Sunday, August 21, 2011

A Unified Theory of Everything

I find it more than a coincidence that India's Anna movement is playing out concurrently with American Tea Party resurgence, Israeli Tent City protests, UK underclass rioting, and Arab Spring revolutions.

Sonali Ranade, in her recent Daily Times column, linked middle class protests to the credit crisis. In her thesis, the enormous losses suffered by large financial institutions are being surreptitiously socialized through stealth taxation on middle class savings.

In this essay, I'll attempt to expand on this analysis.

Clearly, the aftermath of the credit crisis is crucial to explaining the global governance crisis. When highly indebted financial institutions tottered in 2008, they threatened to take down the global economic system. Governments, themselves highly indebted but with some residual ability to print and borrow money, found a variety of ways to take the bad debt off bank balance sheets.

In the US, Government partially nationalized leading banks and the Federal Reserve provided them with near-zero cost funding. In Europe, authorities did the above plus allowed banks to not fully recognize their losses. The principle was the same. Postpone the reckoning where possible, socialize private sector losses where necessary, and transfer wealth to banks so they can recapitalize.

All this played out while Governments in India and China went on debt-fueled binges of welfare and infrastructure expansion respectively.

This is how the banks were saved and the Governments imperiled.

How do deeply indebted Governments resolve their debts? They can print money to inflate it away, sell assets to pay for it, impose taxes, seize private wealth, cut back entitlements, or declare bankruptcy. No other way, really. Except war.

In all of these, there is an implicit transfer of wealth from one set of citizens to another. To expect this to happen without political push-back is naive. Each group will inevitably flex its political muscle to lay down a marker for politicians to contemplate.

Where entitlements have been cut back (e.g., UK), the underclass has revolted. Where entitlements have expanded financed by corrupt asset sales & inflation (e.g., India), the middle class has revolted. Where the debate is raging between entitlement cuts and increased taxes (e.g., US), everyone is morose. Where a kleptocratic autocracy has financed its lavish lifestyle through taxation, inflation, and forcible appropriation of national assets (e.g., Maghreb), revolutions have happened. Where utter confusion has reigned (e.g., Europe), everyone has gone on vacation!

The global credit crunch has become a local political crisis - everywhere.

This is how we must understand what's happening. This isn't about dial 101 for integrity or democracy in the desert or even a new social contract between the rulers and the masses, this is fundamentally about money. And the way this is resolved is not the tedious (and violent) battles for redistribution, rather through new wealth creation.

So how is this to be done?

Prosperity has come to the world in waves, riding the euphoria of new ideas. The end of the cold war, the peace dividend, technology, globalization, and easy credit carried us for two decades. We now need new catalysts to carry us forward.

Some of these can be the end/down-gearing of seemingly interminable wars (e.g., India-Pakistan, Israel-Palestine), new agreements for expanded global trade (e.g., the much delayed Doha round), radical economic reforms in BRIC countries (e.g., privatization and professionalization of economies), dramatic increase in technology usage to rationalize the highly inefficient welfare States in OECD countries (e.g., healthcare subsidies), a new surge of investment in education for the information era, etc.

These are big ideas that require big visions and bold leadership. Our challenges are not going away by use of batons on protestors or expressing helplessness about lack of political consensus. And the Jan Lok Pal ain't going to create prosperity by diktat out of thin air. If we don't take bold steps for reforms now, we should be deeply pessimistic about the coming decade. Not only will we see Anna style protests at home, we are likely to see regional and even global wars break out. This is the lesson of our history. Every major turning point of this magnitude, where huge wealth has been taken from some and given to others, has always come with protest, revolutions, and war. We have a small window to head off this fate. This is the bottom line.

The stock market is a great barometer for our collective belief in the future. Presently, it is telling us we don't believe our leaders have it in them to be bold. Were they to start acting as leaders instead of chickens with their heads cut off, we will see this reflected in the markets immediately. Mr Hazare can then go home.

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