Financial Storm to hit India - One crore job loss

Exports from India are expected to plummet by more than fifth as the global slowdown slashes demand for Indian goods. Commerce Secretary G.K. Pillai indicated that overseas sales could decline to $11.5 billion from $14.7 billion a year ago.

Exports in the developing economies began to slide after the global financial crisis froze credit markets and sent developed economies towards recessions. The sector is witness more slowdown outstripping previous months slide which is a stark evidence of the Asia's third-largest economy becoming the victim of recession.

"The government should immediately come up with more relief measures for exporters. Otherwise the export sector will be in a very bad shape," said A. Sakthivel, President of the Federation of Indian Export Organisations.

Dip in India's export by 22 percent in January along with the ongoing financial crunch is likely to take away one crore jobs in labor-intensive industries in the current fiscal ending March, forecasts Federation of Indian Export Organizations (FIEO).

Reeling under the downturn, industries like textiles, garments, chemicals and gems and jewellery had cut production by 10-50 percent. As per a recent survey by Commerce Ministry, over one lakh people have already lost jobs upto January 15.

"Textile garments and handicraft sectors were the worse affected. Together they are set to lose more than 4 million jobs by April 2009. Other sectors that could lose anywhere between 5 and 10 lakh jobs each include gems and jewellery, chemicals and engineering and auto component sectors," Ajai Sahai, Director General of FIEO told The Economic Times.

Predictions from Nouriel Roubini and Ian Bremmer

Great Depression, World War II and Global Financial Crisis

Geopolitical risks would also become more severe if a U-shaped global recession were to mutate — because of mistaken policy responses — into an L-shaped stag-deflation (a deadly combination of economic stagnation, recession and deflation). After all, the stock market crash of 1929 turned into a Great Depression because of poor monetary, banking and fiscal responses. When the Depression became global, trade wars — starting with the Smoot-Hawley tariff — further contracted global exports and imports, capital controls became pervasive and defaults in emerging markets became the norm. Some similar risks are emerging today as countries become more protectionist and impose capital controls. Ecuador already defaulted on its foreign debt and others are teetering on the verge of a sovereign debt crisis. In the 1930s, the botched policy response and severe depression led to the rise of nationalistic, militaristic and aggressive regimes in Italy, Germany, Spain, Japan to name a few. The final result was World War II.

Today, the lessons of the Great Depression have hopefully been learned and a destabilizing L-shaped global stag-deflationary slump should be avoided. But monetary easing is weak in some regions and is less effective in the presence of insolvency/credit problems. Fiscal stimulus is constrained in many countries by previous high deficits and debts and cleaning up and bailing out the financial system is constrained by the “too-big-to-save” banks (i.e. losses in large, internationally active banks are much larger than the resources of small open economies to rescue them). And widespread and disorderly defaults by households, firms and financial institutions may follow a severe debt deflation.

Capitalism is not Dead

This is not a final crisis of capitalism and market economies. To paraphrase Churchill, market oriented capitalism is the worst economic system apart from the alternative. But the specific brand of Anglo-Saxon, laissez faire, wild-west, free market fundamentalism without prudential supervision and regulation of financial systems has been debunked. Central banks that are usually the lenders of last resort have become the lenders of first and only resort. And the new Keynesian Finance ministries have become the spenders of first and only resort, as private demand – consumption, residential investment, capex spending – is plunging

MNCs - No Longer Powerful

Globally, today’s leading multinational institutions — the UN Security Council, the IMF, the World Bank, etc — no longer reflect the true balance of political and economic power in the world

Global Financial Crisis - white Swan

The global financial crisis — missed by most analysts — shows that most forecasters are poor at pricing in economic/financial risks, let alone geopolitical ones. In normal times, markets are poor at pricing low probability, fat tail risks (black swan events), but the recent global financial crisis was a white swan event, as it followed a gradual build-up of predictable financial vulnerabilities that were ignored by most. But when the proverbial financial or geopolitical shocks hit,
the market over-reaction can become severe, as fear follows greed and markets tend to react in extremely risk-averse ways, replacing the denial and indulgence of good times with the extreme risk-aversion of bad times.


Protectionism - Reverse Globalization

Protectionist pressure will become more severe if the global economic slump is more protracted and deep. Certainly Doha is dead as multi-lateral trade liberalisation is impossible. Protectionist tariff actions have already started to emerge in places such as Russia and India and they may spread further. Trade-distorting subsidies are more likely than tariffs (see the rescue of Big Auto in the US). Currency tensions — for example between the U.S. and China — could escalate into trade wars. One also needs to worry about financial protectionism as a backlash against sovereign wealth funds and even FDI that may take place

What happens to BRIC countries?

