits in Orisssa since last Christmas, and just as it failed to prosecute the perpetrators of the Sikh massacre following the assassination of Prime Minister Indira Gandhi - even though, in every case, the names of the chief instigators and actors are known, and some of them are today even in high places.
As long as we Hindus, who are the majority, do not do all in our power to actively reject what Dr Vishal Mangalwadi has called "the spirituality of hatred", we will never be able to create peace and progress in India.
And there is no evidence, at least to date, that the VHP and its allies are willing to search their souls and to accept that they are to blame for whipping up hatred against minorities and secular Hindus (indeed all Hindus who disagree with the VHP).
Nor is there evidence that the Government is able or willing to bring to book the culprits for the massacre of Sikhs after the murder of Mrs Indira Gandhi, the massacre of Muslims so many times since Independence, and the increasing massacre now of Christians, as well as the re-targeting of Dalits and Tribals all over the country after the historic reduction in that oppession for a few decades.
Indeed, I have noticed over the last few years that the atmosphere in the country has become more and more fearful. Even before the Mumbai violence. Very few people are prepared to stand up for freedom and against intimidation. How can we expect individuals to stand up against intimidation, when the government itself is intimidated?
Of course the government will clean out the terrorists from the Taj and the Trident and the Jewish school. But what our government needs is the guts to bring all terrorists to book, starting with Hindu terrorists, and then going on to Muslim or any other terrorists.
In the absence of competent government, able and willing to provide justice and stability, and in view of the growth of the new Hindu spirituality of hatred, I foresee now more violence against Muslims, followed by more Muslim terrorist attacks, followed by more violence against Muslims, followed by more Muslim terrorist attacks....
Neither the new Hindu spirituality of hatred, nor the Muslim doctrine of "just revenge" can save the country.
As Gandhiji once said, "An eye for an eye makes the world blind".
It is only the spirituality of Jesus the Lord, which enables one to turn the other cheek, that can provide any basis for communal peace and progress in our country.
Meanwhile, as I did on September 13, I call again for a Government of National Unity in our country - a government that apologises for the past and is prepared to work together for the real progress of the country.
What I wrote some ten weeks ago was:
"We need a Government of National Unity which sees its task NOT (as at present) as lining its own pockets and those of the elite, but rather sees its task as addressing the basic problems of our country.
My heart goes out to the families of those killed and hurt, and I pray for solace and healing for them.
But my heart goes out even more for our country as a whole.
At a time when the global economic crisis is already causing problems for our country, this event will add further economic challenges. Foreign investment will continue to be withdrawn, and the rupee will continue to fall in value. Various countries and major companies have already placed India on the "Alert" list against travel to the country. All this will cause even more unemployment, and thrust even more people into poverty, ironically including millions of poor Muslims.
The tragedy is that we have increasing terrorism in our country: think of Gauhati last month, Delhi the month before that, Bangalore in July, Jaipur in May, Hyderabad in August last year, the bombing of the train from India to Pakistan in February last year, Bombay in July 2006, Varanasi in March 2006, Delhi in December 2005....
Sadly, there is probably an even bigger tragedy that is yet to unfold because no one in our culture looks at history, only at immediate events.
In order to understand the current terrorist attacks, we need to remember two things:
(a) our government has mis-managed the Kashmir issue (just as it has mismanaged the Naga and Mizo issues, which are still festering, and have not produced parallel results only because Nagas and Mizos lack a support structure similar to Muslims both abroad and within India, in spite of consistently and massively repeated lies by the VHP to the contrary). Blaming "outside forces" is all very well, and may have some truth to it, but we cannot control what is happening in other countries. Let us not fool ourselves by talking about Al-Qaeda and Islamic terrorism. If we had acted justly and wisely in our own country, we would not have created the problem in the first place, and since we continue to act unjustly and foolishly, it is we who continue to nourish the problem.
(b) this Muslim terrorism is part of the reaction to Hindu terrorism in Ayodhya and Vadodra, and the failure of the government to bring the culprits to book, just as the government has failed to get at the culprits in Orisssa since last Christmas, and just as it failed to prosecute the perpetrators of the Sikh massacre following the assassination of Prime Minister Indira Gandhi - even though, in every case, the names of the chief instigators and actors are known, and some of them are today even in high places.
As long as we Hindus, who are the majority, do not do all in our power to actively reject what Dr Vishal Mangalwadi has called "the spirituality of hatred", we will never be able to create peace and progress in India.
And there is no evidence, at least to date, that the VHP and its allies are willing to search their souls and to accept that they are to blame for whipping up hatred against minorities and secular Hindus (indeed all Hindus who disagree with the VHP).
