Lot of things happened in the world of financial markets last week. The European Central Bank stepped in with its own bond purchases to relieve the European countries in distress. It has worked, for now. Employment generation in the US remains disappointing. That is what the November employment report showed. Yet, many brokerage houses that are releasing their outlook for 2011 are calling for the economic recovery to now morph into a multi-year expansion. Global gross domestic product growth of 4% or above for both 2011-12 are freely bandied about with nary a thought for resource availability and impact on environment. The crisis in 2008 did not happen. All that is needed to wipe the slate clean is not action but imagination. That, investment banks have in plenty. I used to wonder if they and I live on different planets. I have stopped wondering. I am convinced that we are.
Also Read V. Anantha Nageswaran’s previous columns
Even as they were coming out with these reports, US Federal Reserve chairman Ben Bernanke recorded an interview for CBS’ 60 Minutes in which he is said to have reiterated his willingness to expand the bond purchase programme beyond the $600 billion that he had announced on 4 November because he does not see inflation pressures in the US economy even as the unemployment rate edges up and the duration of unemployment (number of weeks out of unemployment for those without a job) creeps higher.
He may think that inflation is not a risk for the US, but if he had seen how commodities prices reacted to the leak of his interview content, he might have considered asking for a re-recording. Commodities exploded off the gates on Friday. The price of Brent crude oil is now above $90 per barrel and the S&P Goldman Sachs Commodities Total Return Index just posted a new high. Even if he does not have an inflation problem, Asian economies will have.
China just announced that its monetary policy would be prudent next year, as opposed to being moderately loose. But, any English translation of its policy statement is bound to be inaccurate as the words have different shades of interpretation. When it comes to dealing with asset bubbles and overheating, China continues to run with the hare and hunt with the hound. It is likely that China would have to pursue this prudent monetary policy at least into the first quarter having gone public with it just on Friday.
Clearly, an economy whose size is close to $5 trillion would be less amenable to administrative tightening than it would have been some 10 or 20 years ago. Lumpy and discrete administrative steps run the risk of triggering an unexpected response from the economy. It is possible that a risk of a hard landing in China’s economy has increased. Unsurprisingly, research reports that one sees from the sell-side would have none of it.
In the case of India, it is clear that no one is in charge. Perhaps, some would argue that that is no bad thing in India. I am not so sure of that. Our current account deficit is uncomfortably high. The quality of our economic growth—as evidenced by the recent third quarter growth figures—remains poor. It is demand-led rather than supply-led. With oil price rising above $90 per barrel, India’s under-recoveries rise. The financing of its capital flows is largely through hot money flows and less through sustainable flows. It appears that “second generation reforms” was a phrase heard about a generation ago and recently resurfaced in a bravely optimistic opinion-piece by Jagdish Bhagwati in the Financial Times. As Arvind Singhal wrote in the Business Standard, with political drift and without economic reforms, Indian growth rates may not be sustainable. Prices of Indian assets are a long way from reflecting these risks.
As for Europe, Kevin O’ Rourke’s piece for Eurointelligence sums up the situation best: “The reaction to the news that Irish taxpayers are to be squeezed while foreign bondholders escape scot-free has been one of outraged disbelief and anger”. Further, with disclosure of the Federal Reserve having lent vast sums of money to financial institutions in the US and in Europe, this begs the question of why regulators in the US and in Europe are allowing banks to walk all over them (replace “foreign bondholders” in the above quote with “foreign banks” and the argument would be clearer). Short of attributing venality or criminality to policymakers, the only explanation that appears credible is that banks are still too fragile to accept any loss or restructuring of their assets.
One thing is clear, regardless of whether the sell-side forecasts bear fruit or not, ultra-loose monetary policy in the Western world is bound to stay, lending extra strength to the real forces shaping the prices of natural resources and other commodities. It also leaves policymakers in the developing world with no option but to include substantial currency appreciation in their policy arsenal.
Finally, political leadership of the highest competence and integrity is called for, in the developing world, to cope with the challenges. Otherwise, the developed world, despite having caused mayhem through its intellectual and financial shenanigans, would still have the last laugh.
V. Anantha Nageswaran is chief investment officer for an international wealth manager. These are his personal views.Your comments are welcome at firstname.lastname@example.org.