Lessons from the East
West, Western government, Western culture always think and believe in Protecting Self interests and they believe if everyone thinks of their interest, the collective interest will be taken care of. For them this is virtuous. However, for India, the underlying belief is to have Unity at the Core or having Ekatmata or being Ekangi.
NewsBharati 04-Aug-2022 12:34:52 PM
Total Views |
Lessons from the East - The US is in recession, the World is in Stagflation, & India is in growth mode
The Manu Smṛiti, also known as the Mānava-Dharmaśāstra or Laws of Manu, which Lord Brahma, the creator originated and passed on to his son Manu states, that one of the imperatives for Sustained and Independent Life is Independence or Self - reliance.
Chapter 4, Verse 160 of Manusmriti states:
सर्वं परवशं दुःखं सर्वमात्मवशं सुखम् ।
एतद् विद्यात् समासेन लक्षणं सुखदुःखयोः I
Sarvaṃ paravaśaṃ duḥkhaṃ sarvamātmavaśaṃ sukham,
Etad vidyāt samāsena lakṣaṇaṃ sukhaduḥkhayoḥ I
Meaning: All that is dependent on others is painful; all that is dependent on oneself is pleasing; he shall know this to be, in short, the definition of pleasure and pain.
What holds good for inner happiness, holds good for life, what holds good for life, holds good for the economy, what holds good for the economy, holds well for the nations.
Seldom does one learns from the past, from the mistakes, from the blunders one had created in the past.
What is being witnessed today is the consequence of such un-learnings and blindfoldedness that some of the most developed nations did and continue to pursue.
The unfortunate part is that the world is under the wrath of inflation and the common man in the west is struggling, battling combating for necessities.
This surely sounds like an exaggeration but facts state the same.
The Present State
The flagbearer of Capitalism in the World, the United States of America presents a similar picture. In March – April 2022, The U.S. Department of Agriculture (USDA) estimated that as many as 30 million adults and 12 million children are living in food-insecure households.
In the U.S. Census Bureau Household Pulse Survey, conducted for the period June 29th to July 11th, 2022, ~ 20% of the households responded that they often don’t have enough to eat or sometimes not enough to eat.
The situation in Western Europe from Italy to Germany also narrates a similar picture. The lights of Berlin Cathedral are being switched off at night to save precious energy. Food inflation is surging and at the same length is the energy crisis deepening. The Russian-Ukraine war has only aggravated the problem and has not solved it.
Never an illness turns acute if symptoms are not ignored and if corrective measures are undertaken with prudence to curb, cure or heal it on time.
This kind of inflation and thus the woes in the western world cropping out of it is not taking place for the first time. 40 years back, the US witnessed similar hyperinflation and a series of rate hikes (The US Fed rates jumped from 4.75% in Nov 1976 to a whopping 20% by Dec 1980) were initiated by the Fed to induce a deep recession shooting inflation down.
The obvious question that comes to one’s mind is whether what worked in the 1980s will be applicable now and whether the US Fed is playing by the same playbook.
The Threat
The problem this time is three-fold.
1. Near Zero Interest rates, now surging - The interest rates in past or during past catastrophes or financial calamities have never reached a point of Zero or 0.25%. These low rates created precedence for a very low-interest rate regime. Once a market is used to low-interest rates or negligible borrowing costs, any significant hike from such a low base can and will impact the EMIs, and the ability of households and corporate to bear the burden of this multifold jump in interest rates and rise in EMIs. (The advent of the Pandemic, in April 2020, forced the Fed to bring rates to 0.25% or effectively ZERO)
2. Unprecedented Leverage both of the government and the Household - Since 2008, after the Great Financial Crisis, unprecedented sums of liquidity have been introduced into the system through Quantitative easing or buying back of toxic bonds. This liquidity is nothing but National or Public debt or borrowings of the Fed. In 1980, the National Debt to GDP for the US stood at 32% whilst at the end of 2021, this number was 124%.
