What made headlines?

“To read a newspaper is to refrain from reading something worthwhile. The first discipline of education must be to refuse resolutely to feed the mind with canned chatter.”

Liquidity unwind

Estimates suggest through various phases of QE starting January 2009 ~$500bn came into Asia ex-China, ~$40bn was lost during the 2013 taper fit the markets threw and ~$30bn has been lost in the last 3 months. The markets lost small sums compared to the noise factor in the press. But what this suggests is the level of potential unwinding that is possible if interest divergence were to be become stark. Already the reduction in dollar reserves across countries from Saudi Arabia, Russia or China is causing a quantitative tightening.   

In India, credit growth is getting constrained at the one end by the low levels of inflation - WPI was -4.1% in July and GDP deflator Apr-June was 1.8% and the other by very high bad loans – NPA and restructured assets have reached ~11%. Second, the choking of the capital expenditure in infrastructure or heavy industry in the last 4-5 years has created not only the bad loan issue but also ensured that equity capital in stuck in the these projects and potentially wiped out as a consequence of cost and time over-runs or now due to steep commodity declines. The third is from 2009 onwards physical savings continuously exceeded financial savings (historically physical was around 50%-55%) to the extent that in the last couple of years become almost 2x. This savings went predominantly into real estate which is now facing decline in value and transactions, consequently wealth effect and liquidity are both gone. Fourth, the focus on reducing black money in the economy by the government and the Supreme Court is beginning to bite. The recent decline in equity market valuations surely add to this but on the debt side we have lost only 1% of what we did in 2013. 

Inconvenience of election promises

Narendra Modi is a master of rhetoric and this was principal amongst other aspects that laid the foundation of his victory. The Indian constitution recognizes the Parliament as the highest decision-making body with the Prime Minister at its helm but does not in the same breadth take away the powers or allow the Parliament to override the state governments or the courts or the upper house which has representation of the states at the center. It is designed as a check to protect the basic character of the nation from violent majoritarian-ism. No leader would get elected if he points out his constraints to the electorate and no leader unless he steps in the chair understands these constraints fully anyway. Thus, the aspirational high before elections is designed to fail.

Having said this, the regionalism of India represented by many regional political parties, of which I have written many times, ensures a permanent divergence of views. And in this specific case the presence of overwhelming majority center, has forced regional parties to collaborate to protect their turfs while they live to fight each other another day. A declining Congress has limited stake in constructive behavior, as its victory is more likely to come from the BJP’s mistakes.  

Having said this, politics is the art of working with 'material at hand' and turning promises to reality. "In order to govern, the question is not to follow out a more or less valid theory but to build with whatever materials are at hand. The inevitable must be accepted and turned to advantage." - Napoleon Bonaparte

When it rains

If the twin crises of economic malaise and Ukraine were not enough for Europe, it has stepped onto the new crises brought by fighting and political instability across its southern arc from Syria to Libya. The migration of millions of people to Europe has sparked fear and guilt. Sweden has received the highest number of application (more than 8 / 1000 population), UK the least (under 1 / 1000 population). While Germany at almost 3 per 1,000, is receiving 68% of the EU refugees. In context the levels are the highest ever since the cold war – for example Germany has received ~2x the applications it did at the peak of the Yugoslav war which were the highest till date. The sharing of this burden is causing friction within the European Union and the fear of accepting large Muslim population from the war torn countries is also sparking demographic tensions at a time when Europe is facing a decline in its dominant Christian population.

Europe prior to WW II had hegemony over North Africa and this was the source of cheap labor. When they lost their empire, they had no choice but to allow controlled migration to ensure availability of labor. But they never assimilated this population which can be seen in the ghettoization of Muslims even cities which claim to be multicultural like Paris. This non-acceptance has its roots in the wars fought with Islam for over 1,000 years. This is was a period where Christian Europe had great evangelical zeal to kill and convert its enemies, be it Islam or different strains of Christianity. While Europe sapped its zeal to allow peace within Christianity, slivers of Islam maintain that zeal and continuously espouse that they speak for the rest of Islam. European nation states are about shared history, language and common values, the migrated Muslims share none of these.

Europe will turn again to welcome immigration in the next 2 decades as its population decline deepens but this would come out of need rather than the current burden of conscience.

Indrani Mukherjea…?

Incompatibility accentuated by decline in money flow leads to breaking of marital vows resulting in current mess. All the worlds’ problems seem to be in one microcosm and I am sure we can find more. Well hasn’t the media got it all…