India Trade Deficit and Economic Fundamentalism
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Dr. Susmit Kumar, Ph.D.
Note: This article is not about any individual. Instead, it is about the fraudulent and bogus “Reaganomics” economic policy, which is being religiously preached by nearly all US economists/MBAs and Wall Street.
When the future of world trade was discussed and the Bretton Woods conference was planned during World War II, many Third World countries were still under colonial rule and had absolutely no say in those discussions. The main deliberations took place between the United States and Britain exclusively, and at Bretton Woods all other countries were invited simply for the formal signing-in ceremony.
Reasons behind India's Economic Crisis and their Solution
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Dr. Susmit Kumar, Ph.D.
Currently, nearly all economies, including the Indian economy, are facing a downturn. But the downturn of the Indian economy is much worse than others, mainly due to the record NPA (Non-Performing Assets) of the banking and non-banking financial sectors, as shown in Chart 1, which is the highest among the large economies. The record NPA is not due to any faulty policy of the Modi administration, which took over in 2014. Instead, it is due to large scale corruption during the Congress-led UPA governments from 2004 to 2014. During that period banks were forced to provide loans to dubious people after getting calls from the highest level of the government. The NPA has grown from 2.5% of total loans in 2011 to 10% in 2018. Without this record increase in NPA, the Modi administration would have been able to use this same 7.5% money (of outstanding loans) to jump-start the economy.
Think Twice Before Accepting Any Statement of a US Economist/MBA
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Dr. Susmit Kumar, Ph.D.
Few days ago, our Economic Affairs Secretary Shaktikanta Das said in Japan, “In particular, it points to S&P Global Ratings keeping China at “AA-“ despite rising debt and slowing growth, while India has been kept at one step above junk….China’s reported debt surged to 264 per cent of its GDP at the end of 2016, from 193 per cent in 2009. In contrast, India’s debt fell to 66 per cent of its GDP from 72 per cent” (Rating agencies far detached from India’s ground realities: Das, The Hindu, May 6, 2017). In reality, the factors, described by Mr. Das, have nothing to do with our “BBB-“ rating. Credit rating depends on factors like the probability that loan would be repaid. There is no significant change in Indian economy after the India’s Capital Account Deficit (CAD) crisis during 2011-13. Indian economy is still vulnerable to external factors like crude oil price, NRI remittance and Foreign Direct Investment (FDI). Also India is nowhere as compared to China because India has trade deficit year after year in last two decades whereas China has trade surplus during the same period.
Niti Aayog Needs to Stop Following Reaganomics, responsible for Bankrupting the US
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Dr. Susmit Kumar, Ph.D.
[Note: I do not get time to read all the recommendations of Niti Aayog. Sometimes I read Niti Aayog’s recommentions in newspapers. Several weeks ago, I read about its recommendation on Coal India and hence I wrote an article on it which is at my website also. Today I read about the issue which I am writing below.]
As per Niti Aayog’s recommendation, non-performing or "hollowed" government schools should be handed over to private players. The private sector would adopt government schools while being publicly funded on a per child basis (“Hollowed govt schools should be handed over to pvt players, suggests Niti Aayog, Deccan Herald, PIT, August 29, 2017). In India, having wide-spread corruption, it would end up with privatization of majority of government schools because the private firms, in the business of running these schools, would be able to easily manipulate the state officials and ministers to privatize them. In majority of advanced countries like the US and Canada, the school system (elementary school, middle school and high school) is still in public domain. The school voucher system is a pet project of US Republican Party under their much-revered “Reaganomics” policy.
Stop giving any consideration to Privatization and Consolidation of Public Sector Banks: Needs cleansing and overhaul of the entire financial system
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Dr. Susmit Kumar, Ph.D.
After the $2 billion Punjab National Bank (PNB) scam has come to light, Arvind Subramanian, the Chief Economic Advisor (CEA), is forcefully advocating the majority privatization of public sector banks (PSBs) (Time to study PSU bank privatisation: Chief economic advisor, The Times of India, February 18, 2018). It is worth noting that Mr. Subramanian is also vociferously advocating consolidation of banks in India (CEA bats for bank consolidation, The Tribune, October 26, 2017).