Nor is there evidence that the Government is able or willing to bring to book the culprits for the massacre of Sikhs after the murder of Mrs Indira Gandhi, the massacre of Muslims so many times since Independence, and the increasing massacre now of Christians, as well as the re-targeting of Dalits and Tribals all over the country after the historic reduction in that oppession for a few decades.
Indeed, I have noticed over the last few years that the atmosphere in the country has become more and more fearful. Even before the Mumbai violence. Very few people are prepared to stand up for freedom and against intimidation. How can we expect individuals to stand up against intimidation, when the government itself is intimidated?
Of course the government will clean out the terrorists from the Taj and the Trident and the Jewish school. But what our government needs is the guts to bring all terrorists to book, starting with Hindu terrorists, and then going on to Muslim or any other terrorists.
In the absence of competent government, able and willing to provide justice and stability, and in view of the growth of the new Hindu spirituality of hatred, I foresee now more violence against Muslims, followed by more Muslim terrorist attacks, followed by more violence against Muslims, followed by more Muslim terrorist attacks....
Neither the new Hindu spirituality of hatred, nor the Muslim doctrine of "just revenge" can save the country.
As Gandhiji once said, "An eye for an eye makes the world blind".
It is only the spirituality of Jesus the Lord, which enables one to turn the other cheek, that can provide any basis for communal peace and progress in our country.
Meanwhile, as I did on September 13, I call again for a Government of National Unity in our country - a government that apologises for the past and is prepared to work together for the real progress of the country.
What I wrote some ten weeks ago was:
"We need a Government of National Unity which sees its task NOT (as at present) as lining its own pockets and those of the elite, but rather sees its task as addressing the basic problems of our country.
Why? Because we are wracked by Islamic violence, Naxalite violence, Hindutva violence, the general almost mindless system of violence against the poor and disadvantaged, the widespread corruption, the decay and threatened breakdown of our institutions, the unreal optimism of the even slightly-educated, the irresponsibility of most of those of us who are incredibly rich, and the hopelessness of the average Indian."
Sphere: Related ContentSaturday, November 22, 2008
Will Obama's rumoured plan to rescue the US auto industry provide a "floor" to the current crisis?
There are rumours that President-elect Obama will announce a plan this week to rescue the ailing auto industry in the USA.
The question is: if so, will that provide a "floor" to the current crisis?
The answer is "Yes". However, that will not mean that the crisis is over. It will simply mean that the crisis won't get any worse. At least for the USA.
What that means for other countries remains to be seen. My own feeling is that it will not make that much of a difference to global sentiment, so that the crisis could continue getting worse in other parts of the world, if other governments do not take other actions to support their own economies.
What the world (and the US) is waiting for is not simply the rescue of the auto industry, important as that is.
What the world is waiting for is steps that will safely unwind the all-encompassing bubble of unregulated hedge funds, derivatives and their ilk, worth $1,144 Trillion at the end of September! That bubble should never have been allowed to come into being in the first place, and came into being only because of the irresponsibility of US lawmakers who not only repealed the Glass-Steagall Act but also then refused to regulate hedge funds and derivatives.
Till there is recognition that leveraged betting is what has created this problem, and till there is a resolution of that, there will be no progress with really resolving the crisis. Sphere: Related Content
The question is: if so, will that provide a "floor" to the current crisis?
The answer is "Yes". However, that will not mean that the crisis is over. It will simply mean that the crisis won't get any worse. At least for the USA.
What that means for other countries remains to be seen. My own feeling is that it will not make that much of a difference to global sentiment, so that the crisis could continue getting worse in other parts of the world, if other governments do not take other actions to support their own economies.
What the world (and the US) is waiting for is not simply the rescue of the auto industry, important as that is.
What the world is waiting for is steps that will safely unwind the all-encompassing bubble of unregulated hedge funds, derivatives and their ilk, worth $1,144 Trillion at the end of September! That bubble should never have been allowed to come into being in the first place, and came into being only because of the irresponsibility of US lawmakers who not only repealed the Glass-Steagall Act but also then refused to regulate hedge funds and derivatives.
Till there is recognition that leveraged betting is what has created this problem, and till there is a resolution of that, there will be no progress with really resolving the crisis. Sphere: Related Content
When can we expect an upswing?
Now that the Morgan Stanley index shows a worldwide loss of equity value of some $32 trillion, shares have corrected the entire 21st century rally which should never have taken place.
As I am one of the very few (perhaps the only one?) to have predicted oil at $50 when it was 130 and headed to nearly 150 (and the Russian view was that it was going to go to 250!), I am being asked: are we at or near the bottom?