What it simply means is that the US government and thus the public has a humongous amount of debt on their head to be paid back. The US household debt also narrates the same story where the US Household Debt to GDP jumped from ~ 42% in 1980 to 78% by the end of 2021.
This means both households and the government are leveraged more than ever. Till now, they enjoyed huge sums of debt at obnoxiously low-interest rates, creating a scenario of positive leverage and borrowed consumption.
With now interest rates rising, and inflation rising, the ability of households to pay the increased EMIs on Credit Cards, Student loans, Consumer loans, home loans will be a question mark.
On the other hand, the US Fed needs to pay higher interest rates on US bonds and the US treasuries, when it borrows money from the market. With the rising interest rates, the US economy surely is slowing down or technically is already in recessions (The US economy shrank by annualized 1.6% from Jan to March 2022 and shrank by annualized 0.9% from April to June 2022).
A slowdown in economic activity means a reduction in tax revenues for the US government putting even further pressure on its budgets, to pay interest.
The question then arises can rising interest rates put US householders and the US government in a debt trap?
3. Supply-side Inflation - The biggest and the most severe problem or the core of the problem is a disruption in the supply chain. With the advent of covid, one of the biggest trading partners for the US, China, saw a surge in demand for goods (manufactured in China) as services (rendered in the local country, the US) were clamped down during covid.
Shipping lines faced the heat of restrictions and thus China which constitutes nearly 20% of the US imports and nearly 25% of the US non-imports (if one excludes the import of petroleum products) saw a jump in freight costs by 700% to 800%.
Furthermore, the world has opened up whilst China restrictions continue to exist on account of covid 19.
China purposely wishes to keep the economy & country under lockdown as a locked up economy leads to a reduction in economic activity and with reduced economic activity, demand for household and private sector debt remains subdued, thus cooling the leveraged economy.
(China’s private sector debt has seen massive default on account of the collapse of the real estate market in mainland China. A large number of Private sector businesses and households have invested their hard savings in the real estate business with mammoth interest earnings and the value of those investments has nosedived as big real estate borrowers have defaulted).
With China, being the manufacturer or supplier of the World as well as to the West and Russia being the supplier of Energy to the West as well as supplier of fertilizer to the US, Inflation is something that is not looking to cool off.
Once a nearly self-sufficient Western Europe in terms of energy shifted quickly to EVs and renewables or one should say on the imports from Russia.
(The logic of this shift seems to be convoluted where one states that this shift is on account of fighting against climate change. Irrespective of whether oil production or fossil fuel production happens in one country or another country, the carbon emissions will continue to impact the ozone layer everywhere. Getting dependent on another country for energy and showcasing that one’s country is free from fossil fuel emissions does not seem to be wise.)
The Solution
How and what India did do differently?
The logic of Western classical economists was welcoming then. Bring the interest costs to Zero, and let governments borrow more money at Zero or negative or near zero rates.
Flush this money to drive demand and keep businesses going, keeping employment, earnings, and income levels high.
As earnings of both households and the private sector will first sustain and then grow, the tax revenues will significantly jump after seeing a slight dip.
Since there is practically no cost of borrowing, thus there is no downside in having incremental borrowing and as the economy picks up, tax collections get buoyant, the excess taxes collected will be utilized to pay off the debt. Everyone will remain happy and they all will live happily ever after.
When covid struck, there was fear, there was chaos, there was turmoil, and this seemed to be the best fit for people appeasing, puppet politicians.
The war one prepares for is never the war one gets to fight.
The India Strategy
India also increased its fiscal deficit, which means borrowing incremental money but instead of dolling cash handouts, money was spent on three avenues.
a. Building Atma Nirbhar Bharat - Made in India. Building things and goods for India in India and for the world.
The first step was to replace imports with things and goods assembled in India and then manufacture in India.
But the challenge was that the government can't manufacture using public funds as running businesses is not the core activity of the government. Also when there is uncertainty, unpredictability, and ambiguity which was the case during covid, private capital goes back home and stays safe.
To make things worse, there was no recent precedence as the last such pandemic occurred a century back in 1918 and 1919 killing nearly 20 million people and infecting ~ 500 million when the world population was ~ 1.8 billion. Thus the scale and period of the problem were neither known nor could have been predicted.
