Back with a bang?

Green shoots notwithstanding, I begin to wonder if we have the collective strength to lever ourselves out of this mess. The experts have certainly started speaking of a recovery. Goldman Sachs has shown us again – that they have whatever it takes to survive ups and downs. The questions being asked now are about the shape of the recovery.

Certainly not the bang that we all hoped for. Sharp downturn, sharp upturn ‘V’ shaped recovery, it is not. Paul Krugman in an interview today spoke of a ‘W’ shaped recovery – where we see things get a bit worse before they get better. This is probably more realistic than the previous prediction of a long slow ‘U’ shaped recovery pattern.  Just a little reminder – the letter is a combined letter – made of a ‘double U’ (not a combined V), the recovery too is likely to be the same.

There are signs of demand picking up in some sectors. Among other things that are seen as leading indicators such as real estate and gold, I tend to watch shipping rates. These have finally seen a bit of an upturn indicating a modest increase in international trade, albeit one way. The summer sales in the UK have been better than was feared. Demand data across the world sends mixed signals. China seems to be holding its end up. Investments are still largely government led – therefore a series of promises. Hope again rests on the BRIC countries.

For once, contrary to my instincts, I beleive that the answers to this tangle lies in the small picture. It is the time when we will have to depend on micro-projects, micro-finance and micro-entreprenuers to seize every mico-opportunity. This does not exclude the big players – but it does mean that they need to be able to spot the small gaps and opportunities that they would have ignored in better times. We live in times when we cannot afford to miss the smallest opportunity.

It is time for the Dunkirk strategy again. A flotilla of little ships to the rescue. And we survive to fight another day.

Anti protectionism

 

Our biggest fear today should not be  ’how long will the recession last?’

What we should fear is protectionism as these are like many other indulgences – feel great in the short term but are harmful in the longer run and for the larger self. A bit like chocolate and alcohol, they are addictive too, and can lead to greater evils – in this case jingoism. Unfortunately, protectionism is a popular story, easily sold while the logic of comparative advantage across countries needs better PR. It will take much juggling and manouvering to get public opinion and policy makers to actively and publicly support what must be done.

In response to the global slowdown, governments have responded, albeit slowly to the symptons. They are curing the fever, not the disease. Most governments – at least the larger ones seem to have come up with the formula – protect your economic borders, give cash (ish) handouts and tax the future incomes of the nation.  How, but how can this be right? Why is this any different from the retail profligacy of the past few years? Is there virtue in the aggregation of unsustainable debt? Or is the securitisation of possible future streams of taxable incomes any different from what the banks have done?

While in an earlier blogpost I had argued that the government must – and indeed is the only entity that can – pump money into the economies to stimulate demand, I must say I am apalled at the way it is being done. Cash handouts at the retail level, incentives to buy houses and cars, subsidised interest rates…how is any of this sustainable. Or, to rephrase – is this the best use of the money (future taxes) to stimulate demand?

Given the mess we are in, governments and central banks will certainly have to dance the fiscal and monetary dance. There will be a series of  expensive stimulus packages followed by severe cutbacks and taxes. It is up to each sovereign government to decide the beat and the rhythm of this dance. This much is certain. What is interesting is what comes next in the decision tree.

The key question today really is – what should the money be spent on? Should governments use the money to close their borders (almost) and seek to stimulate local demand and local production? However populist this measure may be, it should be obvious to all that this is a very expensive way of doing things. To coin a soundbyte: a global problem cannot have a local solution.

Or should they, as I think they should, invest in the long term needs of the country. Investment in infrastructure, education, skills, productivity, innovation, research – all of these, among others will be the determinants of future success. Spending on these will also release funds into the economy. With good PR and public education campaigns (again, income for some), these investments can serve the dual purpose of riding out the storm and preparing for the good times ahead, while holding the rudder steady.

Will politicians have the guts to invest in the future rather than pretend to protect the present and steal from the future?

What are governments’working towards?

 

 

Niranjan Rajadhyakshya’s blogpost in Mint and the comments on that led me to respond with this:

 

“There is no doubt that governments have a larger role to play in the downturn, and their greatest contribution will be in filling the investment gaps left by the receeding private investors. I beleive that they will also have to support the gap in demand for services for a while too, while the economy finds its new rhythm and balance.