Well, the S&P 500 of US stocks has crashed to its lowest in 11 years. London's Financial Times newspaper says that "It is now, without question, the worst bear market since the 1930s". But they mean in terms of percentage falls - I greatly doubt that the market will go back to 1930 levels, though it could (and probably will) go back to 1990 levels before finding its correct level. Will the market go lower than 1990 levels? It is possible. Whether it will happen depends on whether governments take seriously the sorts of measures I (and others) have been recommending.
Readers will remember that, in order to identify when we are near the bottom, I had given two signs to watch for in - oil at 50 and the G-20 meeting last week. Since the G-20 meeting disappointed, this is the natural result. Sphere: Related Content
As I am one of the very few (perhaps the only one?) to have predicted oil at $50 when it was 130 and headed to nearly 150 (and the Russian view was that it was going to go to 250!), I am being asked: are we at or near the bottom?
Well, the S&P 500 of US stocks has crashed to its lowest in 11 years. London's Financial Times newspaper says that "It is now, without question, the worst bear market since the 1930s". But they mean in terms of percentage falls - I greatly doubt that the market will go back to 1930 levels, though it could (and probably will) go back to 1990 levels before finding its correct level. Will the market go lower than 1990 levels? It is possible. Whether it will happen depends on whether governments take seriously the sorts of measures I (and others) have been recommending.
Readers will remember that, in order to identify when we are near the bottom, I had given two signs to watch for in - oil at 50 and the G-20 meeting last week. Since the G-20 meeting disappointed, this is the natural result. Sphere: Related Content
Friday, November 21, 2008
Will the Euro now come under pressure?
It is official: in the third quarter of 2008, the Eurozone economies shrank for the second quarter in a row. That means that they are now formally in recession.
When the Euro was launched in 1999, there was uncertainty about its future because it was the world's first currency (and remains the only currency) with no sovereign nation behind it, and it is the first (and only) currency in the world which operates independent of the fiscal and monetary policies that are followed by the rich, middling and poor countries in its region.
To everyone's surprise, the currency strengthened on launch, and has continued to do well till now. So much so that the Euro has even been mooted as the world's next reserve currency!
However, the entire career of the Euro has coincided with a historically-unprecedented (and artificially-induced) boom. Now that the world is in an economic depression, the question is: will the euro be able to continue to be a viable currency, as the the less-developed parts of the eurozone have started falling further behind the richer ones?
It is one thing to maintain a single currency within a region with such huge economic disparities when the constituent economies are converging - and, in any case, the poorer economies can be helped from the largesse of the richer economies.
It is quite another to maintain that currency when the economies are diverging, and when even the rich countries feel that they have little with which to help the poorer countries.
Quite suddenly, at some point, it is likely that the pressures will become intense.
Don't rule out speculation against the Euro. Don't even rule out the eventual break-up of the Euro.
I hope that I am completely wrong, because that will be terrible for all the countries involved. Sphere: Related Content
When the Euro was launched in 1999, there was uncertainty about its future because it was the world's first currency (and remains the only currency) with no sovereign nation behind it, and it is the first (and only) currency in the world which operates independent of the fiscal and monetary policies that are followed by the rich, middling and poor countries in its region.
To everyone's surprise, the currency strengthened on launch, and has continued to do well till now. So much so that the Euro has even been mooted as the world's next reserve currency!
However, the entire career of the Euro has coincided with a historically-unprecedented (and artificially-induced) boom. Now that the world is in an economic depression, the question is: will the euro be able to continue to be a viable currency, as the the less-developed parts of the eurozone have started falling further behind the richer ones?
It is one thing to maintain a single currency within a region with such huge economic disparities when the constituent economies are converging - and, in any case, the poorer economies can be helped from the largesse of the richer economies.
It is quite another to maintain that currency when the economies are diverging, and when even the rich countries feel that they have little with which to help the poorer countries.
Quite suddenly, at some point, it is likely that the pressures will become intense.
Don't rule out speculation against the Euro. Don't even rule out the eventual break-up of the Euro.
I hope that I am completely wrong, because that will be terrible for all the countries involved. Sphere: Related Content
An Open Letter to President-elect Obama
Mr. President
In case you have wondered why the economic crisis continues to get worse in spite of all the medicine in the world from the best experts in the world, the reason is simple: we have the wrong diagnosis (that this is a liquidity crisis) and we are therefore administering the wrong medicine.
You will not only be tempted to put the interests of the USA first, you may well consider it your duty to do so.
However, from your Administration, a fresh impetus towards open markets would be most welcome. The alternative to free trade is protectionism, which will ineluctably result in conflict - or War.
The parallels to the end of the previous phase of globalisation, in 1873, are chilling.