Then came the series of incentives for the private sector to open purses, remove fear and make for the World. A small nudge at the right time can propel people to act. PLI schemes or Performance linked incentive Schemes were introduced across 10 core sectors which were then increased to 14 sectors providing the right set of motivation for private capital to participate in Make in India and putting India on the manufacturing map of the World.
b. Building Infrastructure to create multiplier effect - Bharat came up with building and expanding infrastructure during the covid period. One is aware that the demand inducement can happen via monetary measures or reduction in interest rates or fiscal measures by spending on developmental expenditure. Bharat chose both in a measured manner but giving a Philip to Infra spend and infra construction. Roads, Bridges, and Highways were built in record time at record speed and they continue to be built even after the Pandemic is over creating a multiplier effect.
c. Building a Healthy India & creating Food Safety - Nutrition and medical aid programs were instituted for the benefit of millions and they continue to be run till today. Where the medical infrastructure in most western nations collapsed during the pandemic, India sustained and expanded the infrastructure as demand and need for it increased.
The Why
The core difference in outcome is on account of the difference in approach. The approach that distinguishes between the thinking of East and West. West, Western government, Western culture always think and believe in Protecting Self interests and they believe if everyone thinks of their interest, the collective interest will be taken care of. For them this is virtuous.
However, for India, the underlying belief is to have Unity at the Core or having Ekatmata or being Ekangi. For India, everything is conjoint and connected and hence one has to solve for all parts, and if any part of the same body is left unattended, the pain will be felt across.
This philosophy or this feeling of oneness has been and continues to enable India to cross and overcome any challenge, any catastrophe any calamity with flying colors.
The Manu Smṛiti, also known as the Mānava-Dharmaśāstra or Laws of Manu, which Lord Brahma, the creator originated and passed on to his son Manu states, that one of the imperatives for Sustained and Independent Life is Independence or Self - reliance.
Chapter 4, Verse 160 of Manusmriti states:
सर्वं परवशं दुःखं सर्वमात्मवशं सुखम् ।
एतद् विद्यात् समासेन लक्षणं सुखदुःखयोः I
Sarvaṃ paravaśaṃ duḥkhaṃ sarvamātmavaśaṃ sukham,
Etad vidyāt samāsena lakṣaṇaṃ sukhaduḥkhayoḥ I
Meaning: All that is dependent on others is painful; all that is dependent on oneself is pleasing; he shall know this to be, in short, the definition of pleasure and pain.
What holds good for inner happiness, holds good for life, what holds good for life, holds good for the economy, what holds good for the economy, holds well for the nations.
Seldom does one learns from the past, from the mistakes, from the blunders one had created in the past.
What is being witnessed today is the consequence of such un-learnings and blindfoldedness that some of the most developed nations did and continue to pursue.
The unfortunate part is that the world is under the wrath of inflation and the common man in the west is struggling, battling combating for necessities.
This surely sounds like an exaggeration but facts state the same.
The Present State
Fareshare, a charity in the UK mentions that ~ 7 million people in the UK are struggling to afford to eat. This number represents 1 in 10 of the UK’s population. Another, global Internet-based market research and data analytics firm YouGov via their research conducted in April 22 found that more than one in 10 households, or 6.8mn adults, had had smaller meals or lesser meals than usual or skipped meals in the past month because they could not afford or access food.
The flagbearer of Capitalism in the World, the United States of America presents a similar picture. In March – April 2022, The U.S. Department of Agriculture (USDA) estimated that as many as 30 million adults and 12 million children are living in food-insecure households.
In the U.S. Census Bureau Household Pulse Survey, conducted for the period June 29th to July 11th, 2022, ~ 20% of the households responded that they often don’t have enough to eat or sometimes not enough to eat.
The situation in Western Europe from Italy to Germany also narrates a similar picture. The lights of Berlin Cathedral are being switched off at night to save precious energy. Food inflation is surging and at the same length is the energy crisis deepening. The Russian-Ukraine war has only aggravated the problem and has not solved it.