This is an opportunity for the governments to focus on re-examining their systems – physical, regulatory and at the policy making level. The recent frenzied pace had governments rushing to keep pace with the demand for each of these services,and the slowdown gives them an opportunity to do just that. The tools they use to do so must have the twin targets of supporting investments and creating demand while re-inventing these systems. The ultimate goal of course being sustainable long term (high) rates of growth (at least till we climb Maslow’s mountain!)

This begs the next two questions: ‘What needs to be done?’ and ‘How do you know it is working?’ Here I have to agree with myself and other commentators – Direct targets for fiscal policy can really only be set in terms of inputs. The results (phal) of these policies are based on complex inter-relationships, unpredictable and very difficult to measure. The correlation of any stimuli to growth may be measurable, the causality truly is not. Intermediate targets such as jobs, health (delivery numbers), education and skills initiatives are great examples of the categories of targets that can be measured. (The underlying assumption here being that there is a direct causal relationship between these measures and the goal – growth/living standards/happiness).

To add my tuppence and answer the original question at the very begining of your post: Should there be an explicit variable that they should target. Yes,it has to be explicit. They will be measured by other economies, by the press, by the people and if they are to be honest about their progress, they must let us know what they are working towards.

I add another question: Can it be a single variable? I think not. I think they (or some of us!) will have to work to creating a composite that is like a ‘balanced scorecard’ and I know that there are others like me who would love to take this forward.”

 

 

My question here is: What should this scorecard contain?  What are governments really working towards?

Of economists

How can you tell an economist apart from a normal person? Well, they answer every question with the words. ” It depends..”

True…economics is a behavioural science. You cannot expect a single answer as in physics or mathematics. Every issue is complex and will naturally have multiple solution sets. Honest economists will try to estimate the chances of each of these solutions. Economists in lobby groups, political parties or in need of funding will have to chose the path that is economically beneficial to them. If I were to read the opinions of and economist and beleive them without researching their affiliations, I would be a fool.

 

 

In response to: http://indianeconomy.org/2009/01/17/can-we-trust-economists/

How about a two-for-one on Jobs?

Here is a solution for our current crisis. Make Job sharing compulsory till the situation has stabilised. And make most businesses work 2 or even the whole three shifts, if they can afford to. And with expanding governments, maybe the lead should be taken by government departments.

This is probably too simple a solution to appeal to the policy maker’s sense of bombast. But if you think about it, it is not too simplistic. It is true to the Keneysian policies that brought us out of the previous depression. It provides work to many, and enough leisure to spend the money they earn. If designed properly, it will neither be inflationary nor should productivity suffer. It will certainly hold off the recessionary boss for a while. (Now for a cheat that tells us where to deal the lethal blow to the big boss!)

Obama in his inauguration speech has already hinted at a cut in hours or wages to hold off job losses. This is a sacrifice that he expects workers to make, and this is something that has certainly been successful in the past. While this may have worked for individual businesses, will this necessarily work for the entire system?

I think the JOb share solution is neater, for all the stake-holders in our economic system. It works well at the micro and macro level for the economy, it works well at the personal level too. Businesses will moan, as they do for every change they have to go through – unless it makes more money for the big bosses. And yes, it will have its detractors too.

What will compulsory job sharing achieve? For the economy as a whole, it will certainly reduce the number of unemployed people – people who are currently in distress and worried about their next pay cheque. It will also stimulate demand for both goods and services. A larger number of employed people would logically drift towards more value added consumption. For example: sales of work clothing, ready meals, lipstick, ties, school pick up and drop off services etc. should improve. Since a large proportion of people would be working part time, the demand for leisure services should improve too.

On the supply side, I suggest that most businesses and governments be available to its customers, just like supermarkets – 24 hours a day. Or at least 16 hours a day. I understand that it is possible that many businesses cannot afford to do this, unless there is clear demand for out of hours services. I will wait for the day when ‘out of hours’ becomes a redundant term – for I believe that businesses will not shrink from more, if the demand beckons. Maybe government can start this one off. I would love to see my tax money go towards funding part time jobs for better, faster and always-on government services. At least it is better than giving it away as a hand-out to irresponsible bankers.

Job shares can only be good for better work life balance too. Everybody works a bit less, and has a bit more family time. Back to good old wholesome family time and away from the time when bribing family for time spent away had become the norm. Sure, everybody has a little less money, individually. But let us demolish the sexist bastion once and for all, and maybe have all adults in the family work for at least part of the time. Psychologists will point out the benefits of adults being engaged outside the house, especially if part time. Apart from bringing the indulgence cash home, it improves social life, keeps stress and depression at bay, improves self confidence and makes for happier families. you may rightly point out that having two people do sort-of-part-time jobs is not the same as having a main bread earner who is doing very well, thank you very much. True. But in times like these, nothing is the same as before.

