Monkeybelle

Monkeybelle

People who say that a new year is just a date designed to mark time passing, may be struck by the speed and pace of momentous developments, both at home and abroad, since the 1^st of January 2016.

Of course, there are many new year dates celebrated by different people, communities , cultures, and religions. But the over-arching one, Christian and originally Catholic as it is, standing atop an ancient Roman  (Julian) calendar,  is universally acknowledged and celebrated.

The Gregorian Calendar was devised in the reign of Pope Gregory XIII, in 1582; back in the day when popes were puissant.

Next month, on 8^th February, we will also welcome the Chinese New Year, and enter into The Year Of The Monkey. The monkey year is characterised by sudden changes, disruption, even delight, at least in some quarters.

But 2016, seems to have an explosive quality to it, sometimes a prelude to war and devastation, chaos, and wild swings of the pendulum.

It may be why, even as India and Pakistan attempt, once again to resolve their differences peacefully, there was a fresh terrorist attack on a major air force base at Pathankot. And North Korea, unofficially nuclear weaponised since 2006, let off a powerful hydrogen bomb underground, occasioning a 5.1 Richter scale event.  

The Chinese new year is worth a special mention because, in many ways, the paroxysms of the Chinese economy, and the changes it will force, both in China’s global stature, and its stance, and its ramifications felt far and wide, may well define 2016.

Just as perhaps, the precipitous decline in oil prices and the geo-political power equation rearrangements it occasioned, marked 2015, the year just gone by.

And, of course, there was in 2015, at last, after a pause that lasted over a decade, the first little uptick in US interest rates. It was speculated upon as imminent for at least two calendar years before it finally happened. And that too, with just a 0.25%  hike.

It signals, tentatively enough, that America is growing its economy again, that it is stable now. This even though the US Federal Reserve Bank Chairman Janet Yellen has reserved the right to change course once again, if warranted by subsequent events.

Meanwhile, the US dollar, the world’s trade and reserve currency, has been getting stronger in anticipation. Investment funds have been gravitating back from the emerging markets, even from still economically beleaguered Europe,  once more towards the behemoth of the  US bourses.

This is not altogether helpful, however, for US exports, including its high technology military exports and its civilian aeroplanes. But, the US government has many ways to soften and sweeten such deals.

But here, only days into January, we have the Chinese economy under fresh stress. There have been two 7% plus tumbles of the Shanghai Composite Index in the first week of January, and sudden, 4% plus devaluations of the Yuan, its external currency.

Says billionaire international investor George Soros, as reported in The Economist, the bells have begun to toll for a recession in China.  

In addition, respected market savant Marc Faber, thinks lower global liquidity due to fallen crude prices, may lead to the US crash of 2016, capable of dwarfing that of 2008. Others, will probably also add their voices to this gloomy outlook going forward, citing their own, and varied, reasons.

One point made by some leading economists, including our own Raghuram Rajan of the RBI, is that prolonged stimulus involving billions of dollars a month, both in the US and in the EU, has only kicked the recession, even depression, can down the road.

These analysts expect a day of reckoning to come, when a sharp adjustment against the trillions in debt is inevitable. And it could come because of unexpected external events, the famous Black Swans.

However, it must be said, austerity as a nostrum, the binary alternative, has not been politically popular wherever it was initiated in recent years, and had to be rolled back. And when it was last enforced, it resulted in the Great Depression of the 1930s, that not only caused untold hardship to millions but lasted for over a decade.

And it was massive public expenditure financed by deficits, followed by the economic boom of war production during WWII, that pulled the US out of it in the end. Are we then perhaps headed for WWIII? Mankind cannot, of course, hope to survive a nuclear war of any kind, and therefore, may have to content itself with opening the safety valves of several lesser conflicts!

But now, unavoidably, a $12 trillion Chinese economy, with many unviable secrets born out of totalitarianism, second only to that of the US, in absolute, and not PPP terms, is apparently  going down. The world economy will be deeply roiled by China doing its best but likely failing at staving off a recession.  

This coming after more than three decades of roaring growth, that has been slowing, ever since 2008.  

The cracks are appearing all over: in China’s stubbornly inflated external currency, the Yuan, being devalued now by 3-4 percentage points, in a sudden jerk with more to come; in its vanished exports, badly compromised banking system, its opaque state owned companies, the rampant, somewhat irrational speculation in the Shanghai Composite Index by millions of mainland punters.

Then there are its China financed infrastructure contracts around the world that are still insufficient to propel the necessary growth in the economy. The vast acreage of empty housing and offices in its major cities. The over-built infrastructure with poor returns on investment, in a slow, inward looking economy today, still trying to grow its domestic consumption to substitute for the drying up of exports.

There is the huge military expenditure, on the substantial and powerful PLA and the Chinese armament industry. The defence industry is difficult to finance with insufficient external demand, and doubly hard to sustain in a recession.

China’s typical forward policy, using muscular diplomacy, with massive grants and soft loans to pave its pathways, also suit a rich country better. Of course, there are trillions in reserves from the good years, but how long will they last?

Saudi Arabia, for example, calculates it has enough to hold out for 6 or 7 years if it does not cut expenditure. But the ruling Saudi royal family of 2,000 princes, are dealing with a very small population of just 28 million, and even then it is battling domestic unrest already.

47 people, one Iranian Shi’ite cleric  and 46 Sunnis from the 85% majority community were beheaded recently for ‘treason’, in a blood- letting not seen since the 1980s.  

Subsequent tensions with Iran have resulted in diplomatic relations being snapped.

And the aerial pounding of Shi’ite rebel Houthis, backed by Iran, in neighbouring Yemen, is not yielding the results hoped for. Instead, it is taking on the contours of Saudi Arabia’s own Vietnam.

And if we talk of the threat from ISIS, not so much in Saudi Arabia, but in Syria, Iraq, Libya and so on, there is a stark picture of West Asian instability.  

The oil scenario   is unrelenting too. The abundant US shale oil industry, able to break even at $ 20 a barrel, even the current prices in the mid-thirties ( India’s own average purchase  is at $29 a barrel now), delivers a profit.

Saudi Arabia, it is reckoned, needs a $ 105 price per barrel to sustain its present rate of expenditure.  But this level of over $100 a barrel is unlikely to come back, unless the global glut, via catastrophe, turns into scarcity once again.

Yet, economic austerity of any kind could upset the apple cart for the rulers in both Saudi Arabia and China.  

Also, even as international demand from the previously oil rich countries for goods and services decline, it does likewise from China too. And this includes the consumption of China’s neo-rich. And, most importantly, the millions and millions of people in the Chinese countryside, with not much to fall back upon, could be a source of unrest.

There is also the concerted effort globally to reduce long term dependence on fossil fuel in favour of ‘green’ solutions, reduction in global warming, and  toxic emission, to consider.

By the time we get to 2017, we can certainly congratulate ourselves, if India, becomes one of the few countries that manages to grow strongly, riding on the back of a much smaller oil bill. As for the world, it will have done well enough if it does not spin into a catastrophic war it cannot control.

For: Swarajyamag

(1,429 words)

January 8^th, 2016

Gautam Mukherjee