Two weeks ago, at my B-school’s alumni party, I ran into a New Yorker who has moved to Mumbai. When I asked him why he chose Mumbai, he said, “Well, the word on Wall Street is Mumbai, Dubai, Shanghai or goodbye!” Really? I thought. Last week, I happened to be in New York and made some counter-intuitive observations of the market. While Wall Street is crying hoarse over “no money”, Main Street continues to somehow have dollars to go around.
Let’s do a recap of some theory. Big fish purchase a bunch of mortgages from lending fish, create financial securities, break them up into several little pieces and sell them to smaller investor fish. Borrow, lend, borrow, lend...they like this game and play it until they leverage themselves to obscenely high levels. When mortgage takers don’t pay up, investor fish and lending fish get squeezed. Big fish get scared and run to daddy fish for help. Daddy fish says, okay let’s convince Congress to donate public money to save the pond. Meanwhile, company fish get tighter working capital loans, make stupid decisions and hurt productivity. Worker fish make less money, don’t pay bills on time and stop buying stuff. No one lends, no one buys, no one pays bills, no one hires. The cycle continues until the whole pond stinks.
However, I wonder if this is really happening because people are buying. I went to suburban malls in Bergen county (in New Jersey), to toy stores, to speciality retailers, to beer stores, to coffee shops and to desi stores. Why did I have to stand in line on a weekday to get seated in a California Pizza Kitchen (which makes exotic-named, overpriced pizza)? How come there were high-schoolers, couples, young professionals hanging out in Starbucks on a Wednesday afternoon oblivious to banks taking a big dump just 50 miles away?
I called an investment banker buddy in the city (NY) and was surprised to find out that he was no more in this city! After his bulge-bracket bank job was flushed out of Wall Street, he moved with his wife and two babies to Chicago. He and his colleagues didn’t see the axe coming. He explained, “Dude, our entire gang in NY split up. One went to London, one to Dubai, one to corporate finance, another to retail and I moved to Chicago doing mid-sized M&A deals...some $500 million-$1 billion range (chuckles).” He echoed his new bank’s view of the economy, “Retail numbers, employment numbers are eating dust every month.”
Assume for a moment that you haven’t read or watched the news in the last one year and go to any reasonably globalized zip code on American soil. I’ll bet you wouldn’t know that you were in a tight economy where the government is actively playing bailout daddy. Life of the dollar seems to go on as usual.
Let’s trace this slippery dollar. The other day, my family and I ate Mexican food for lunch at Englewood downtown in Jersey. My cousin (who works for a tech giant) unassumingly used his credit card to pay for the food. I’m sure he clears his credit card debt on time with the salary he’s assured month on month. His employer must then sell his tech skills to clients who want to build more software applications. These clients could be American, European, Asian or all of the above. Or the clients’ clients could be global. Who knows?
Meanwhile, the credit card firm could be backed by Visa or, perhaps, in the near future by the US treasury. China Investment Corp. (CIC) that manages $200 billion of China’s foreign exchange reserves has investments in both Visa and US treasury bonds. So, can we trace the survival of the Mexican restaurant’s tortillas and salsa to some CIC bond investments made by a farmer in Chongqing? Who knows? But then the key question to ask is: Would the US yank the globe down or would the globe pull the US up?
I’m not oversimplifying a complicated economic problem here, I’m simply trying to view it with my lens on the ground. Yes, delinquent mortgage rate of more than 4% and unemployment at around 6% stink but they aren’t deadly. Thinking of spending vast amount of public money to buy assets of questionable value seems to be deadly when fundamental issues could be something else.
Going back to the shoppers of Bergen county, it’s obvious that the circulating dollar is pumped from somewhere. It’s very likely that that somewhere could be linked to geographies outside of the US. The globe, indeed, could be cushioning the impact of a larger economic crisis than the mall shoppers realize. At an individual level, what matters to average consumers is not if their earnings minus expenses is negative. What matters is cash flow. For the average consumer, as long as the cash flows, life goes on as usual.
For eons, New York has played nerve centre for the world markets. Wall Streeters were happy doing US-centric deals without bothering about global action. But they will now. The current meltdown has exposed the earth that has shifted underneath; the nerve centres are likely to be more distributed and interconnected now. There will possibly be no single nerve centre but several: Mumbai, Dubai, Shanghai, wherever. Meanwhile, my friend wants to move back to New York. He’s waiting for a few months “for the mess to clear up” and to get back to doing deals on Wall Street. This time, he’ll actively seek M&As that have more global play. It’ll cushion his job. Hey, it may also cushion the economy, whatever that is.
Praveen Suthrum is president, NextServices, a health care solutions firm based in Ann Arbor in Michigan, and Mumbai. He blogs at Newageofinnovation.com. Comment at firstname.lastname@example.org