What about businesses? Are they going to like this? Well, it might not be a bad idea to have a trained back up for each job, would it? It might not be a bad idea to have somebody take on the urgent jobs the day an employee pulls a sickie. It might not even be a bad idea to have two people thinking through the same work ideas and processes, competing with each other – or co-operating with each other. If done right, it may even reduce the stress levels at work. And, it would not even cost the business any more!

But what about those of us who think that we are indispensable at work? My job cannot be split by time, surely. Of course, I can be replaced, but you cannot really make this a job share! Well, you may be right. But most of you will not be. Many jobs are easily split – either as a time share, or as a sharing of tasks.  Think back to the industrial revolution – this is what built our modern booming economy. It is time to innovate and take it further. Many jobs are already on job-shares: factory workers on shifts, nurses, station staff, bus drivers, administrators. Many others can be split easily – teachers, doctors, lawyers (they work by the hour anyway!) etc. 

I hear howls of protest: teachers must have a relationship with the students! Consultants must know the clients! Advisors are always on the job – it cannot be divided! I work with a passion – you cannot split my job! True, some jobs will be difficult to split. I cannot see my MP doing a job-share (but am happy to be proved wrong here). Teachers – they are overloaded anyway, are’nt they. Would they not have an easier life doing a bit less? Well, they are not the best paid workers, so splitting this up, that too compulsorily, may be extremely challenging. Yet, there is an opportunity to think this one through and make it work. The year my son had two class teachers on a job share was the year everyone in that class excelled.

A large part of our crisis has occured because we have allowed inefficiencies to creep into our businesses. We run some businesses only because they already exist, not because they make business sense. I see this, now, as a time to rethink our processes, our productivity and our profitability. And therefore our viability. And forcing a discussion on job shares will do just that – make us think of what we do, why we do it, whether it can be done better/faster/cheaper. And we get a two-for-one, even for the discussion.

 Like  every big policy move, the devil is in the detail. There are a myriad opportunities to get this wrong. Of course, it cannot be made compulsory. But there are such strong positives to this – that I believe that we should make the discussion compulsory. Raise the potential!

Of Printing Money or delivering value

The Satyam saga, just as the Madoff scandal and the Enron collapse is a case of simple greed. No more, no less. And yet the timing is so unfortunate that all of us suffer more than we thought we would. It deepens the current crisis, undeniably. There is even less trust than there was previously. And of all the things that has dried up the fastest, it is trust.

 

For credit is nothing but trust that the money that you are handing over to the other person will be repaid. These days people have stopped talking about return on capital and are more concerned about return of capital! I wonder how long it will take for us to take it one step forward to currency. Again, currency is nothing more than a promissory note from the Central Bank of each country. It used to be backed up by real gold reserves but not any more.

From lack of trust in our biggest retail banks to lack of trust in governments and the central banks is not a very big step. Especially when governments seem to have tried and failed in almost all their moves. Interest rates are at their lowest in the UK for 300 years. The rest of the capitalistic west is not faring much better. Nor are their bread and widget baskets – China and India. Western governments are larger than before, thanks to the crises, but so very much weaker under the burden of almost unserviceable debt, despite the low interest rates. So, what is next? Printing notes?

 

Sure, already been announced. Being done too. What does that do to the situation? It does provide temporary relief but will leave us with long term problems, if history is to be believed. Yes, the governments have the money to repay their debts. But they got this fresh hot money by borrowing from their own central banks. See the irony?  (Here is the brainteaser – how many layers of irony can you see?)

It is a terrible situation for these governments to be in – damned both ways, for their currency loses trust and therefore value in both situations. If they do not print money: they cannot repay their debts, they lose credibility and their currency becomes worthless. If they do print money, they release the inflationary monster and their currency slowly becomes worthless. Which one would you choose? Jhatka or Halaal?  The swift chop or buy yourself time to fix the mess?

 

And how will this mess be fixed?

Let me tell you a tale, a parable if you will. There was a merchant in distant Rambopur. He had a business trading goods. One day his customers realised that his goods were not too good, so they stopped trusting him. What can he do to rebuild this trust?

