History Repeats itself

History bounds to repeat itself, if we don't learn from our mistakes! What is been feared so long is happening. The G20 meet was a failure in the sense for the welfare of the company. The same mistake committed in 1930s, pulling back the expansion even before the economy was stable is being repeated again! Neither Obama was able to convince his fellow senators, nor the big heads of the nations were willing to hear the wise advise of Dr. Manmohan Singh. A positive news is that the taxing the banks was put on hold. But considering the austerity measures of the governments headed by Germany, and the mis-informed LEI figures of China and high unemployment rates of the western countries, we can expect another depression bigger than the Great Depression. But why should this be much bigger than the previous ones? The answer is obvious, the damage one suffers while falling from a peak is proportional to its height. Given, the extent of leverage we enjoy today, the fall of dominoes will have far reaching consequences. The stock market has already expressed its pessimism over the government policies. Hope the leaders sense this and correct their mistakes fast.

See what Paul Krugman has to say about this here.

Recession Vs Depression

So what is it that they are playing with? What really is economics? Is it really to do with Money or rather a far superior entity which money represents? Isn’t Economics supposed to be a social science closely tied with the mob behavior of the animals with sixth sense rather than just playing with money? Just because there is a good correlation between money supply and well being of the economy, does it mean that one can manipulate just the money supply and the economy will follow suit? “Aggregate demand can be increased by fiscal expansion or monetary expansion as per economic theory”. It is true to an extent that by balancing the supply and demand of money, one can play with the economy. At least are the policymakers playing this game well?

We have some definitions for recession like “If we record two quarters of continued negative growth, we are officially said to be in recession”. But then how can we define the turn around. Is there really any such definition? How can we conclude that an economy is back to health and it is time to stop the medicines (stimulus). Which one should we be bothered about? DIS-ease caused by an infection or the side effects of the medicines we administer to counter the infection?

The job scenario hasn’t recovered much. It has just stopped falling. It is not a great news to say something is not bad. It doesn’t mean it is good. That too most of the jobs are still created from the public sector and the private sector is generating jobs in paltry sums. Many put the real unemployment figures for both U.S and many European nations at 20%. The broad money supply, M3 is also said to be declining despite so much infusion of money into circulation. This being the case, how sane is it to conclude that the economy has recovered and it is time to stop the stimulus measures? Just because the stocks have retraced most of its downfall, is it right to conclude that the economy has recovered?

Stock market is said to be a good barometer of the health of the economy. But it is also known that stock value is not established just by discounting the future cash flows. The expected price movements in the near future also determine it. It is also appropriate to mention here that the valuations are strongly affected by the positive/negative bias of the investors, which are in turn affected by the optimism/ pessimism of the investor. It won’t be misleading to put that the value of the indices are determined by the short term speculation and bias (due to pessimism/optimism) in valuations. In fact this is the reason the stock suffers such price fluctuations. The same stock which has traded at a PE multiples of 20+ during booms trade at 10+ during recession. When the management, strategy or the business practices of the company hasn’t changed why should the stock suffer such distortions? It is purely because of the investor confidence of the future. But the confidence of the price movement on the negative side doesn’t comes from the business prospects. Rather from the expectations of the price movement of the stocks in the short term. The stock indices can’t be taken for granted to be a pure reflection of the investor confidence of bright future and markets can’t be taken to be sane perfectly discounting all future cash flows. If one says that the economy has recovered just by looking at the index, it won’t be appropriate. Of course, it can be taken as one of the tools to assess the health economy. Even the real barometer has its own restrictions. Its readings are correct only in a temperature range. Similarly, indices can’t be taken as a cue at volatile times like today.

Some argue that, “Fine I accept that the economy hasn’t recovered much. But does that mean that I can keep on borrowing? Won’t it increase my debt and interest burden? Ultimately won’t it lead to default?”

Actually, the fear of interest burden should be the last things we should be thinking of. If we don’t stimulate the economy (consumer/investor confidence) and once deflation steps in, it will be far more painful. With the economy reeling under unemployment and low investor confidence, our tax revenues will come down. It will also be difficult to raise tax revenues. In such situations the debt burden will be much more painful even with debts at current level. It is worth to take risk to stimulate the economy by taking more debt rather than austerity measures.

I guess it is time to teach a few economists a bit of biology. When we administer drug for a disease, it is strongly advised that medication has to be completed the full course. If stopped in between, the pathogen might acquire drug resistance and it will be difficult to treat the pathogen with the same medication. The same is happening to Europe and America right now. The policy makers are stopping the medications before the course is over (which might result in a double dip recession). One is bound to repeat the history if he doesn’t learn from it. We haven’t learnt from what happened in Japan. Once the mistake is done no amount monetary/ fiscal stimulus will get you back to feet. That is why in the beginning it was mentioned “to an extent one can manipulate the economy”. Once the consumer/investor confidence is lost, no amount of fiscal/monetary measures can help us.

Moreover as it was rightly feared, it is just the reserve currency status, which is still holding the dollar. Which is in turn held high by investor confidence. This gives US an upper hand to easily manage its debts by printing money. This investor confidence is based on the confidence on the economy as a whole. The austerity measures not only threaten of deflation. Over a period of time, it threatens of a currency crisis (Thunder Bolt)!