Saturday, March 28, 2009

Before the G-20 Summit, 2009.

‘Perhaps it is freedom, of speech and conduct, which is really envied by the unsuccessful – not money or even power.’ - Graham Greene in, 'Travels With My Aunt'.

The American Dream, and its many variations, has driven the process of creativity further than any other single phenomenon in modern times. The films, books, plays and innovations driven by it have had as much of an effect on the industrialist flying in his private jet across the Atlantic Ocean as on the street-hawker sitting on a pavement at a judicious crossroad in Bombay. And we are seeing the first signs of its deadly implications on a global scale today.

It has been many months and counting since the global recession has hit the headlines and it seems that the bad news is not going away. We are hearing about multi-national bank closures, government bailouts, a revaluation of the economic system the world over, and scary forecasts about local unemployment in India. Along with the jargon being thrown at us from every so called ‘expert’, there seems to be a base ignorance or an unwillingness to name the underlying reasons behind the gloom at the heart of the financial crisis. But for anyone who has possessed even a passing interest in the predominantly free-market model of capitalism practiced in the West, this crisis was undeniably waiting to happen for a long time.

The United States of America has been the only superpower in the world for the last fifteen years ever since the collapse of the Soviet Union in the early 1990's. This event resulted in a radical shift of economic policy in almost every country in the world – on both sides of the Cold War fence. The few countries that refused to recognize the local repercussions of this major event at the time have been almost completely marginalized and are arguably much worse-off today as a result. In our own country the economic change that the collapse of the Soviet Union spawned, gave rise to a not-so-silent revolution in almost every sphere of life, but it was not so much a choice as an imperative necessity. The ‘with-us or against-us’ heavy-handed strategy of the U.S. is not only a trend of the War on Terror campaign, it has been an accepted form of their foreign policy, both economic and military, for most of the last two decades. And this is the major reason that their current economic crisis is now being felt in widely divergent areas of endeavour across the globe – from international government-backed aid efforts in the poorest parts of the African continent to the country of Iceland whose local banking industry resulted in a country of just four-hundred thousand people located at the northern most part of Europe being the dominant story in the news for well over a month. What exactly happened?

Every aspect of economic activity is dependent on the laws of supply and demand. If I create a product or a service, the value of the said product or service is determined by how much people need it. These people are labelled consumers, and it is a fact of life that consumers can be led to believe that they absolutely need a certain thing that they can very well do without. In the U.S., local consumers were told that they absolutely needed bigger and better houses in more beautiful and more spacious areas of the country they inhabit. It was not important that most of these consumers would not be able to afford the high mortgages that came with the decision to satisfy what they term, ‘The American Dream’. Big banks lent vast sums of money to small banks, and the small banks lent vast sums of money to millions of people, at ‘competitive rates’ of course, with no regard to the fact that they would not be able to repay the loans at their current levels of income. It is also a fact that these small banks lent consumers the money to buy homes in the hope they would aspire, by any means possible, to be able to work towards being able to afford the high loans. Now, the housing bubble led to raw materials being sourced from thousands of small, medium and big industries across the world, an example of what we now know as globalization. And this provided employment to millions of workers in the manufacturing sector of China, among other countries, who were completely dependent on the needs of consumers in the U.S. You might ask at this point, why only American consumers? What about consumers in other countries? The reason, it has now been discovered, is that American consumers along with a comparatively miniscule proportion of their counterparts in other regions of the world believe whole-heartedly that it is not necessary to assume that you cannot possess a thing that you cannot afford – you can always buy things on credit.

So houses were being built for people who couldn't afford them and the well-oiled wheels of progress were churning on, until there came the time to pay all the money back. Naturally the plumbers, electricians, teachers, small businessmen, etc. could not pay their large mortgages back to the small banks on their current levels of income. The small banks could not pay the big banks back, and the big banks had to close down because they were now bankrupt. You might ask, at this point, why all at once? These sorts of things happen all the time, don't they? And the answer is that this is the definition of a ‘bubble’. Bubbles occur in every industry – the valuation of a product or service is sometimes inflated to many times its value, and then the inevitable correction to its precise value arrives, which is sometimes hard on a few companies, but just as inevitably leaves the whole industry much more stable. But the issue in this case is that a house is the largest purchase that most people, even Americans, make in their lifetimes. And the ancillary industries that depend on the building of houses are varied and spread out across a range of industries – e.g. steel, timber etc. When existing houses have to be ‘foreclosed’, a lot of these subsidiary industries suffer because of the drop in demand for new housing. And in today's world, the subsidiary industries are located in various other countries in the world, all with their own companies and local workers. When you put such a large amount of money into one particular industry such as housing, which is experiencing a bubble, which was the case for a lot of big banks in the U.S. and the world, and you do not get repaid when the correction comes, then all the other areas or industries that you have been putting money into at a lesser level become liabilities. And because you do not have the money anymore to be functional you declare bankruptcy. And a hole is now created. A major fact in this system is that the big banking institutions get their money from the stock market, or more accurately, from investors who invest in them, and who are also expecting to be paid back. When you cannot afford to pay such a large amount of money to such a large amount of investors back, there is a knock-on effect in all the other industries that investors have put their money in. There is a large fear-based withdrawal from the stock market by the investors, which leaves all the other companies in the stock market without the money to conduct their own businesses in other areas of industry and they close up as well. The fear now spreads to banking institutions not in any way connected with the housing industry. Can we lend money now to people to buy a car, they ask for example. Suppose they don't pay back? And they start to re-evaluate the potential for consumers to pay back their car loans. This leads to less production by the car companies who are the ultimate target of these forecasts because they are dependent on other financial institutions to lend them money to make their cars. The car companies now lay-off workers because they make fewer cars. And the workers now cannot afford to be the consumers they once were because they have now lost their salaries. And the knock-on effect goes on until it permeates the lives of every individual dependent on his salary to continue being a consumer in the economy. This is an economic crisis.

We have already seen how a crisis in one large industry, such as housing, can lead to crises in other industries as well. What we tend to ignore is the power of the American consumer to dictate the fortunes of individuals in other areas of the world. China's industries are already suffering because of the credit crisis. The demand from American consumers, who make up their biggest customer base, is now dropping for the products that their innumerable factories churn out. The American consumer suddenly has less money to indulge in things that they now perceive as unnecessary luxuries but which they earlier took for necessities. To assuage the ‘necessities’ of the American consumers was the main reason that many local factories in China began functioning. Thousands of Chinese factory workers working for comparatively much lower wages than their American counterparts (and without a similar access to credit) are, or will be, suddenly without jobs. The same applies to workers in India – in Manufacturing, I.T. and other industries. The all-pervasive American demand for their work is now gone, or is much less. And many families who did not depend on loans but on their hard-earned salaries to invest in their children's education or their basic upkeep now find that the means to fulfil their plans have evaporated.

We now know that the whole system of Western capitalism is flawed, in a very fundamental way. We also know that there is really no alternative to it since the collapse of communism, even in a quasi-socialist system with its evident inequities. What the world needs now is a revamp of what the people of the U.S call, 'the American Dream'. Their citizens need to be realistic about their goals and aspirations and question the diktats of what they are told by their leaders and captains of industry with a healthy scepticism. The dependence of other countries' economies on the largest, richest and most powerful customer base that is the United States of America will not lessen for another twenty-five years. Or at least until the local demand and purchasing power in other emerging economies like China and India with their large populations, a substantial proportion of whom are still mired in poverty, outstrips that of the vast U.S. consumer base.

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