Lead us not towards the same mistakes. Lead us towards a form of capitalism which includes the possibility of a humane future for everyone in the world by means of a global level playing field for capitalism.
The Achilles' heel of the current phase of globalisation was the WTO's deliberate avoidance of a level playing field in terms of health, safety, environment, pensions - indeed, minimum standards in virtually all areas. I admit that the problem was compounded:
_ because of the pre-existing tendency to debasing money ("inflation"); and,
- because of legalising the possibility of gambling with money meant for other purposes, without requiring anyone even to keep track of who was betting how much - and indeed whether they even had the money with which to bet.
The result is that the world faces an unprecedented crisis whose true dimensions are being systematically ignored or underplayed.
The heart of the global problem is not currency misalignment or inter-bank liquidity or toxic assets - these are all important, but the key challenge is the derivatives/hedge funds/ credit default swaps (CDS) industry, whose global overhang is $1,144 Trillion (or 1.14 Quadrillion). That is as much as 23 times the total quantity of actual wealth in the world - Global GDP only amounts to some $50 Trillion. Even if we mark such trades at 5% of their value, as is usual, that still makes these trades roughly equal to world GDP.
In other words, the mass of outstanding CDS/Derivative/ Hedge Funds cannot be supported by all the money that all the governments in the world can provide. As there is no registration of such deals, no one knows who holds how much of these "acid assets", no one knows who will be required to cough up massive sums of money at what point, and whether such a person will have the capacity to pay or borrow such massive amounts. That is why not even banks trust other banks, let alone companies or individuals.
Moreover, in view of the current low appetite for long-term bonds, it is not at all clear whether even governments will be able to raise the quantities of money that have already been promised by them. So it is possible that some 30 countries are already bankrupt or well on the path to bankruptcy.
Much more innovative and substantial action is therefore needed. Any analysis of the contemporary phase of globalisation (the last 20 years or so) shows that our global economic system suffers from alarmingly large booms and busts. These may be inevitable, but intelligent ways are well established in the research literature for smoothing both booms and busts. High growth is always politically attractive, but it is much more important for growth to be sound, otherwise the illusion of so-called growth is quickly exposed as being hollow.
Here, therefore, are some key proposals:
1. As the purpose of CDSs was to provide insurance, and it is clear that insurance cannot in reality be provided by these at present, all CDSs should immediately be declared illegal, and the challenge of the actually-existing non-insurance should be met by government commitments to provide minimum insurance, but no more - that is, insurance that would enable all companies that were "going concerns" (say, at the end of September 2008) to continue trading. The initial amounts invested, provided those were before say 30 December 2007, could be returned to the original investors. The consequences for governments and for companies need to be worked out in detail but those could be good broad principles on which to act, essentially unwinding as safely as possible the huge industry which should never have come into being in the first place, at least on this sort of scale.
2. Derivatives and hedge funds have two purposes: (a) to provide insurance and (b) to provide speculative gain. The first function should, in accordance with item 1, also be taken over on a similarly minimum basis by governments, while all hedge fund and derivative activity which was oriented towards speculative gain should be immediately declared illegal, and compensation should be provided to the extent of returning the amounts originally invested.
3. All future speculative financial activity (hedge funds, derivatives, CDSs...) should be regulated by means of (a) standard templates (developed by the financial services industry) which provide transparency, measurability, gradeability and accountability, and (b) registration on, and sale exclusively through, recognised exchanges. At least seven global exchanges need to be established and maintained by law: competition is an important principle to uphold, specially when the scale of activity is so enormous.
4. The different types of financial activity (insurance, commercial banking, retail banking, investment banking, asset management...) should be separated by new global laws, so that speculation cannot be carried out with money originally supplied for other purposes. Certainly leveraged betting should be banned.
5. In order to make rescues of companies by governments viable, no company's turnover should be allowed to grow to a size of more than 0.5% of the GDP of the country where it is registered. As soon as any company is within 20% of that range, it should be required by law to start planning to spin out parts of the company; if a company does not do so, the national authorities must intervene with such plans - which will in any case go into effect as soon as company size does arrive at the borderline.
6. Countries within the UN, the WTO, Bank of International Settlements (BIS) and other such global bodies should agree to avoid printing more money than is justified by their GDP. Debasing a currency can provide a short-term spurt to an economy, but sound money is essential if solid growth is to take place. Any country violating this principle should be considered to have disqualified itself from belonging to the community of civilised countries with whom trade is possible.
