Get ready for depression

As the global financial system went into free-fall,my children and I spent a free Wednesday evening playing a board game that was developed during the Great Depression of the 1930s, Monopoly. It is basically a game of buying and hoarding properties, developing monopolies, and forcing your opponents into bankruptcy (obviously a genial family game). It’s an apt game at a moment when the planet is headed for another economic depression.

Many “average” Indians seem nonplussed; they think the current global financial meltdown affects only Americans, Europeans and those Indians who are rich enough to play the stock markets. They appear to hope the crash of stock markets around the world will herald the downfall of Western civilization (such idealists should play Monopoly with my ruthless son).

Even our TV news channels have a strange attitude to the economic crisis: during the day, they go on and on about the Bombay Stock Exchange’s Sensex being in sight of the 10,000-mark; but in the late evening,when it’s time for news analysis, they will go on and on about Sourav Ganguly.

This is even more bizarre considering how often our finance minister is on TV these days, repeating how India’s economy’s fundamentals are strong, and that though there is a liquidity problem there is no reason to panic.Hmm.Whenever someone important starts telling you every day that there’s nothing to worry about, it means there is something to worry about. Especially someone as TV-camera shy as P Chidambaram. Or someone like the US president, George W Bush who, despite being deeply loved by India, had been keeping a low profile (till the crisis went into top gear).

Theirs is a tough job. The Wall Street financial crisis has made money scarce. People and companies are withdrawing money from banks; there isn’t any for businesses, which need cash for their day-to-day operations.

Businesses will soon start failing, and the number of jobs will start falling. Chidambaram and Bush are walking a tightrope: being on TV is necessary to reassure markets and bankers about the light at the end of the tunnel; but being on TV is a reminder to everyone that they are indeed in a tunnel, and that contributes to panic. Panic erodes trust. Look at any currency note on the planet, and you will see that it is trust that makes that note valuable (in India, you trust the RBI governor to keep his promise to pay you the amount of the rupee in your hand).

The disappearance of trust is at the heart of the worldwide economic crisis.

There are some, like the government’s chief economic advisor, Arvind Virmani, who think the crisis may bring India “collateral benefits.” This is wishful thinking, premised on the belief that the world crisis will be short-lived, say, six months or so.

This is also based on the belief that India’s reliance on foreign money is mostly in sectors like realty; we can continue building our infrastructure with our own money, as we have been doing, and keep growth at a relatively high pace.

That would be soothing if it did not finesse certain realities. The rupee is about to touch 50 to a dollar; that’s because the shortage of money in the West is sucking dollars from all corners of the globe, driving the dollar up (and the rupee down). Oil is about to touch $80 a barrel (and should head further south by the time OPEC meets in November) but Indian oil companies are complaining that our banks are not lending them money for the day-to-day operations. And to top it all, Chidambaram says the government will help liquidity by putting money into the market this month for the farm loan waivers and the pay commission awards. This finesses the fact that these electoral bribes add to our current account deficit, which adds to our vulnerability to the financial crisis. A recent Citigroup report says India is among the most vulnerable on this score, and China among the most resilient.

To say the crisis will be short is to be intellectually dishonest. India will not have “collateral benefits” if the commodity prices come down, because the world is entering a deflationary period. (Ironically, just months ago we were worried about inflation, or high prices; now we’re worried about prices dropping endlessly). In a deflationary spiral, prices get lower, but no one buys because they think prices will get even lower.

So prices do fall further. Interest rates drop close to zero, so loans are virtually free, but no one borrows because they do not want to add to their debt. Businesses fail, people lose jobs, governments lose revenue, and economic activity grinds to a halt. This happened at the outset of the Great Depression of the 1930s.

If you are still unsure, look at the seriousness of the crisis (which no one can admit to, because it would worsen the crisis).

The world’s financial system is living in a reality that is day-to-day. Each market, each finance minister and each central banker is somehow praying that each day will end without too much damage. But it does not.

The bailout of the insurance giant, AIG, satisfied the stock market, but for only a day.

The whopping $ 700 billion US bailout to ensure bank liquidity helped the markets for about half a day, before they returned to free-fall. The central banks of the US, some European countries and China coordinated a rate cut, but that did not slow the fall. England set aside 50 billion pounds for its banks, but its citizens were still panic-stricken because three Icelandic banks had failed and Reykjavik was verging on bankruptcy (many Britishers kept money in Iceland’s banks because they kept unnaturally high interest rates to offset inflation).

Clearly, nothing short of decisive and farreaching action will save the world from another depression. Japan had a financial crisis that lasted the full 1990s because they were slow to act. The Swedes had a crisis in the late 1980s that was painless because they swiftly acted. Coincidentally, the G-7 and IMF meet this weekend, and it should be an occasion for finance ministers of the world to coordinate for some decisive action.

Decisive action in the form of government spending, both for public works (in order to create jobs) as well as for helping banks, needs intelligent and decisive leaders. Unfortunately the planet is led by Bush, a man who is deeply unloved by his own Republican party (he couldn’t even convince them to vote for his bailout plan the first time around); a man whose every policy has been a damaging failure; a man who looks intelligent only in comparison to Sarah Palin, who vice-presidential debate revealed to be brainless and incoherent.

At the moment, you can’t help but feel that even if we manage to avoid another Great Depression (whose marker was a big stock market crash 79 Octobers ago), we’re in for a long, deep recession. And far from collecting “collateral benefits”, India faces the possibility of a hard landing !