Sep 15, 1998|
The 'D' word
There are a lot of "D" words floating around these days. In the United States,
stock markets juggle with a few of these "D" words at any given point in time.
The US stock markets swing between the "denial" syndrome and the "deflation"
syndrome. In October 1997 just after the Korean currency went into a free-fall,
the Dow Jones Index stood at the 7,200 level. A wall of money and soothing words
from equity analysts and corporate chiefs took the Dow to the 9,500 levels. Now,
it stands at 7,300 - back to the October, 1997 levels - despite the fact that
the world economy looks a lot sicker than it did when Korea threw in the towel.
And yet, many people in the US are still in a "denial" mode. Russia has been
described as a "rounding off" error and Asia as a 1% effect on corporate profits
of US companies. Yet, it was these same companies and equity analysts who a few
years ago, told us that the future growth of the multinationals was the potential
demand in the emerging economies. How many more cars can Ford sell in USA and
Europe? How much more toothpaste can Colgate sell in the developed world?
Yes, the demand that was supposed to be there in the developing world still
exists but the people living in the emerging economies are a lot poorer today
than they were twelve months ago and cannot afford to pay for a lot of the
products that the multinationals hoped to sell to them.
Which takes me to the next "D" word spoken by a few brave people: deflation.
With so many car, toothpaste, and petrochemical factories built all over the
world and fewer people to buy them, prices of various products will decline.
That takes us to a deflationary environment. Deflation is bad for economies:
if the price of a car will be lower tomorrow, then most people will buy the
car at tomorrow's lower price and not today's higher price. Since deflation
is a lot of tomorrows, people will stop buying many things and that will
reduce economic activity further and lead to a self-fulfilling depression.
Now that ("depression") is a "D" word that some really courageous folks are
beginning to whisper.
And the last truly global depression is best characterised by the Crash of 1929
when wealth was decimated on a global scale. In the 1920's, it was the European
markets that led the downturn to the US stock market. Seventy years later, history
may record that the Asian economic crisis caused the domino (another "D" word)
effect that has rattled Latin America and impoverished Russia. Suddenly, the new
world and the new paradigm of technology leading us into a golden era of sustained
prosperity has been shattered. Economic cycles have proven that they are not
dead (another "D" word) and that the humans who make decisions are apt to make
blunders and mess things up. We may not be getting smarter, but we could be
getting dumber (the "D" word again) in latching on to false gods. The theme for
much of the past fifteen years has been de-regulation (the "D" word again) and
many governments did away with capital controls and allowed the free movement
of money. Six bankers in a musty room were not smart enough to determine a
country's exchange rate, but thirty year-old traders manning computer terminals
were assumed to be a lot smarter than those six safari-suited men. Well, the
world has got it wrong. The markets know as little as the men in the safari
suits and, what is worse, the markets now have a time horizon and attention
span of a few minutes.
It is still a fashionable view in Delhi (the guru of all "D" words) that
depreciating (note the "d") the Indian currency is the path that India must
follow. India, you see, must track the Japanese yen in its "d"ownward spiral
and stay competitive with products manufactured by the Japanese. Sure, the
next time you see a tourist buying a Sony walkman, advise him to buy the
better Indian version. By allowing the currency to weaken, India only succeeds
in forcing the multinationals to "d"elay their investments in India. And any
delay in fx inflows only hurts the "d"elicate fx reserves position of the
country. Weakening your currency causes it to weaken more than what you
really wanted it to and can take an economy to the brink of "d"isaster.
See how "d"angerous one action can be.
Which takes me to another "D" word: if President Clinton had only kept his "
d" under control, we would not have to be here reading all these "d" words!
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