7. Financial institutions (FIs) currently lend 12 times (or more) of the amount they actually have in money deposited with them. The greater the proportion that they lend, the more vulnerable they are to lack of depositor confidence at any time, and the consequent possibility of bank runs. FIs may therefore not lend more than 6 times the amount of deposits they hold at any one time. The rate of credit growth should always be below the rate of GDP growth for every country within the BIS, WTO, and similar treaties. Whenever the rate of growth of credit in a country comes within 20% of the rate of its GDP growth, the amount FIs may lend should immediately drop to 5 times what they have in deposits. Contrariwise, when the rate of GDP growth slows to 2% or less, the amount that FIs can lend should be increased to 7 times what they hold in deposits. If the GDP growth rate drops to 1% or less, the amount that FIs can lend should be increased to 8 times deposits. The intention of such a policy is to be counter-cyclical and to be well within safety margins, so that it would be unnecessary for FIs to be rescued by governments. Variable lendable quantity is an important but ignored lever, in addition to the equally-important but highly-attended-to-lever of interest rates, in order to influence debt, economic activity and sound growth within the global economy.
8. Tax and other positive and negative incentives should be used to discourage credit-based growth for individuals, families, companies and countries. Instead, investment-based growth should be encouraged.
9. The current monopoly of currencies (Yen in Japan, Dollars in the USA, the Pound Sterling in the UK, et al) needs to be complemented by currencies which are specifically designed to be cycle-dampening. The literature on cycle-dampening currencies and the experiences with them around the world are well known.
10. As accelerating stock market activity over recent years has speeded short-termism, two classes of stocks (Long Term and Short Term) should be immediately deemed to have been created for all publicly-quoted companies, and all existing stock holdings should be immediately considered to have been divided equally into these two classes. New stocks may be purchased only in equal quantities of Short Term stocks and Long Term stocks. Short Term stocks can be traded at any time. Long Term stocks may be traded only once a year on the date of purchase. This will eliminate "day trading" and so slow down the rate of economic activity, but at the same time enable growth to be much more solidly and healthily based. The exact proportions of Short Term and Long Term stock issuable and purchasable can be varied by global agreement from time to time, say every 3 years.
11. The 100 richest families in the world may be required by law to invest (invest, not donate! - whether through existing vehicles or through vehicles that develop for the purpose) 2% of their total wealth in democratic countries that are Least Developed. In addition, the 1000 richest families in each country may be required to invest 1% of their wealth in micro-enterprises in their own country, or to funds devoted to that purpose. Note that the intention is not to encourage micro-lending at the sorts of scandalous rates that are considered acceptable; rather, the intention is to encourage micro-investment.
12. Regulatory arbitrage around the globe should be immediately prevented through global frameworks, global minimum standards and global approaches to health, safety, pensions, minimum income, environmental protection, and tax (for the last, minima and maxima can be established depending on the level of achievement of a country). If a level playing field cannot be established around the world straightaway, there should at least be rational and agreed principles on which different levels of playing fields are recognised and established from time to time.
CAVEATS: Whether or not any or all of these proposals find favour, the vast majority of people in the world would deem the following to be completely unacceptable:
- attempts to form a world government, and
- attempts to create a world currency.
This is because we view such things as constituting, or at least laying the foundation for a slide towards, global totalitarianism. The world has had 20 years of casino or jungle capitalism. On the rebound, there is a real danger that there will be a temptation to rush into authoritarianism.
Global stability and sound global growth are essential. But these can only continue on a secure footing if we conserve and nurture political, economic, fiscal, financial, business, social, religious, ideological and lifestyle freedoms around the world.
Yours faithfully
Prabhu Guptara Sphere: Related Content
In case you have wondered why the economic crisis continues to get worse in spite of all the medicine in the world from the best experts in the world, the reason is simple: we have the wrong diagnosis (that this is a liquidity crisis) and we are therefore administering the wrong medicine.
You will not only be tempted to put the interests of the USA first, you may well consider it your duty to do so.
However, from your Administration, a fresh impetus towards open markets would be most welcome. The alternative to free trade is protectionism, which will ineluctably result in conflict - or War.
The parallels to the end of the previous phase of globalisation, in 1873, are chilling.
Lead us not towards the same mistakes. Lead us towards a form of capitalism which includes the possibility of a humane future for everyone in the world by means of a global level playing field for capitalism.
The Achilles' heel of the current phase of globalisation was the WTO's deliberate avoidance of a level playing field in terms of health, safety, environment, pensions - indeed, minimum standards in virtually all areas. I admit that the problem was compounded:
_ because of the pre-existing tendency to debasing money ("inflation"); and,
- because of legalising the possibility of gambling with money meant for other purposes, without requiring anyone even to keep track of who was betting how much - and indeed whether they even had the money with which to bet.
The result is that the world faces an unprecedented crisis whose true dimensions are being systematically ignored or underplayed.
