The debasement of money

An Anglican priest, Fredrick Donaldson said in 1925 that the seven social sins were ‘wealth without work, pleasure without conscience, knowledge without character, science without humanity, worship without sacrifice and politics without principle’. How prescient he was.

Wealth without work: Central banks around the world have caved in to political and market pressure, to lower interest rates and so debase money. This is happening in capitalist societies, which have money, and the value of it, as the foundation.

Two decades ago this columnist observed an ad in the Economist which announced interest rates by a leading bank, for high value deposits ($2,50,000 and over) in 10 different currencies. The rates were zero per cent for all, making one wonder why the bank was advertising this, in the first place, and why people wealthy enough to have a quarter million as a surplus, would be attracted to getting zilch on their money.

The US Central bank was freed in 1971, by Richard Nixon of the necessity to back the amount of currency they printed with an asset like gold. They have been on a printing spree since; egged on by politicians seeking re-election and wanting lower interest rates to boost spending. Today, a record $12.3 trillion of debt yields a negative yield.

Since the global crisis in 2008, the US Fed has increased its balance sheet size by printing money, hoping that the money would be used for capex and for consumer spending. Neither happened; the money was used, instead, to prop up various assets (stock and commodity markets, etc) and by companies to buy back their own shares, thus increasing their value. The higher value, brought about by debasement of money, was Wealth Without Work, the first social sin.

So debased is the value of money that investors gave Austria’s Government money for 100 years at an interest rate below 1.2 per cent.

Science without humanity: Science is a double-edged sword, providing immense benefits to humankind as well as the potential for immense harm. Every country in the world today overspends on military technology in order to procure the latest weapons. Weapons that would never be used, such as nuclear bombs. Politicians place the arms race ahead of the human race. And, of course, the revenue from sale of weaponry even when its used, as by Saudi Arabia against Yemen, against innocent civilians. Science without morality.

One can see examples of all seven social sins in society today.

Globalisation was predicated upon open trade, and based upon advances in communications and computational technologies. These technologies enabled people to do work they were good at, irrespective of location. And, because of free trade, globalisation led to huge global prosperity, beautifully explained by Thomas Friedman in his book ‘The World is Flat’.

Today, however, we see that the world is no longer flat, but global trade is. US President Trump has given hammer blows to previous trade agreements. Global stock markets are keenly anticipating a trade deal to be struck at the G20 summit in Japan, when Trump and Xi will meet. So keenly that stock markets spiked when CNBC prematurely, and with grammatical error, announced that a deal was imminent.

5G and growth

Linked to the US-China trade deal is the technology issue of 5G, and the role of Chinese Huawei versus American competitors. Trump has made it out to be a security issue, but it’s more likely a competitive gambit to lay pressure on China.

5G technology is a crucial factor in propelling the fourth Industrial Revolution, which is the hope for the global economy to emerge out of the trap of excessive debt combined with falling productivity of capital and of labour. The world will no longer be flat if there are two 5G technology consumers will need to chose from; a Chinese one without American apps such as Google Maps or Whatsapp or an American one without the Chinese apps, but with more updated technologies. The whole purpose of competition is to give consumers choice of what they feel is the best technology/product, and not dividing the world into different standards.

Next week the new Finance Minister will present the Budget. One ought not to expect a lot of giveaways; the pre-election sops have exhausted the Government’s capacity to spend, including on capex.

But there are two positive indications for Indian stock markets. One, as per a Crisil report, gross NPAs of banks have dropped 3.5 per cent and likely to be 8 per cent by March 2020. It can be lower if the timelines for bankruptcy courts are not allowed to be extended. The other positive development is that it appears that the private sector capex cycle has re-started. This augurs well.

A return to sensible monetary and global trade policy, a de-emphasis on attaining military superiority, a crackdown on criminals by speeding up the judicial process, and an agreement on technology standards would sustain the long bull run. Will sense prevail? Can we hope for politics with principle?

(The writer is India Head — Finance Asia/Haymarket. The views are personal.)

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