This is the first globally synchronized recession and there are very few places to hide as the forces of recoupling shatter the myth of decoupling: first markets and then real economies have become almost perfectly correlated. Among the BRICs, Brazil and India are less affected than Russia and China, but even Brazil will suffer from falling commodity prices, shrinking export markets and an increase in investors’ risk aversion; thus growth may be barely positive.

India depends less than China on global trade flows, but it depends more on capital flows to finance a large current account deficit, and its’ banking system financed a credit boom with foreign liquidity that is now drying up.

A hard landing in Russia is unavoidable with growth being sharply negative (-3 percent or worse) if oil prices average $40 a barrel this year. For a country like China that needs a growth rate close to 10 percent to move 10 million poor rural farmers every year to the modern urban industrial sector, a drop to 5 percent growth or below (a most likely outcome) is effectively a hard landing. Since the legitimacy of the Communist Party depends on achieving high growth, I believe the hard landing that China will experience this year will have political consequences. Even when growth was 10 percent plus China had over 70,000 mass protests every year according to official records; with growth in the hard landing territory (actually likely negative in Q4 of 2008 and through the middle of 2009) protests will increase, especially as millions of migrant workers return to cities after the Chinese New Year to find that there are no jobs, and as millions of university graduate discover a challenging job market. So while the risk of a political revolution is limited, the more severe the hard landing, the more likely is the chance that the anger of the masses is converted towards the domestic authorities, rather than being channeled in a nationalistic and anti-foreign direction.


Urbanization of India and China - Next Drivers for Global Growth

The return to potential growth will imply rapidly rising demand from urbanizing and industrializing China, India and other emerging markets.

Atlas Shrugged

Ayn Rand is one of my most influential writers. Her books and articles have influenced my thinking during my teen age. Ayn Rand has also been a significant influence on Alan Greenspan who has been the proponent of market fundamentalism that had led to the current financial crisis.

Sofia Ghori Saleem in The Hindu, writes about this:

She has inspired politicians, presidents and economists across the globe. One notable and illustrious follower of Ayn Rand’s philosophy is former United States Federal Reserve chairman Alan Greenspan. Greenspan’s policies dominated the world economic situation for decades. In his early years, Greenspan was part of her close knit and exclusive club called the “Collectives” that met every week to write, discuss and promote her ideas. In those days he wrote spirited commentary for her newsletter with the fervour of a new convert. So great was her influence on him that he invited her to attend his swearing in ceremony in Washington D.C.

Sofia also questions,

Last year, when the world banks came crashing down and the housing market was brought to its knees owing to the mortgage crises, Greenspan expressed shocked disbelief at the magnitude of the credit crisis and admitted that there was a flaw in his hands-off unfettered free market ideology. The laissez faire philosophy whose cornerstone is self regulation of financial institutions proved to be an oxymoron.

In the Universe defined by Objectivism, with the absence of a supreme being, who will shoulder the responsibility for the free fall of the free markets? If selfishness is a virtue, then what is greed?

Contrary to this view that Ayn Rand's Objectivism is at the root of the crisis, many ayn rand's followers are clamoring against the Bail out.

from a Time Article, "What would Ayn Rand have done?"

But as the largest bailout in government history unfolded in almost dizzying waves over recent days, a very different view prevailed at the Ayn Rand Center for Individual Rights, an outpost of free-market, anti-government thinking located just a few blocks from the newly aggressive and highly interventionist Department of Treasury in downtown Washington.

"It's a complete disaster," said Yaron Brook, the executive director of the center. "Its a form of national socialism of the financial markets...This is socialism 101."

They are implying that selfishness of a few should not undermine the capitalist view.

Maybe capitalism of Ayn Rand is also idealistic?

is Globalization a giant ponzi pyramid scheme

was Globalization sustained by a giant ponzi pyramid scheme supported from schemes such as privatization of public resources, economic colonization etc.?

Automatic Earth provides a stark vision of globalization

1. Ponzi Schemes

"Everyone has heard of pyramid, or Ponzi, schemes. In their simplest form they are short-lived deliberate frauds where a small number of existing members are paid from the buy-in of a larger number of newer members until the supply of newer members is exhausted, whereupon they collapse. Typically, the founders, and perhaps a few others who got in early and out before it was too late, end up making a lot of money at the expense of later entrants, who end up holding the empty bag. There are always many more losers than winners. What most do not realize, however, is that Ponzi dynamics are far more pervasive than people think. There are many human systems that ultimately rest on the buy-in of new entrants, and every one of them will ultimately meet the same fate, although it can take far longer for complex constructions than for simple pyramid frauds.