He went to his business guru, fell at his feet and said: Please help be build credibility again.

The Guru smiled kindly and said: For that you have to return what you have stolen. You promised them value, but delivered less than what you promised them. It is now time to show them some value.

And this time, you will have to invest – give them more value than you promise, give them value for free to reddress the balance. For a balanced world will spin towards equilibrium.

And the merchant understood.

Receeding Capitalism

The series of unfortunate events in banking, spreading to manufacturing, to job losses had to reach governments too. Governments, like the brave kings of yore have ridden in to the rescue. They have bought up banks, guaranteed deposits, secured pensions. Do not worry, your money is safe with us. (To discuss whether these governments are safe would border on political, which I declare out of the scope of this space).

For years it is these very governments that have prided themselves on being the vanguard of capitalism. Through the IMF they have declared large public sectors evil. They have made privatisation a condition of more funding in many emerging markets. Conditions there were similar – high debt, high public sector deficit, high trade gaps and high levels of unemployment.  Then, these conditions were chronic, and the solution was to shrink the size of the government. Now, it is ironic, that the same issues result in expanding the government. Did I hear that right?

 

So what happens to capitalism in this brave new world? Does it get redefined? Are free markets an unsustainable myth? Is equilibrium a mirage? Will there always be power and politics that controls the balance between safe and sorry, between creative and chaos, indeed between rich and poor?

 

They declared the death of communism a few decades ago and now capitalism is on the wane, for it has proved once again to be a false god. Will we forgive this once again and go back to being ruled by fear and greed, or shall we choose new gods to rule over us.

Or maybe, is it just possible that we emerge into this world, where there is funding for every good idea, rewards for every honest saver and investor and security for every home while keeping freedom for every individual? If this sounds like a fairy tale, maybe it is, for it does not mention the dark underbelly of risk – where things go wrong.

I wonder, and this is just a thought, that if we did not deal with chunks of money, and dealt only with slivers, would things be different? We aggregated money traditionally only because of intermediaries who knew how to deal with them. Truly, in this day of web 2.0 (and growing), do we need these intermediaries at all? We need information, analysis, processes and transactions. But do we need these to be consolidated in financial intermediaries? Or can we throw this yoke off now?

To inflate or to deflate…

Damned if you do and damned if you don’t, spend money that is.

I bet there are many heads of government sitting across their finance advisors these days asking this question, “So, are you asking me to cut spending or increase it?” And I can bet that they do not get a clear answer. I bet that their answer goes something like this, “well, if you…then…,  and if you….”

Its like this: if the governments spend money on great public works or whatever, they will be doing some good. They will be providing employment, they will be putting money in the economy, they will be supporting businesses (both by buying goods and services for these great works and the salaries of their new staff who can now buy their goodies), and they will be earning taxes. The wheel goes round and round.

Sounds good, why don’t they do it? What’s the problem then? Here is the biggie: where does the money come from? Most governments too have debts (budget deficits), they do not have the money to spend. Can they not borrow? Of course they can, but where are the big banks that used to lend them money – oh yes, I remember – being rescued by the governments!

There is no money. Its not as if the government can just print more money!?…???..Can they? Yes they can. But should they do that knowing that if you have too much money chasing the same production/goods, then the prices will surely rise. That is inflationary. Which of course will take us right back to the begining of the problem.

Okay, so we do not like the spend money (inflationary) idea. How about what the other guys are saying – cut costs. All of us know we are in this mess only because we spent too much when we did not have the money. Fine, sorry. Lets change that now and cut spending.

Wish we could do that – but now that is even more dangerous. With all the job losses, there just isn’t enough money to keep the wheels turning. If the government cuts their own spending, and encourages others to do the same, there will be even more businesses in trouble and more job losses.  Recession.

How about a bit of this and a bit of that?  Do a bit of the support prices thing, and a bit of the cost cutting thing. Spend a bit, give businesses a boost, then when that is done, then work on the inflation. Can that be done? I think, that is what will have to be done eventually. But how it will be done is a very tough question.

Too much of or too many swings in the markets will only confuse everybody. The press will support the hue and cry, the stock markets will be confused and will tumble again, the consumers will start hoarding and businesses will not know whether they are coming or going.

