Global pneumonia

After presiding over a totally American induced economic disaster and mindless wars and occupation, the G20 meet is lame duck president George Bush's last hurrah

Mohan Guruswamy Delhi

As his last hurrah, lame duck US President George Bush has convened a meeting in Washington DC of G20 leaders on November 15 to discuss the current economic crisis and possibly even find a way to halt the US contagion from spreading any further. The crisis is entirely one of American origin and a consequence of the prolonged mismanagement and under-management of both, the US economy and its financial system.

When Bill Clinton handed over power to George Bush in 2001, he left him with a budget surplus and a robustly growing economy. Since then, the US government's finances have deteriorated sharply because of its vengeful and senseless war on Iraq and another misadventure in Afghanistan. Both wars are without UN sanction and due to US delusions of omnipotence. So, financially, things ended up worse than before Clinton.

This year the US had a budget deficit of about $455 billion. The US has had a balance of trade deficit for decades now and this has now grown to $847 billion in 2007 and is still growing. Traditionally, it has been quite simple for the US to bridge the ever widening gaps because the rest of the world constantly hungered for US securities. China has almost $1 trillion in US securities and India too has over $120 billion. Consequently, the US had an external debt exceeding $12.5 trillion in 2007 and this is growing by $500 billion since 2003. If you add future outgoes like Medicare, pensions etc. the US has another $42 trillion due for payment.

The irony is that the world and even relatively poor countries like India saw lending to the US by buying US securities as a sound investment instead of the pyramiding scam it had actually become. That India still sees it as a sound investment is amply reflected by the fact that there have been no withdrawals even when the rupee came under pressure due to the flight of FII dollars.

What now compounds this problem is that the US accounts for about 20 per cent of the Gross World Product (GWP) which is the sum of all national GDPs. So when the US sneezes, many others catch a cold, which might even turn into pneumonia for some. If it was some third world country that was caught in this situation it would have been taken into hand by the IMF and the finances set right with all the attendant pains it would have entailed. If you didn't accept the IMF conditionalities you were threatened with a foreclosure and shut down, as happened to India in 1991. This has happened to Brazil, Argentina and even Great Britain.

Now you can't do that to the US of A. It practically owns the IMF. And there is no one among the G20 who has the gumption or even the clarity of vision to tell the Americans that it can't go on with spending and borrowing as usual, and if it doesn't set its house in order the rest will have to act.

Not only is the US the world's greatest debtor, most of its citizens are just as profligate borrowers. The credit card debt in the US is now in excess of $365 billion and of this $91 billion is considered as bad debt. This debt is bigger than most national debts of even good sized economies like India. This now threatens to be the next big blowback.

The US crisis is two crises morphing into one.  The economic crisis which has been festering for long and the financial crisis which came to a boil a couple of months ago resulting in the failure of giants like AIG, Lehman Brothers and Bear Stearns etc. Chinese Prime Minister Wen Jiabao has succinctly described them as the crises in real and fictitious economies.

The largely unregulated US financial system began to tank when the bottom fell out of the US housing market. This was due to the downward spiral brought about by the oversupply of housing, high interest rates and poor creditworthiness of the borrowers. This turned into a severe liquidity crisis for the commercial and investment banks with huge exposures in the housing markets. With the liquidity crisis the reckless domestic lenders began to pull out their investments in emerging country share markets like that of India.


In the past few weeks, the FII's have pulled out over $8 billion from India causing the stock market to tank. The rapid exit of FII funds caused a spike in the demand for dollars that caused the Indian rupee to devalue by as much as 20 per cent at one point. The hitherto high flying Sensex fell to below 8000, less than half of what it was a few months ago. The Sensex falling is not an economic crisis. But the devaluing rupee presents an economic challenge. Imports get expensive stoking inflationary fires, while simultaneously, export markets are contracting. True world oil prices are also down but even at this price level, petrol, diesel, kerosene and cooking gas still need to be subsidised.

The real Indian economy which otherwise was as robust as it ever was in the last few years, is naturally beginning to feel the pinch and it has begun to hurt somewhat. Compounding this is the rapid contraction of consumer markets in the US, the world's most profligate spender whose humongous trade deficits we had all learned to love. China, in particular, with its US trade surplus of over $300 billion, is badly hit. In the past few weeks hundreds of Chinese exporting companies have shut shop throwing hundreds of thousands out of work.

India is a relatively small exporter of manufactured goods to the US and so will be less badly hit. Which is why we must be more optimistic than others. But our PMO and North Block measure our crisis in terms of the fall of the Sensex. This, of course, is nonsense, but what else can Manmohan Singh say or do having all along made the rise of the Sensex an index of the success of his economic policies?

India's economy has been growing at over 9 per cent for the past three years and even after the predicted global slowdown is expected to post a growth of around 7.5 per cent. This is not at all bad for a country that has seldom seen more than 3 per cent growth for the first half century of its independent existence. The government of India's finances are robust and the ‘Current Account Deficit' is manageable. But the crisis seems to have seized our minds because of the precipitous fall of the Sensex.

This is a real crisis for many and particularly those leaders of government who have salted away huge amounts in the share market. It is no surprise that all our recent policy initiatives are focused on lifting the Sensex. It is a futile exercise because the FII's can pull out far more money than the government's FI's can invest. What our government should instead be thinking off seriously is to bring back, say, $100 billion, or a third of our foreign reserves, and launch a major infrastructure building programme to boost the economy. Instead of doing this, Manmohan Singh, true to habit, went with a begging bowl to Oman and Qatar pleading for investments.

A few years ago, Montek Singh Ahluwalia, in a rare moment of concerned insight, had suggested bringing in some of our foreign reserves to fund infrastructure development in India. The usual bunch of ignoramuses, some former finance ministers and some communists - like Pavlovian dogs - howled with indignation, and that was that.

The Breton Woods Conference of July 1944 took place under the fast receding shadow of World War II and when the US was literally the last man standing. All other pre-war powers including the victors were in shambles. The US was now the world's dominant economy and military power. The Soviet Union was excluded from the conference and so a new arrangement was easily midwifed by the US. This system was unilaterally abrogated when in 1971 Richard Nixon delinked the dollar from the gold standard. In the absence of a standard and useful regulatory function for the IMF, coupled with the Reagan/Thatcher era that followed, the great private banks were given a license to run amok. We are now reaping the bitter harvest.

The G-20 meets under this backdrop. It's a very different world now. For a start, there is no towering visionary economist like John Maynard Keynes on the scene. How can there be one like him when the world economic and financial elite lionised the likes of Alan Greenspan for so long? Or when the world's economic agenda was privatised and handed over to dubious NGO's like the World Economic Forum?

There is no towering figure like Franklin Roosevelt either. Instead, we have George Bush. Except for China's leaders, few others have any capital or standing to make a difference. Not Manmohan Singh or Gordon Brown, both on their way out. After Georgia, Russia is angry and will stand isolated in this crowd. Neither Nicholas Sarkozy nor Angela Merkel have the stature or financial muscle. The only good news is that our elections are around the corner.