In US, banks and financial institutions, including the US Federal Reserve Bank (US equivalent of the Reserve Bank of India) are in private hands. As we will see in this paper, the bank officials and Wall Street bankers were responsible of the 2008 Banking Crisis in the US, which created the 2008 Great Recession in the US and world-wide recession, but as the US banks are “too big to jail/fail,” not a single bank official was prosecuted despite having documentary proofs of illegal means (which can be termed as day-light robberies), used by the bank officials and the Wall Street bankers. These bankers made hundreds of billions of dollars by using illegal practices. Since early 2000s, bank officials in US started creating shading mortgages and the Wall Street bankers created shady derivatives on the top of these mortgages. The ultimate losers were the ordinary Americans, who were tricked into purchasing these shady mortgages, and also people, both in US and throughout the globe, who were tricked into purchasing these shady derivatives. The US government had to spend trillions of dollars (several thousand times the $2 billion PNB Scam) to overcome the 2008 banking crisis created by these corrupt bankers. Just a decade ago before the US bankers started creating shady mortgages in early 2000s, the US had to spend taxpayers’ $132 billion (trillions of dollars in current US dollars) to overcome the 1990s Savings and Loan Crisis, caused by the US bankers. It is worth noting that nearly 1,000 bank officials were sent to jail for their parts in the Savings and Loan Crisis. The Savings and Loan crisis was one of reason for the early 1990s recession in the US. There have been similar bank scams in other Western countries also.
Dump the New Transport Infrastructure Policy
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Dr. Susmit Kumar, Ph.D.
I find Mr. Nitin Gadkiri’s plan for public transport infrastructure very troublesome because his plan would create massive privatization of transportation all over India. The prime motive of private firm is profit and job creation is the least priority.
As discussed in this article. Mr. Gadkari needs to again go back to drawing board to come up with a transportation infrastructure policy for India otherwise there would be massive unemployment in India.
As per recent newsreport (India's public transport infra to be developed on London model: Gadkari, The Tribune, January 31, 2019) – “[Mr. Gadkari] … said that World Bank can come out with a total public transport vision for India and added that public sector Wapcos which has inked a joint venture with Austria's Doppelmayr has prepared two project reports for skybuses in India.”
Here is the question – at how many places in the world, skybus is being used for mass transportation?? Answer is less than 20. Skybus technology is more than 50 years old. Skybus is a jewelry for India which it does not need. Also China is not using it for mass transportation and hence India should never go for it because China, having similar population, is far ahead of India in infrastructure.
China’s OBOR and Niti Aayog
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Dr. Susmit Kumar, Ph.D.
By watching the grand show of China’s OBOR (One Belt One Road) Summit, attended by 65 countries, including US and Japan, all Indians are feeling dejected. Under the OBOR project, China is planning to spend $1 trillion to reshape the global economy. This is one more step taken by China in its goal to replace the US as the super-power. Indians have to blame their political leaders for letdown. Both China and India started the economic liberalization nearly at the same time in the early 1990s, but China is now the global economic leader whereas India is nowhere. Since then, India have run trade deficits year after year whereas China had trade surpluses, enabling it to amass four trillion dollar FOREX (FOReign EXchange), making it the undisputed country to replace the US as the world’s number one economic superpower. Yes, the growth rate of India in last couple of years is the highest in the world but it is vulnerable to economic collapse, due to an economic crisis as a result of generating trade deficits year on year.
China Does Not Care For US Credit Rating Agencies
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Dr. Susmit Kumar, Ph.D.
Rather than paying any money towards its principal, which is right now more than $19 trillion, the US has been accumulating additional debt of anywhere from $300 billion to $500 billion each year. While describing the US debt, Niall Ferguson, Laurence A. Tisch Professor of History at Harvard University said, ("In China’s Orbit", Niall Ferguson, December 1, 2010)
“With a debt-to-revenue ratio of 312 percent, Greece is in dire straits till now. However, the debt-to-revenue ratio of the United States is 358 percent, according to Morgan Stanley. The Congressional Budget Office estimates that interest payments on the federal debt will rise from 9 percent of federal tax revenues to 20 percent in 2020, 36 percent in 2030, and 58 percent in 2040. Only America’s “exorbitant privilege” of being able to print the world's premier reserve currency gives it breathing space. But this very privilege is under mounting attack from the Chinese government.
If a person or a firm is not able to pay his or her yearly expenses, and only increasing their debt year after year, banks will certainly stop providing loans. Then again, the US Treasury Debt has one of the highest ratings from world renowned credit agencies such as S&P, Fitch and Moody’s.