This is a very tricky situation. I would feel sorry for the people in charge of governments if I was not so angry with them. They are responsible for a car with punctured wheels – if they inflate too much, the tyres could explode; if they allow too much deflation, then we wobble and cannot move on. Unforunately, they do not have a good reat time gauge to measure our sustainable well being, so they really cannot know whether their actions are doing some good or harm. But they have to try.

Take it to a garage, you say? Where are the experts? Don’t they have the answers. In theory they do. Among the many answers, there is one called reflation, and they can talk for hours about it and its nuances. It is a very useful framework, and the real test of it is now – when you have to actually do it. Its easy to say it, far tougher to show and do.

This is a game of skill, finesse and timing.  And our livelihoods are at stake.

 

 

(c) meetasengupta

Trendz

Ever noticed how tough economic times make us behave in certain patterns that do not seem logical at first sight?

Yup, hemlines ride up and all the way down, indicating boom and bust cycles, as was noticed in the 1920s and then the 1960s.  Some even believe that fashions can be used as a predictor of economic cycles, though I am not sure I agree with the logic in the linked article. They say that people feel more insecure in tough times and tend to dress more demurely. Less flashy = less cash, kind of logic.  While I understand the thinking behind covering up and feeling safe inside a cocoon of clothing as a response to insecure economic times, I do not see how it represents less cash flashed. I have seen some really expensive long dresses, and some really expensive short ones. I do not see the point here.

A Wharton economist called George Taylor even created a hemline index in the 1920s to correlate the Dow Jones Index with hemlines. I do not know whether he started off trying to demonstrate nonsense correlation. This is when stuff unrelated to each other shows high correlation levels, though completely meaningless. A good example of this would be the sun rising everyday and my doing my paperwork. The correlation would be a perfect negative, one always happens (thats the sun!) and the other never does. But the there is no relationship between these two. Anyway, Taylor discovered that the stock index was correlated to hemlines, and this has been proven time and again in the 20th century. I would be interested to hear of (serious) work done on establishing causality here. Does it only work one way? Can I and the sisterhood raise my hemline and ward off the bad times? Should kilts be the order of the day?

At the same time, using hemlines to predict economic cycles is a fascinating art. Unfortunately, while it tells us what is goong to happen, it does not tell us when it is going to happen. Not very useful for stock-picking then.

But there are things that we tend to consume more of in tough economic times. According to a New York Times article, we tend to prefer slow songs, laxatives and beans (any correlation between beans and laxatives?). Chocolates, dry goods, candy, beer and pasta sauce are supposed to be pretty recession proof. Stock pickers, anyone?

Hard economic times have been better for health in the Western economies. Apparently, Britain was at its healthiest after the war and rationing years. Butter, cheese and meat were rationed, people had to eat limited quantities of food. Everybody had to work harder, including physical work – involuntary physical exercise led to fitter bodies. This time round we do not have rationing, but higher food prices have led many of us to cut back on our consumption. This may be a good time to, like me, make some healthy economic decisions.

 

(c) meetasengupta

Fear and Greed

Fear and Greed

 

There was a time, I admit, when I was an investment banker. And the one lesson I took away from there is that the world of money is controlled by two emotions – Fear and Greed. Economic models are all very well, as are the sophisticated financial models that predict markets that only rocket scientists could understand. (By the way, it is true, the myth that rocket scientists have contributed to financial market models). But every trader at our desk knew, that whatever the models said, the only way to predict which way the market would go was to be an astute judge of emotions.

 

So, how did they get it right all the time? They did not. Nobody can be a perfect judge of emotions, even their own, let alone an entire markets’. Ever been in a relationship? Yup, see what I mean? As long as you win more than you lose, you are doing well. If you win more than 80% of  the time, you are one of the greats. If you win all the time, you are a star for now, but every star falls sometime.

 

Is that what was happening in the markets? Were our billions being traded, nay gambled, on somebody’s opinion of whether fear would rule the day or greed?

 

I believe so. And I do not disapprove at all. For years, when things were going our way, neither did we. Now, now, gotta be fair.

 

What is really important here and now is to realize this and build it into our future. We cannot let this happen to us again. If we do not know what went right and what went wrong, we will never be able to make things go right for us. Economic rationality is not all, which is why economists came up with bounded rationality. (more on that later, if anybody is interested). 

 

We need to be able to build emotions into financial decision making models – like impulse, inertia, temptation, greed, peer pressure. All of these have played a role in our financial decision making at some time or the other. The big question is how.

Watch this space, I’ll think of something(!)

 

(c) meetasengupta