What is the difference between Suman Bery and John Gapper? Well, the former is director general of the National Council of Applied Economic Research (NCAER) and the latter a columnist for the Financial Times (FT). The former writes for the Business Standard (BS) and the latter, of course, writes for FT. Well, presumably, Bery is an Indian and Gapper is either an American or British. Why do we need this elaborate “spot the difference” contest?
Bery had written his latest column in BS after the 10th annual Neemrana (in Rajasthan) conference co-hosted by NCAER and the National Bureau of Economic Research (NBER) in the US. He confesses that, after listening to his co-hosts, he is forced to revise his earlier “somewhat unthought assumption” that the worst of the slowdown in the major economies was behind us. He is being honest. Many other economists do not admit to confusing hope for forecasts.
Whereas Gapper writes in FT that the US treasury and the US Federal Reserve want to be reassured that the US taxpayers’ money is in familiar American hands. There is a cryptic suggestion here that “Vikram Pandit” does not sound like a familiar American name.
Regardless of whether that is reasonable or unreasonable in today’s world, the hunt for scapegoats, for the failure to wave the magic wand and wipe the slate clean of the accumulated dirt and filth of at least two decades, if not longer, has begun.
The expectation that things would turn for the better from the second half of 2009 is commonplace. In most cases, it was not even an educated guess. It was wishful thinking elevated to a forecast riding on the massive and concerted policy intervention in the world. All the counterarguments such as the lagged effects of policy intervention, the possibility that intervention might appear concerted, but is not coordinated and may even be working at cross-purposes have been ignored. Also ignored is the possibility that a crisis that most of those living today have not experienced before would consequently prove more formidable for us to resolve.
As the reality slowly sinks into our heads and as it spreads, the rush to find scapegoats for the failure to revive the global economy and financial markets would intensify. It would spread from individuals to institutions to nations. Nations, let alone individuals, would turn curmudgeonly. Trade protectionism will be on the rise. Already, some Western commentators are pointing the finger at leading developing nations, including India, for raising import tariffs soon after the Group of 20 meeting in mid-November. Whether true or not, by sheer dint of repetition such a view will take hold, resentment will gain currency and retaliation will follow.
It is this potential for conflict that should interest us most, particularly when Marc Faber went on air recently with the observation that World War III had already begun.
In an NBER working paper published in December, Prof. Robert Gordon reviews The Wages of Destruction: The Making and Breaking of the Nazi Economy, the work of Adam Tooze published in 2006. The perceived shortage of agricultural land (rather than the abysmally low labour productivity or the excessively high labour to land ratio in Germany) led the Nazis to march into eastern Europe and Russia with the plan to obliterate about 45 million people through “natural wastage”.
Land may not be the only catalyst for conflicts now. Other natural resources are important, too. In the last six months, they have faded away from public scrutiny due to the spectacular crash in their prices. But, if oil companies and the International Energy Agency are to be believed, even with unchanged demand up to 2012, the additional crude oil required just to make up for declining production would be around 5 million barrels per day. Just when forecasters contemplate a price of $20 per barrel, it makes sense for investors to take out-of-the-money bets on much higher crude oil price at one-two-year maturity. It is a forlorn trade now.
There is another reason to focus on similar extreme outcomes. With the belated recognition of the failure of the world economy to respond to massive global fiscal and monetary stimulus, two outcomes are possible. Either the world economy sinks into a long slump and associated deflation or policymakers do not rest until all the world’s drainage systems are clogged with currency notes.
The possibility of these extreme binary outcomes should be taken seriously. Hence, investors should be willing to bet on a value of 1.00 and 2.00 for EURUSD, on 1% and 4% yield for the 10-year US treasury, on S&P 500 at 400 or at 1,400, on crude oil at $20 and $80 per barrel and on gold at $300 and at $3,000 by end-2010.
V. Anantha Nageswaran is head, investment research, Bank Julius Baer & Co. Ltd in Singapore. These are his personal views and do not represent those of his employer. Your comments are welcome at email@example.com