A despondent memory of the future

It’s been ten months or so since I have been in Bangalore. My voracious appetite for news and analysis now includes (in addition to Nyt/Wapo etc.) – regular feeds of Hindu, Firstpost and links from many more local contacts on FB/Quora. There’s finally a point where one thinks that one understands what’s going on. The glasses finally fit – everything comes into focus. I think i reached that point in the last few weeks. It’s possible I am wrong. But i think the world economy is irretrievably screwed up.

This post is for me to look back and hopefully remember as an example of how the pendulum swings too far on the dark side. It’s also simply catharsis.

It’s rather simple. Globalization lead to investments and transfer of production to developing countries. The developed countries weren’t producing as much anymore. In a rational world – they would have had to decrease consumption to match. Instead they kept going at it. No democratic Govt. can tell it’s citizens to lower their standards of living. And there were funds available to borrow. So the Americans, the Europeans – they kept (and keep) living off money they don’t have.

Prices should have fallen much more than they did. After all – wages in developing countries are an order of magnitude less than the West. But the false demand from West, built on a sea of debt, kept them from getting totally depressed. The wages for workers in India, for example, are still just barely sustenance levels. So who made out?

The companies that produced cheaply and sold dearly had to have made out. Strong corporate profits and balance sheets over the last few years are testimony.

These developing countries are absolutely and totally corrupt. If I were to use India as an example – the politicians, the mafia, some business houses – a small handful of brutally corrupt folks made out big time. That investment that came into the country – a big chunk of that – from direct bribes, to taxation (most of which just ends up as black money) to subtle theft of savings (forced investments from Govt. run savings institutions like LIC and SBI, depreciation of currency, inflation) – all this just disappears into a few private pockets.

So think about it. An indebted middle class in the developed world trades with a penurious one in the developing countries. And a whole lot of money, that used to be in the pockets of hundreds of millions of relatively honest middle class people just disappeared into thin air. Into Swiss accounts, Gold – whatever can never be taken back.

The permanent loss of demand that is happening because of this altered equilibrium is the root cause of world economic ills. It cannot be fixed by developed country govt. stimulus. It cannot be fixed structurally. It cannot be fixed just by taxing the rich in the developed world (for the rich have a lot of places to hide wealth). In America – they dream that the developing world will one day become rich enough that all boats will again start rising. They never consider that not all outcomes are so sanguine. Maybe – the boats will all end up lower.

So the global economy is now a robber baron one. With no global institutions and mechanisms to pull it back. Maybe we are simply reverting to mean – maybe the last half of the 20th century was an aberration. Enough for one day – we will end on a cheerful note by not bringing up global warming.