What allows a more complex pyramid to last for longer than a simple one is a supplementary source of funds to pay members, besides merely the buy-in of newer members. The more such sources there are, legitimate and otherwise, the more complex the pyramid can become and the longer it will last, as the apparent on-going success of early entrants will attract many more new ones. There's nothing like seeing one's friends and neighbours seemingly making a lot of easy money for a long time to eventually overcome the mental defenses of even the most skeptical."

2. Ponzi Scheme applied to Globalization

At the largest scale, empires are also grounded in pyramid dynamics, which is why they too have a limited lifespan. They grow by assuming control, either politically or economically, of new territories, positioning themselves to cream off surpluses from an ever-expanding geographical area in a form of involuntary buy-in. In the past political control through invasion or physical colonization was more common, but latterly globalization has enabled the development of a sophisticated system of economic control based on international debt slavery, supplemented with economic colonization for the purpose of resource extraction. Both resources and financial surpluses, in the form of perpetual interest payments, could be efficiently extracted from the periphery and accumulated at the centre, where they led to the development of an unprecedented level of socioeconomic complexity.

Such wealth conveyors in favour of the economic centre, at the expense of the hinterland, are the very heart of empire, but without continual expansion to feed rapidly developing central complexity, they eventually fail, leaving the centre unable to sustain its existing complexity level. As with economic bubbles, empires hollow out in the latter stages, consuming their own substance in a catabolic manner in order to compensate for the inability to strengthen wealth conveyors sufficiently quickly to keep pace with the expanding requirements of the centre.

Soros also been saying the same about the Super Bubble based on US Dollar as Reserve Currency of the World. Ponzi Scheme metaphor definitely suits Globalization well.

Globalization ka Side Effects

Privatization of Public Assets was one of the core tenets of Globalization. Keeping pace with the never ending stream of bad news for globalization, BBC reports about the spurt of deaths among men due to privatization in erstwhile USSR. The sideeffects of privatization has indirectly led to the death of about a million people, reports the BBC.

he rapid mass privatisation which followed the break up of the Soviet Union fuelled an increase in death rates among men, research suggests.

The UK study blames rapidly rising unemployment resulting from the break-neck speed of reform.The researchers said their findings should act as a warning to other nations that are beginning to embrace widespread market reform. The study features online in The Lancet medical journal. Lancet researchers have said

Great caution should be taken when macroeconomic policies seek radically to overhaul the economy without considering potential effects on the population's health

They conclude that as many as one million working-age men died due to the economic shock of mass privatisation policies. The latest analysis links this surge in deaths to a 56% increase in unemployment over the same period. However, it found some countries with good social support networks withstood the turmoil better than others. Where 45% or more of the population were members of at least one social organisation, such as a church group or labour union, mass privatisation did not increase mortality.

Link

Buy now, pay later losing appeal for US consumers

US People seem to listen to Shania Twain now..

By choice or by force, more U.S. consumers are putting away their credit cards as the financial crisis reshapes attitudes toward spending and debt.

Wal-Mart Stores Inc noticed that customers were pulling out the plastic less and less this year as the financial turmoil intensified. The world's biggest retailer said the portion of transactions using credit cards was falling after three consecutive years of double-digit gains.

"Customers have maxed out on their credit limits," Eduardo Castro-Wright, the head of Wal-Mart's U.S. stores, said at a recent conference. "They can't use (credit cards) more."

Link : Buy now, pay later losing appeal for US consumers

Ka-Ching and the US Credit Crisis

Shania Twain has forewarned about the Credit Crisis than most of the economists...

We live in a greedy little world--
that teaches every little boy and girl
To earn as much as they can possibly--
then turn around and
Spend it foolishly
We've created us a credit card mess
We spend the money that we don't possess
Our religion is to go and blow it all
So it's shoppin' every Sunday at the mall

All we ever want is more
A lot more than we had before
So take me to the nearest store

[Chorus:]
Can you hear it ring
It makes you wanna sing
It's such a beautiful thing--Ka-ching!
Lots of diamond rings
The happiness it brings
You'll live like a king
With lots of money and things

When you're broke go and get a loan
Take out another mortgage on your home
Consolidate so you can afford
To go and spend some more when
you get bored

All we ever want is more
A lot more than we had before
So take me to the nearest store

Let's swing
Dig deeper in your pocket
Oh, yeah, ha
Come on I know you've got it
Dig deeper in your wallet
Oh

All we ever want is more
A lot more than we had before
So take me to the nearest store

Can you hear it ring
It makes you wanna sing
You'll live like a king
With lots of money and things
Ka-ching!