Never an illness turns acute if symptoms are not ignored and if corrective measures are undertaken with prudence to curb, cure or heal it on time.
This kind of inflation and thus the woes in the western world cropping out of it is not taking place for the first time. 40 years back, the US witnessed similar hyperinflation and a series of rate hikes (The US Fed rates jumped from 4.75% in Nov 1976 to a whopping 20% by Dec 1980) were initiated by the Fed to induce a deep recession shooting inflation down.
The obvious question that comes to one’s mind is whether what worked in the 1980s will be applicable now and whether the US Fed is playing by the same playbook.
The Threat
The problem this time is three-fold.
1. Near Zero Interest rates, now surging - The interest rates in past or during past catastrophes or financial calamities have never reached a point of Zero or 0.25%. These low rates created precedence for a very low-interest rate regime. Once a market is used to low-interest rates or negligible borrowing costs, any significant hike from such a low base can and will impact the EMIs, and the ability of households and corporate to bear the burden of this multifold jump in interest rates and rise in EMIs. (The advent of the Pandemic, in April 2020, forced the Fed to bring rates to 0.25% or effectively ZERO)
2. Unprecedented Leverage both of the government and the Household - Since 2008, after the Great Financial Crisis, unprecedented sums of liquidity have been introduced into the system through Quantitative easing or buying back of toxic bonds. This liquidity is nothing but National or Public debt or borrowings of the Fed. In 1980, the National Debt to GDP for the US stood at 32% whilst at the end of 2021, this number was 124%.
What it simply means is that the US government and thus the public has a humongous amount of debt on their head to be paid back. The US household debt also narrates the same story where the US Household Debt to GDP jumped from ~ 42% in 1980 to 78% by the end of 2021.
This means both households and the government are leveraged more than ever. Till now, they enjoyed huge sums of debt at obnoxiously low-interest rates, creating a scenario of positive leverage and borrowed consumption.
With now interest rates rising, and inflation rising, the ability of households to pay the increased EMIs on Credit Cards, Student loans, Consumer loans, home loans will be a question mark.
On the other hand, the US Fed needs to pay higher interest rates on US bonds and the US treasuries, when it borrows money from the market. With the rising interest rates, the US economy surely is slowing down or technically is already in recessions (The US economy shrank by annualized 1.6% from Jan to March 2022 and shrank by annualized 0.9% from April to June 2022).
A slowdown in economic activity means a reduction in tax revenues for the US government putting even further pressure on its budgets, to pay interest.
The question then arises can rising interest rates put US householders and the US government in a debt trap?
3. Supply-side Inflation - The biggest and the most severe problem or the core of the problem is a disruption in the supply chain. With the advent of covid, one of the biggest trading partners for the US, China, saw a surge in demand for goods (manufactured in China) as services (rendered in the local country, the US) were clamped down during covid.
Shipping lines faced the heat of restrictions and thus China which constitutes nearly 20% of the US imports and nearly 25% of the US non-imports (if one excludes the import of petroleum products) saw a jump in freight costs by 700% to 800%.
Furthermore, the world has opened up whilst China restrictions continue to exist on account of covid 19.
China purposely wishes to keep the economy & country under lockdown as a locked up economy leads to a reduction in economic activity and with reduced economic activity, demand for household and private sector debt remains subdued, thus cooling the leveraged economy.
(China’s private sector debt has seen massive default on account of the collapse of the real estate market in mainland China. A large number of Private sector businesses and households have invested their hard savings in the real estate business with mammoth interest earnings and the value of those investments has nosedived as big real estate borrowers have defaulted).
With China, being the manufacturer or supplier of the World as well as to the West and Russia being the supplier of Energy to the West as well as supplier of fertilizer to the US, Inflation is something that is not looking to cool off.
Once a nearly self-sufficient Western Europe in terms of energy shifted quickly to EVs and renewables or one should say on the imports from Russia.