The heart of the global problem is not currency misalignment or inter-bank liquidity or toxic assets - these are all important, but the key challenge is the derivatives/hedge funds/ credit default swaps (CDS) industry, whose global overhang is $1,144 Trillion (or 1.14 Quadrillion). That is as much as 23 times the total quantity of actual wealth in the world - Global GDP only amounts to some $50 Trillion. Even if we mark such trades at 5% of their value, as is usual, that still makes these trades roughly equal to world GDP.
In other words, the mass of outstanding CDS/Derivative/ Hedge Funds cannot be supported by all the money that all the governments in the world can provide. As there is no registration of such deals, no one knows who holds how much of these "acid assets", no one knows who will be required to cough up massive sums of money at what point, and whether such a person will have the capacity to pay or borrow such massive amounts. That is why not even banks trust other banks, let alone companies or individuals.
Moreover, in view of the current low appetite for long-term bonds, it is not at all clear whether even governments will be able to raise the quantities of money that have already been promised by them. So it is possible that some 30 countries are already bankrupt or well on the path to bankruptcy.
Much more innovative and substantial action is therefore needed. Any analysis of the contemporary phase of globalisation (the last 20 years or so) shows that our global economic system suffers from alarmingly large booms and busts. These may be inevitable, but intelligent ways are well established in the research literature for smoothing both booms and busts. High growth is always politically attractive, but it is much more important for growth to be sound, otherwise the illusion of so-called growth is quickly exposed as being hollow.
Here, therefore, are some key proposals:
1. As the purpose of CDSs was to provide insurance, and it is clear that insurance cannot in reality be provided by these at present, all CDSs should immediately be declared illegal, and the challenge of the actually-existing non-insurance should be met by government commitments to provide minimum insurance, but no more - that is, insurance that would enable all companies that were "going concerns" (say, at the end of September 2008) to continue trading. The initial amounts invested, provided those were before say 30 December 2007, could be returned to the original investors. The consequences for governments and for companies need to be worked out in detail but those could be good broad principles on which to act, essentially unwinding as safely as possible the huge industry which should never have come into being in the first place, at least on this sort of scale.
2. Derivatives and hedge funds have two purposes: (a) to provide insurance and (b) to provide speculative gain. The first function should, in accordance with item 1, also be taken over on a similarly minimum basis by governments, while all hedge fund and derivative activity which was oriented towards speculative gain should be immediately declared illegal, and compensation should be provided to the extent of returning the amounts originally invested.
3. All future speculative financial activity (hedge funds, derivatives, CDSs...) should be regulated by means of (a) standard templates (developed by the financial services industry) which provide transparency, measurability, gradeability and accountability, and (b) registration on, and sale exclusively through, recognised exchanges. At least seven global exchanges need to be established and maintained by law: competition is an important principle to uphold, specially when the scale of activity is so enormous.
4. The different types of financial activity (insurance, commercial banking, retail banking, investment banking, asset management...) should be separated by new global laws, so that speculation cannot be carried out with money originally supplied for other purposes. Certainly leveraged betting should be banned.
5. In order to make rescues of companies by governments viable, no company's turnover should be allowed to grow to a size of more than 0.5% of the GDP of the country where it is registered. As soon as any company is within 20% of that range, it should be required by law to start planning to spin out parts of the company; if a company does not do so, the national authorities must intervene with such plans - which will in any case go into effect as soon as company size does arrive at the borderline.
6. Countries within the UN, the WTO, Bank of International Settlements (BIS) and other such global bodies should agree to avoid printing more money than is justified by their GDP. Debasing a currency can provide a short-term spurt to an economy, but sound money is essential if solid growth is to take place. Any country violating this principle should be considered to have disqualified itself from belonging to the community of civilised countries with whom trade is possible.
7. Financial institutions (FIs) currently lend 12 times (or more) of the amount they actually have in money deposited with them. The greater the proportion that they lend, the more vulnerable they are to lack of depositor confidence at any time, and the consequent possibility of bank runs. FIs may therefore not lend more than 6 times the amount of deposits they hold at any one time. The rate of credit growth should always be below the rate of GDP growth for every country within the BIS, WTO, and similar treaties. Whenever the rate of growth of credit in a country comes within 20% of the rate of its GDP growth, the amount FIs may lend should immediately drop to 5 times what they have in deposits. Contrariwise, when the rate of GDP growth slows to 2% or less, the amount that FIs can lend should be increased to 7 times what they hold in deposits. If the GDP growth rate drops to 1% or less, the amount that FIs can lend should be increased to 8 times deposits. The intention of such a policy is to be counter-cyclical and to be well within safety margins, so that it would be unnecessary for FIs to be rescued by governments. Variable lendable quantity is an important but ignored lever, in addition to the equally-important but highly-attended-to-lever of interest rates, in order to influence debt, economic activity and sound growth within the global economy.