Rupee Crisis - Who is to be blamed and How to solve it
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Dr. Susmit Kumar, Ph.D.
Due to high crude oil price, Indian rupee is sharply going down. During first three years of the Modi administration, the rupee was stable as it went down from 1:62 (USD:Rupee) to 1:64 only, but in last several months of this year, India is facing full blown currency crisis as rupee to USD is now 72 and it is the worst performing currency among all the Asian currencies.
As we have seen in two previous rupee crises - 1991 (resulting in IMF bailout) and again during 2011-13 – both our rupee and our economy are vulnerable to the crude oil price. On the other hand, increase in crude oil price does not have such detrimental effect on economies of China, Japan and Germany, the economic superpowers apart from the US which solves any economic crisis by just printing its currency, taking advantage of the fact that its currency is the global currency. One point worth noting is that all three economic superpowers, namely China, Japan and Germany have had trade surpluses in last several decades. Without having trade surplus for couple of decades, India cannot even dream of becoming a superpower.
US Business Schools, Wall Street and India
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Dr. Susmit Kumar, Ph.D.
In 2009, I attended a conference on Indian economy at a Business School in a Midwest university which is in top five business schools in the US. During the first session, I raised the question that yes Indian economy was booming, but its trade deficit had been increasing like the US trade deficit and US could pay it by printing its currency but India would face a crisis down the line. I also mentioned that I had just published a book in 2008 which had discussion about Indian and global economy in detail. They did not give any direct answer. After my question, they changed the format of question from audience (after the first session) - in the first session, you just needed to raise your hand to ask question. But now they asked to submit questions on a piece of paper to the moderator and it would be up to the moderator to choose from the submitted questions. They did this change because any talk about debilitating effects of growing trade deficit on Indian economy would have had ruined the conference whose aim was to present the bright side of the economic growth in India. In fact just after two years of the conference, Indian economy was in the midst of a grave crisis. Due to record trade deficits during 2011-13, the exchange rate of the rupee (vis-à-vis the US dollar) tumbled from 44.17 in April 2011 to 62.92 in September 2013. After the sharp devaluation of the Indian rupee and double digit inflation during 2011-13 due to the high crude oil price, some economists even started to write the obituary of the Indian economy (read: "None of the experts saw India's debt bubble coming. Sound familiar?", The Guardian, UK, August 26, 2013; ‘Fragile Five’ Is the Latest Club of Emerging Nations in Turmoil, New York Times, January 28, 2014).
Coal India - Niti Aayog Needs to Treat India as a Country, Not as a Firm
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Dr. Susmit Kumar, Ph.D.
Coal India is the country's second-biggest employer. As per a June 2017 Niti Aayog draft of a new energy policy, Coal India Ltd (CIL) should be broken up into seven independent companies to make it more competitive. Apart from this as per the draft paper, fresh production from new mines should come from private sector, calling for comprehensive reforms in allocating coal blocks on commercial lines to independent companies. The division of CIL is fine, but private sector in new mines will be death knell for CIL.
India and the US - Jobless Economic Growths - Part I
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Dr. Susmit Kumar, Ph.D.
Recently in India, some economists have argued that as India has been experiencing nearly 7% GDP growth rate, there has to be corresponding job growth also. As per these economists, proper surveys are needed to find the jobs being created due to 7% GDP growth rate. In the last couple of years, in places like Noida in NCR (National Capital Region), rents have gone down drastically which shows that good-paying jobs are not being created.
India's Real Estate Contradicts Job Growth Theory
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Dr. Susmit Kumar, Ph.D.
The US GDP nearly doubled between 2000 ($10.28 trillion) and 2016 ($18.46 trillion), but instead of increasing good paying jobs, the US lost more than 5 million such jobs during the same period (Chart 1) whereas the job growth was in the low-wage sector ((Recovery Has Created Far More Low-Wage Jobs Than Better-Paid Ones, Annie Lowrey, The New York Times, April 27, 2014). The total number of jobs lost may be two to three times of the factory jobs, if we consider indirectly associated jobs also such as in schools, hospitals, apartments/homes, home repair related jobs, gas/petrol stations, restaurants, grocery shops and auto sector as factory workers would spend their income in these associated fields (please read my article: The Hidden Cost of Imported Items and The Need to Redefine Modi Administration’s “Make in India” Policy). In a small town, if a factory, having couple of thousand workers, closes, it devastates the entire town.
