The communiqué released after the recent conversation between the prime ministers of India and Pakistan was clear in debracketing dialogue and the pursuit of terrorists. India had released Pakistan from the obligation to bring to justice the perpetrators of 26/11. Then came the “clarification” that any dialogue would resume only after Pakistan brought the terrorists responsible for 26/11 to justice. A friend suggested that the clarification was Orwellian.
Lesser mortals like us would not know if there was any grand plan behind a seemingly unilateral concession. But what we know is that when it comes to Orwellian tactics, India has plenty of company in the world. An unusual op-ed piece (“Investors have to be sure that statistics do not lie”) in the Financial Times (FT) on 16 July suggested that professional investors had begun to doubt the veracity of government reports and that they wanted the unvarnished truth.
As though to substantiate the author of that piece, FT carried two news items on the same day. Eurostat, the European Union’s official statistical agency, has decided to exclude the emergency measures taken to rescue the financial system from its calculation of budget deficits and debt. Obviously, this would make European governments’ finances look less sickly than otherwise. In another news, the Bank of Japan called a bottom in the economic slump but nonetheless revised downwards the growth estimate for the current fiscal year and next (2010-11).
The Economist of 11 July commented on the troubles in the United Arab Emirates (“The perils of autocracy”): “For the first time since the seven Gulf statelets joined together as a union in 1971, people are beginning to mutter— rather quietly, for sure—whether there may be something amiss with the autocratic, opaque system that hitherto seemed to work so well behind closed doors.” “Nobody really knows what any of the statistics are,” says a Western analyst. “We have not seen the half of it yet,” says a Western banker, referring to the debt and the possible defaults.”
Of course, Western analysts and Western banks are sitting inside glasshouses when they throw such stones. A good number of economists covering China are from the West. They have been mostly unanimous in overlooking the egregious growth in bank loans in China and the risks it entails. During the technology crisis, dissenting voices were a small minority. Analysts were extolling clicks and eyeballs in a vain attempt to justify stratospheric valuations. Similarly, China’s unsustainable fiscal stimulus and loans from state-controlled banks to state-owned enterprises are supposed to epitomize a robust response to the economic crisis. Not only are growth estimates for this year being revised upwards, but even those of next year’s—with little substantiation as to the growth drivers if US and European consumers show little appetite to raise their spending next year.
The less said about Western banks, the better. One is unable to recall a wider chasm between them and the rest of society. Their accounting methods and the profits they show to pay themselves compensation, as in the halcyon days of 2006-07, are nothing short of Machiavellian.
It was not long ago that Britain’s Office for National Statistics admitted (FT, 15 May) that it might have overstated retail sales volume growth by a cumulative 56% since the crisis began in August 2007. In April, after it published its own estimate of the bank bailout costs in Britain of approximately £200 billion, the International Monetary Fund changed it, without explanation, to £130 billion. The British chancellor was due to present his estimate of £60 billion to Parliament. The statement released by the fund last week, at the conclusion of its Article IV consultation with Britain, noted that continued trust in the country’s fiscal position was an essential prerequisite for the success of the government’s policy measures. Enough said.
Finally, on Thursday, US stocks finished the day on a positive note, spurting towards the end as they have done so often in the recent past. The spurt was attributed to Nouriel Roubini’s remarks that the US recession would be over by the end of the year. For good measure, it was added that Dr Doom, as Roubini is known, had become more cheerful on the economy. Roubini later issued a statement denying that he had become less pessimistic.
Banning short sales, ceasing publication of uncomfortable statistics, changing accounting rules and tweaking numbers through statistical methodologies do work. They work because investors too want to believe that good news is their birthright. Whether or not voters get the governments they deserve, investors get the policies they deserve. But this won’t last long. Not long enough for investors to exit with profits, because investors who are overanxious for good times would not be easily satiated. They would be still invested in the market long after such tactics cease to work. That is why Bare Talk is convinced that governments and investors are spinning themselves into the next crisis.
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