8. Tax and other positive and negative incentives should be used to discourage credit-based growth for individuals, families, companies and countries. Instead, investment-based growth should be encouraged.
9. The current monopoly of currencies (Yen in Japan, Dollars in the USA, the Pound Sterling in the UK, et al) needs to be complemented by currencies which are specifically designed to be cycle-dampening. The literature on cycle-dampening currencies and the experiences with them around the world are well known.
10. As accelerating stock market activity over recent years has speeded short-termism, two classes of stocks (Long Term and Short Term) should be immediately deemed to have been created for all publicly-quoted companies, and all existing stock holdings should be immediately considered to have been divided equally into these two classes. New stocks may be purchased only in equal quantities of Short Term stocks and Long Term stocks. Short Term stocks can be traded at any time. Long Term stocks may be traded only once a year on the date of purchase. This will eliminate "day trading" and so slow down the rate of economic activity, but at the same time enable growth to be much more solidly and healthily based. The exact proportions of Short Term and Long Term stock issuable and purchasable can be varied by global agreement from time to time, say every 3 years.
11. The 100 richest families in the world may be required by law to invest (invest, not donate! - whether through existing vehicles or through vehicles that develop for the purpose) 2% of their total wealth in democratic countries that are Least Developed. In addition, the 1000 richest families in each country may be required to invest 1% of their wealth in micro-enterprises in their own country, or to funds devoted to that purpose. Note that the intention is not to encourage micro-lending at the sorts of scandalous rates that are considered acceptable; rather, the intention is to encourage micro-investment.
12. Regulatory arbitrage around the globe should be immediately prevented through global frameworks, global minimum standards and global approaches to health, safety, pensions, minimum income, environmental protection, and tax (for the last, minima and maxima can be established depending on the level of achievement of a country). If a level playing field cannot be established around the world straightaway, there should at least be rational and agreed principles on which different levels of playing fields are recognised and established from time to time.
CAVEATS: Whether or not any or all of these proposals find favour, the vast majority of people in the world would deem the following to be completely unacceptable:
- attempts to form a world government, and
- attempts to create a world currency.
This is because we view such things as constituting, or at least laying the foundation for a slide towards, global totalitarianism. The world has had 20 years of casino or jungle capitalism. On the rebound, there is a real danger that there will be a temptation to rush into authoritarianism.
Global stability and sound global growth are essential. But these can only continue on a secure footing if we conserve and nurture political, economic, fiscal, financial, business, social, religious, ideological and lifestyle freedoms around the world.
Yours faithfully
Prabhu Guptara Sphere: Related Content
Tuesday, November 04, 2008
India's place in the community of nations
As our people seem incapable or unwilling to do anything systematically to raise the level of our country, it is sad to us continuing among the unsuccessful nations.
According to the just-released Standards Compliance Index, which ranks a country’s compliance with the TwelveKey Standards for Sound Financial Systems (Standards and Codes), India ranks 47th! That is below such countries as Brazil, Chile, Kazakhstan, Romania, Thailand, and even Colombia!
In the Business Indicator Index, India actually ranks 71st, with only the following countries worse off: Bolivia, Bangladesh, Indonesia, Cameroon, Syria, Algeria, Vietnam, Thailand and Iran!
The Business Indicator Index ranks a country’s overall political, economic, and business environment.
For full details see: http://www.estandardsforum.org/ Sphere: Related Content
According to the just-released Standards Compliance Index, which ranks a country’s compliance with the TwelveKey Standards for Sound Financial Systems (Standards and Codes), India ranks 47th! That is below such countries as Brazil, Chile, Kazakhstan, Romania, Thailand, and even Colombia!
In the Business Indicator Index, India actually ranks 71st, with only the following countries worse off: Bolivia, Bangladesh, Indonesia, Cameroon, Syria, Algeria, Vietnam, Thailand and Iran!
The Business Indicator Index ranks a country’s overall political, economic, and business environment.
For full details see: http://www.estandardsforum.org/ Sphere: Related Content
Saturday, November 01, 2008
Is it possible to defend Credit Default Swaps?
On Reuters.com today, I see an attempt to defend Credit Default Swaps (CDS) titled "Demonization of CDS mis-states real role in crisis".
If I recollect aright, I have earlier explained on this Blog that CDS have two roles. First, they have an insurance function, and are used to protect against the risk of a company, government or other borrower not paying back their debt. When a borrower fails, the party that buys the protection is eligible to be paid the full amount insured.