India and the US - Jobless Economic Growths Part-II
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Dr. Susmit Kumar, Ph.D.
Recently in India, some economists have argued that as India has been experiencing nearly 7% GDP growth rate, there has to be corresponding job growth also. As per these economists, proper surveys are needed to find the jobs being created due to 7% GDP growth rate. We will see in this article that despite having 2% to 3% GDP growth rate in last nearly two decades (except the few years of recession), the US kept losing a significant amount of good paying jobs year after year (Chart 1), with job growth coming from mostly low-wage industries. As India is following the US economic policies, there is no wonder that most of the job growth in India may be coming from low-wage industries, which are not being considered in the existing surveys. In this regard, it should be noted that India’s trade deficit with China (Chart 2) is following the same trend as the US trade deficit with China (Chart 3). Due to over-valued dollar, even a low-wage worker in US has living standard of a middle class worker of India (please see my article: Coal India - Niti Aayog Needs to Treat India as a Country, Not as a Firm). But once a high-wage or middle-wage worker in India loses his job and gets a low-wage job, he will be nowhere.
Productivity, Growth Rate, Trade Deficit and Jobs
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Dr. Susmit Kumar, Ph.D.
The US GDP nearly doubled between 2000 ($10.28 trillion) and 2016 ($18.46 trillion) (please see Chart 1), but instead of increasing good paying jobs, the US lost more than 5 million such jobs during the same period (Chart 2) whereas the job growth was in the low-wage sector (Recovery Has Created Far More Low-Wage Jobs Than Better-Paid Ones, Annie Lowrey, The New York Times, April 27, 2014). Therefore it does not make any sense if someone, especially a US-based economist, tries to claim that if India has 7% growth rate, there must be [good paying] job growth also. It is said – what you sow, you reap. As India is following the US economic policies, no wonder most of India’s job growth come from low-wage industries.
Where are the Jobs?? - Please stop talking about $8 trillion GDP in 15 years
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Dr. Susmit Kumar, Ph.D.
In US, the real estate is considered a parameter to measure the job growth in a region. In US Midwest, real estate collapsed during the 2008 Great Recession and still it has not improved. If you try to sell a home in Midwest, it generally takes 8 to 9 months to sell it and it is sold at about 8% to 10% below the market rate. On the other hand if you try to sell a home in Silicon Valley, California (which has the highest per capita income in US), it would sell within a week or two for 10% above the market value. Please see at bottom of this email two cases - (i) one in Rust Belt in US and (ii) another in Silicon Valley, California. This will tell you why Americans in Midwest voted for Trump.
PM Modi, Resignation and Economic Reforms
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Dr. Susmit Kumar, Ph.D.
Right now writers at financial websites like Forbes and Bloomberg are criticizing the Modi administration for the resignation of Mr. Panagariya, claiming that PM Modi is turning back on reforms. But the question is - what kind of reforms they are talking about? These economists/MBAs/Wall Street have destroyed the US economy and middle class in the US. I lived in Ohio (a state in US) for 15 years and it is part of Rust Belt in US which has suffered massive job losses due to shifting of manufacturing jobs to China - the median salary in the state was $56,400 in 2000 whereas in 2013, it was only $48,000, i.e. 15% drop - nearly all the states in Midwest (in US) have similar drop in median incomes (5 States Where the Middle Class Is Being Destroyed, Sam Becker, July 30, 2017, www.cheatsheet.com). Do we need a similar "reformed" economy in India?
US Economy Is Socialist, Not Capitalist
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Dr. Susmit Kumar, Ph.D.
Since the mid-1990s, the US government has been decreasing taxes for the rich. Apart from this, the Wall Street, in collusion with economists and MBAs, compel firms to show profit every quarter to be given to the shareholders, the majority of whom are ultra-rich. In general, socialism has come to mean that the government takes money from the rich to give to the poor. The last four decades of the US economy have seen the opposite, i.e. the US government, in the garb of “Reaganomics”, and Wall Street have transferred massive amounts of money to the ultra-rich from all others (please see Table 1 and Charts 1 to 7 below).
India Is A Country, Not A Firm
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Dr. Susmit Kumar, Ph.D.