(The logic of this shift seems to be convoluted where one states that this shift is on account of fighting against climate change. Irrespective of whether oil production or fossil fuel production happens in one country or another country, the carbon emissions will continue to impact the ozone layer everywhere. Getting dependent on another country for energy and showcasing that one’s country is free from fossil fuel emissions does not seem to be wise.)
The Solution
How and what India did do differently?
When covid struck, the west including Western Europe, the US, and the UK governments were engaged in taking further debt on their balance sheet and disbursing free money and monetary incentives to induce demand.
The logic of Western classical economists was welcoming then. Bring the interest costs to Zero, and let governments borrow more money at Zero or negative or near zero rates.
Flush this money to drive demand and keep businesses going, keeping employment, earnings, and income levels high.
As earnings of both households and the private sector will first sustain and then grow, the tax revenues will significantly jump after seeing a slight dip.
Since there is practically no cost of borrowing, thus there is no downside in having incremental borrowing and as the economy picks up, tax collections get buoyant, the excess taxes collected will be utilized to pay off the debt. Everyone will remain happy and they all will live happily ever after.
When covid struck, there was fear, there was chaos, there was turmoil, and this seemed to be the best fit for people appeasing, puppet politicians.
The war one prepares for is never the war one gets to fight.
Covid ended and one was preparing for a buoyant economy and with a buoyant economy, tax collections and those taxes to be paying off the principal. And the Russian-Ukraine war arrived, derailing the entire plan.
The India Strategy
India also increased its fiscal deficit, which means borrowing incremental money but instead of dolling cash handouts, money was spent on three avenues.
a. Building Atma Nirbhar Bharat - Made in India. Building things and goods for India in India and for the world.
The first step was to replace imports with things and goods assembled in India and then manufacture in India.
But the challenge was that the government can't manufacture using public funds as running businesses is not the core activity of the government. Also when there is uncertainty, unpredictability, and ambiguity which was the case during covid, private capital goes back home and stays safe.
To make things worse, there was no recent precedence as the last such pandemic occurred a century back in 1918 and 1919 killing nearly 20 million people and infecting ~ 500 million when the world population was ~ 1.8 billion. Thus the scale and period of the problem were neither known nor could have been predicted.
Then came the series of incentives for the private sector to open purses, remove fear and make for the World. A small nudge at the right time can propel people to act. PLI schemes or Performance linked incentive Schemes were introduced across 10 core sectors which were then increased to 14 sectors providing the right set of motivation for private capital to participate in Make in India and putting India on the manufacturing map of the World.
b. Building Infrastructure to create multiplier effect - Bharat came up with building and expanding infrastructure during the covid period. One is aware that the demand inducement can happen via monetary measures or reduction in interest rates or fiscal measures by spending on developmental expenditure. Bharat chose both in a measured manner but giving a Philip to Infra spend and infra construction. Roads, Bridges, and Highways were built in record time at record speed and they continue to be built even after the Pandemic is over creating a multiplier effect.
c. Building a Healthy India & creating Food Safety - Nutrition and medical aid programs were instituted for the benefit of millions and they continue to be run till today. Where the medical infrastructure in most western nations collapsed during the pandemic, India sustained and expanded the infrastructure as demand and need for it increased.
The Why
The core difference in outcome is on account of the difference in approach. The approach that distinguishes between the thinking of East and West. West, Western government, Western culture always think and believe in Protecting Self interests and they believe if everyone thinks of their interest, the collective interest will be taken care of. For them this is virtuous.
However, for India, the underlying belief is to have Unity at the Core or having Ekatmata or being Ekangi. For India, everything is conjoint and connected and hence one has to solve for all parts, and if any part of the same body is left unattended, the pain will be felt across.
This philosophy or this feeling of oneness has been and continues to enable India to cross and overcome any challenge, any catastrophe any calamity with flying colors.
Siddhartha Rastogi
Siddhartha Rastogi is Managing Director & Chief Operating Officer of a Leading Full Service Investment Bank. Views and opinions expressed in this article are those of the authors and do not necessarily reflect the official view or position of any company or sister concerns or group company where the author is presently employed.