Second, however, CDS can be used to gamble, in that one can speculate on the likelihood of a company or government or other borrower not paying back their debt.
The defence of CDS on Reuters needs to be seen in the context of the size of this market: currently CDS are worth $55 trillion (that is, more than all the real wealth in the world). What one thinks of CDS therefore has huge consequences.
Rising to the defence of CDS is Professor Roy Smith of the Stern School of Business at New York University who, according to Reuters, is reported to have said that CDS are "nothing more than an insurance contract .... You can't have a good or an evil insurance policy." He completely ignores the fact that CDS can be used, and indeed have largely been used, for the purpose of incredibly large-scale gambling.
That is why some people (rather more eminent people than myself, but including myself), consider CDS as "evil", "acts of Satan" and "financial weapons of mass destruction". CDS have played a key role in spreading the risks of immoral mortgage-lending decisions globally. CDS have also encouraged banks and insurers to take on more risk than they could handle, sometimes causing not only their collapse but also threatening systemic collapse, such as when they affected Lehman Brothers or Goldman Sachs. The latter had outstanding leveraged bets (such as CDS) worth more than $1Trillion, when its own capital base was "only" $43 billion.
Professor Smith, however, argues that the tool itself is not to blame for lax risk management.
"You could criticize demon rum, or anything that might serve some other purpose that which can be misused," NYU's Smith said. "There are lots of ways to abuse many things."
True. But we forbid juveniles from being able to buy rum and all other forms of alcohol, we don't have rum running free through the public water supply system, and we don't actually pay people to drink rum (don't forget that people were actually making huge sums of money from issuing CDS that they knew they could never honour).
If the abuse of some thing has huge global consequences, then it is right and proper to regulate who can buy or sell, how much they can buy or sell, and for what purpose they can and should buy or sell.
Like Professor Smith, I believe in free markets. But there is (or should be) a difference between a free market and a jungle.
You can have free markets that systematically ignore and subvert even existing safegaurds - as was the case in the global economy over the last decade and more. Or you can have free markets in line with rules and safeguards - like a football match or other sports or athletic event.
There is all the difference in the world between saying "May the better boxer win" and saying "Every murderer should be allowed to get away scot free". Sphere: Related Content
If I recollect aright, I have earlier explained on this Blog that CDS have two roles. First, they have an insurance function, and are used to protect against the risk of a company, government or other borrower not paying back their debt. When a borrower fails, the party that buys the protection is eligible to be paid the full amount insured.
Second, however, CDS can be used to gamble, in that one can speculate on the likelihood of a company or government or other borrower not paying back their debt.
The defence of CDS on Reuters needs to be seen in the context of the size of this market: currently CDS are worth $55 trillion (that is, more than all the real wealth in the world). What one thinks of CDS therefore has huge consequences.
Rising to the defence of CDS is Professor Roy Smith of the Stern School of Business at New York University who, according to Reuters, is reported to have said that CDS are "nothing more than an insurance contract .... You can't have a good or an evil insurance policy." He completely ignores the fact that CDS can be used, and indeed have largely been used, for the purpose of incredibly large-scale gambling.
That is why some people (rather more eminent people than myself, but including myself), consider CDS as "evil", "acts of Satan" and "financial weapons of mass destruction". CDS have played a key role in spreading the risks of immoral mortgage-lending decisions globally. CDS have also encouraged banks and insurers to take on more risk than they could handle, sometimes causing not only their collapse but also threatening systemic collapse, such as when they affected Lehman Brothers or Goldman Sachs. The latter had outstanding leveraged bets (such as CDS) worth more than $1Trillion, when its own capital base was "only" $43 billion.
Professor Smith, however, argues that the tool itself is not to blame for lax risk management.
"You could criticize demon rum, or anything that might serve some other purpose that which can be misused," NYU's Smith said. "There are lots of ways to abuse many things."
True. But we forbid juveniles from being able to buy rum and all other forms of alcohol, we don't have rum running free through the public water supply system, and we don't actually pay people to drink rum (don't forget that people were actually making huge sums of money from issuing CDS that they knew they could never honour).
If the abuse of some thing has huge global consequences, then it is right and proper to regulate who can buy or sell, how much they can buy or sell, and for what purpose they can and should buy or sell.
Like Professor Smith, I believe in free markets. But there is (or should be) a difference between a free market and a jungle.
You can have free markets that systematically ignore and subvert even existing safegaurds - as was the case in the global economy over the last decade and more. Or you can have free markets in line with rules and safeguards - like a football match or other sports or athletic event.
There is all the difference in the world between saying "May the better boxer win" and saying "Every murderer should be allowed to get away scot free". Sphere: Related Content
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