After the 1991 economic liberalization, US- (and to some extent UK-) educated/based economists have had great influence on the Indian economic policies. It is worth noting that due to Margaret Thatcher, the British Prime Minister during 1979-90, the UK has been following the “Reaganomics,” i.e. small government, lower taxes, free trade and privatization. But the US economic policies cannot be applied in India at all because the former is based on a Ponzi scheme called “US Dollar” (read my article The US Dollar – A Ponzi Scheme) (please read “Note” at end of this article also). The US had trade surplus from the end of World War II till the early 1970s, but since it has had trade deficit year after year. The reason for it is that Nixon de-linked the dollar from gold in 1971, after which the US has just continued to print dollars whenever it wants, to fund its trade and budget deficits. This has been going on for more than three decades, since the Reagan administration. This US economic policy cannot be implemented in India at all because India cannot print its currency to pay for its trade and budget deficits.
Credit Rating Agencies and US Rating
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Dr. Susmit Kumar, Ph.D.
After the 2002 US midterm elections, when the then Vice-President Dick Cheney started proposing tax cuts, Treasury Secretary Paul O’Neill told him, “the government is moving towards a fiscal crisis,” and moved on to explain the ill effects of rising deficits to economic and fiscal soundness. Cheney replied, “Reagan proved deficits don’t matter.” A few weeks later, President Bush asked O’Neill to submit his resignation (Ron Suskind, The Price of Loyalty, New York: Simon & Schuster, 2004, 291) and found a Treasury secretary who would rubber-stamp his tax cuts. It is worth noting that O’Neill, a lifelong Republican (party to which President Bush belonged to), successfully ran Alcoa, the world’s largest aluminum producer, for twelve years as its CEO and chairman. At that time, the US Government debt was about USD 6.2 trillion only whereas it is now more than USD 19 trillion, i.e. the debt has since tripled. Due to the advent of Information Technology and subsequent boost to the US economy, the US was able to eke out a small budget surplus during the last years of the Bill Clinton administration resulting from the subsequent tax collection increase.
The US Dollar – A Ponzi Scheme
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Dr. Susmit Kumar, Ph.D.
Published at South Asia Monitor on February 27, 2017.
Recently US President Donald Trump declared China the "grand champions" of currency manipulation, only hours after his new Treasury secretary pledged a more methodical approach to analyzing Beijing's foreign exchange practices. [1]
Nearly all US economists, including Nobel Prize winner in Economy Paul Krugman, do not tell the truth. Krugman has maintained that undervalued Chinese currency is the main reason behind the massive US trade deficit. As per him and C. Fred Bergsten, director of the Peterson Institute for International Economics, "Beijing uses currency manipulation to maintain the value of its currency, the yuan, at an artificially low value, which makes its exports much cheaper and its imports more expensive."[2]. Since 2010, China’s Yuan has appreciated by 20 percent vis-à-vis the dollar, whereas the US trade deficit with China has not decreased.
Niti Aayog Policy Papers are Death Certificates of the Indian Economy
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Dr. Susmit Kumar, Ph.D.
In a small town, if a factory, having couple of thousand workers, closes, it devastates the entire town, of population having say 10,000, because the total number of jobs lost may be two to three times of the factory jobs if we consider indirectly associated jobs as well, such as in schools, hospitals, apartments/homes, home repair related jobs, gas/petrol stations, restaurants, grocery shops and auto sector as factory workers would spend their income in these associated fields. In the US Rust Belt states, towns after towns have witnessed this devastation due to large scale shifting of manufacturing units to overseas. The owner of the firm would only consider the profitability of firm while deciding to reduce its workforce or its closure. But on the other hand, the government needs to take into consideration entire town before taking the same decision. The government should never take decision considering the country as a firm. That’s why I decided to keep the title of my new book as “India is A Country and Not A Company” (Munshiram Manoharlal Publishers Pvt. Ltd., New Delhi, Rupee 350, 212 Pages, 2018). India has not fought any war in last 46 years, i.e. after 1971 but it has spent hundreds of billions of dollars on defense without thinking about any profit from this sector. The wellbeing of its citizens should be the top priority of the government. It has to provide means to its population so that they can get minimum necessities, like food, housing, education and medical. The middle class wants jobs and not just the handouts. Hence using its resources, which are of course limited, the government has to provide jobs to them.
China, Brahmaputra, Privatization of Government Services and Income Inequality
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Once I had a discussion on Indian economy with an Indian-origin US-based MBA who lived in Silicon Valley, California. When I explained the reason behind the demise of job growth in India, saying the massive privatization by the government had reduced the purchasing power of millions of Indians as in low category jobs, workers are paid much lower than in similar government jobs. For an example, a car driver gets only say 10,000 rupee a month in Delhi (5,000 rupee a month in state capital like Patna and 3,000 rupee a month in sub-divisional towns) in a private firm whereas a similar job in government fetches 30,000 rupee a month; the owner or the shareholders of the private firms, which are providing the privatized services to the government, are making millions and billions. Like brain-washed Americans, he said that being a tax-payer, he did not want a driver to be paid 30,000 rupee (taxpayer money) a month when a private firm could deliver the same service for 10,000 rupee a month. Then I gave him the following example:
Nearly entire catchment area of Brahmaputra river is in China whereas India and Bangladesh gets all the water. Therefore as per his theory, India and Bangladesh should not object if China diverts all the water of this river to its massive desert areas in the north. It is worth noting that the economies of several Northeastern Indian states and Bangladesh are dependent on this river.
Then he agreed that the government should intervene to make level playing field for both rich and poor.
IMF (I'M Finished) - Run by Wall Street "Vultures"
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Dr. Susmit Kumar
If a country goes to the IMF in case of a FOREX crisis, the IMF, mainly manned by the US Treasury Department, forces the country to pay the loaners' full amount. After watching IMF at work during the 1997 East Asia Economic Crisis, Joseph E. Stiglitz, the 2001 winner of the Nobel Prize in economics and chief economist at the World Bank from 1996 to 1999, wrote:
I was chief economist at the World Bank from 1996 until last November, during the gravest global economic crisis in a half-century. I saw how the IMF, in tandem with the US Treasury Department, responded. And I was appalled.[i]
The IMF may not have become the bill collector of the G-7, but it clearly worked hard (though not always successfully) to make sure that the G-7 lenders got repaid.”[ii]
It was perhaps he who described the crisis best: [iii]
The IMF first told countries in Asia to open up their markets to hot short-term capital [It is worth noting that European countries avoided full convertibility until the 1970s.]. The countries did it and money flooded in, but just as suddenly flowed out. The IMF then said interest rates should be raised and there should be a fiscal contraction, and a deep recession was induced. As asset prices plummeted, the IMF urged affected countries to sell their assets even at bargain basement prices. It said the companies needed solid foreign management (conveniently ignoring that these companies had a most enviable record of growth over the preceding decades, hard to reconcile with bad management), and that this would happen only if the companies were sold to foreigners—not just managed by them. The sales were handled by the same foreign financial institutions that had pulled out their capital, precipitating the crisis. These banks then got large commissions from their work selling the troubled companies or splitting them up, just as they had got large commissions when they had originally guided the money into the countries in the first place. As the events unfolded, cynicism grew even greater: some of these American and other financial companies didn’t do much restructuring; they just held the assets until the economy recovered, making profits from buying at fire sale prices and selling at more normal prices.
In his book Globalization and Its Discontents, Stiglitz, who was also a member of the Council of Economic Advisers under President Clinton, described meetings where President Clinton was frustrated because an increase of one-quarter to one-half percentage point in the interest rate by Federal Reserve Bank Chairman Alan Greenspan might destroy “his” nascent economic recovery.[iv] A comparison here with the actions of the IMF during the East Asian debacle is instructive: There, the IMF forced interest rates to raise by 25 percentage points—fifty times the interest rate Clinton complained about—for economies going into recession. The IMF argument for this enormous increase was that higher rates would make a country more attractive for investors. In reality, it made the situation even worse. Generally, a crisis starts due to Western creditors’ refusal to roll over short-term loans out of concern about firms’ potential inability to repay their loans on account of high indebtedness. A large increase in interest rates, however, makes matters worse for these firms. An increase in interest rates increases the number of ailing firms, causing an increase in nonperforming loans. Therefore, an increase of 25 points in interest rate is enormous and will thus have more catastrophic consequences.
Explaining the effects of IMF’s bitter pills on East Asian countries at the onset of the 1997 East Asian Economic Crisis, Stiglitz wrote in his book Globalization and Its Discontents:[v]
Because many firms were highly leveraged, many were forced into bankruptcy. In Indonesia, an estimated 75 percent of all businesses were put into distress, while in Thailand close to 50 percent of bank loans became nonperforming. Unfortunately, it is far easier to destroy a firm than to create a new one. Lowering interest would not un-bankrupt a firm that had been forced into bankruptcy; its net worth would still have been wiped out.
The IMF bitter pills expose unfair lending practices by Western institutions. If a creditor loans to a foreign firm at 7 percent, and the firm thinks that it can make 15 percent yearly from this money, but the firm goes bankrupt, it should be a problem for the creditor and not the whole nation or the IMF.[vi] It needs to be considered as a bad loan. Before providing the loan, the creditor needs to check the lender’s creditworthiness. This is standard practice, and the possibility of bankruptcy is always considered a part of any loan. Contrary to standard practice, however, wherever the IMF intervenes and issues loans there after the crash so that Western creditors could recover their money. In the case of Thailand, people invested a lot of money in real estate, but since there were not enough buyers, the real estate market crashed. It was due to Thailand’s real estate sector that most East Asian economies eventually suffered due to the 1997 economic crisis, but currency speculators made a lot of money.
When the Greek debt crisis broke in 2010, Athens turned to the EU for help. Assistance to Greece to this day has been contingent on Athens making domestically unpopular reforms. Nearly seven years, 13 austerity packages, and three bailouts (worth a running total of $366 billion) later, the Greek economy is still struggling. In early 2017, the debt burden now registered at about 177 percent of GDP. Non-performing loans total $119 billion, accounting for 45 percent of the country’s loans. Unemployment was still around 23 percent, and about three-fourths of unemployed people were jobless for at least a year. If all goes to plan, these measures will reduce Greece’s debt burden by one-fifth by 2060. While this may be a practical timetable given the size of the debt, it is not the most realistic solution. A lot can happen in 43 years. The proposal also does not give Greece the debt relief it seeks for the immediate term.[vii]
In the IMF, major decisions, including the election of its managing director, require an 85 percent super-majority. The top three countries, having the highest votes, are the United States (16.75 percent), Japan (6.24 percent), and Germany (5.81 percent). Hence in IMF, nothing can happen without the wish of the US.
It is worth noting that Soviet Union also attended the 1944 Bretton Woods conference where the treaty was ratified, but later declined to ratify the final agreements, charging that the institutions they had created were "branches of Wall Street.[viii]
Explaining the stranglehold of US over the IMF, Stiglitz wrote in his book Globalization and Its Discontents:[ix]
In 1997, Japan offered $100 billion to help create an Asian Monetary Fund [at the onset of the 1997 East Asian economic crisis], in order to finance the required stimulative actions. But [US] Treasury did everything it could to squelch the idea. The IMF joined in. The reason for the IMF’s position was clear: While the IMF was a strong advocate of competition in markets, it did not want competition in its own domain, and the Asian Monetary Fund would provide that. The U.S. Treasury’s motivations were similar. As the only shareholder of the IMF with veto power, the United States had considerable say in IMF policies. It was widely known that Japan disagreed strongly with the IMF’s actions – I had repeated meetings with senior Japanese officials in which they expressed misgivings about IMF policies that were almost identical to my own. With Japan, and possibly China, as the likely contributors to the Asian Monetary Fund, their voices would predominate, providing a real challenge to the American “leadership” – and control.
Eventually … [US] Treasury and the IMF could not ignore the [economic] depression [in the affected countries]. Japan once again made a generous offer to help under the Miyazawa Initiative, named after Japan’s finance minister. This time the offer was scaled down to $30 billion, and was accepted. But even then the United States argued that the money should be spent not to stimulate the economy through fiscal expansion, but for corporate and financial restricting – effectively, to help bail out American and other foreign banks and other creditors. The squashing of the Asian Monetary Fund is still resented in Asia and many officials have spoken to me angrily about the incident.
[i] “The Insider: What I Learned at the World Economic Crisis,” Joseph Stiglitz, New Republic, April 17, 2000.
[ii] Globalization and Its Discontents, Joseph E. Stiglitz, W.W. Norton, New York, 2003, p. 208.
[iii] Ibid. pp 129–30.
[iv] Ibid. p. 109.
[v] Ibid, p. 112.
[vi] Ibid, p. 200.
[vii] “Greece's Debt Problem Has Reached A Dangerous Point,” John Mauldin, Forbes.com, December 21, 2016, https://www.forbes.com/sites/johnmauldin/2016/12/21/greeces-debt-problem-has-reached-a-dangerous-point/#479a9b403583
[viii] "The World Bank Since Bretton Woods: The Origins, Policies, Operations and Impact of the International Bank for Reconstruction," Edward S. Mason and Robert E. Asher, Brookings Institution, Washington DC, 1973, 29.
[ix] Joseph E. Stiglitz, op cit.
Part I - Argentina and RBI’s Functional Autonomy
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Dr. Susmit Kumar, Ph.D.
Table of Contents
(A) Introduction
(B) Mr. Viral Acharya’s Eight Paragraphs on Argentina’s Central Bank Crisis
(C) Pre-1998 Argentina’s Economy
(D) 1998-2002 Argentine Great Recession
(E) Kirchners’ Era – from Recovery to Prosperity (2003-15)
(F) Post-Kirchner Era (2015-) – Another Failed Market-oriented Economy
(G) Details of Vulture Investors’ Case in a New York (US) Court
(A) Introduction:
Part IV – US Bogus Market-Driven Economy and RBI’s Functional Autonomy
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Dr. Susmit Kumar, Ph.D.
Table of Contents
(A) Introduction
(B) US Dollar Ponzi Scheme - Biggest Financial Fraud in Post-World War II Era
(C) US is Surviving Mainly Due to the “Dollar Ponzi Scheme”
(D) US Economy (World War II – 1960s)
(E) 1970s US Economy
(F) 1980s US Economic Crisis, 1985 Plaza Accord and Japan’s Lost Decades of 1990s and 2000s
(G) 1990s US Economy
(H) 2000-2007 US Economy
(I) 2008 US Housing Bubble Collapse
(J) US Economy Since 2009
(K) Future of US – 1990s Russian Economy
(A) Introduction
In this paper, we will see that the US economic boom from World War II (WWII) to 1960s was mainly due to the massive expenditure in defense industry to fight the WWII. Then in order to survive, the US reneged on its 1944 Bretton Woods promise to keep its currency pegged to the gold price, paving the “Dollar Ponzi Scheme” in which the US gets most of its currency back (in the form of foreign investments in US Treasury Bills, US real estate and US share markets) which it again uses as payment to the entire world. Since 1980s the US economy is surviving mainly due to this Ponzi Scheme, not because of any so-called “Market-Driven” economic policy.
US Banks’ NPA and RBI’s Functional Autonomy
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Dr. Susmit Kumar, Ph.D.
Introductory note: I have explained the 2008 US Housing Bubble Crisis in details in my previous two papers: Stop giving any consideration to Privatization and Consolidation of Public Sector Banks: Needs cleansing and overhaul of the entire financial system and Part IV – US Bogus Market-Driven Economy and RBI’s Functional Autonomy). The US Federal Reserve has functional independency which Mr Viral Acharya, the Deputy Governor of RBI, wants for RBI, US Federal Reserve does not regulate or supervise the financial institutions and in any crisis, it, along with Wall Street bankers and their co-conspirators in US Government, makes sure that investors/bankers do not lose any money and they do not care for the common people at all.
Even after a decade of the 2008 US Mortgage Crisis, the big banks like Citibank hide trillions and trillions of dollars of “toxic” assets with the help of the US Federal Reserve and corrupt politicians. At the onset of the 2008 mortgage crisis, several large banks, including Citibank, were insolvent.
London Model – A Wrong Choice for India’s Public Transport Infrastructure
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Dr. Susmit Kumar, Ph.D.
The Modi administration choice for London model for India’s public transport infrastructure is a wrong choice. As per Nitin Gadkari, Union minister for Road Transport & Highways, Shipping and Water Resources, River Development & Ganga Rejuvenation, the London model of transportation system, in which 17 private operators offer services, does not require investment and is a professional one and can offer solutions for frequent traffic jams, pollution and accidents in India (India's public transport infra to be developed on London model: Gadkari, The Tribune, January 31, 2019).
To Survive, PM Modi Should Take A Page from Indira Gandhi’s Book (Part I & Part II)
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Dr. Susmit Kumar, Ph.D.
[Note: Immediately after BJP barely won the majority in Dec 2017 state elections in Gujarat, where Mr. Modi ruled for 12 years before taking over as the Prime Minister in 2014, this two part article was sent on Jan 26, 2018 to 1500+ people in India, which included PM Modi, Prime Minister Office (PMO), several Cabinet Ministers, Several Secretaries & Joint Secretaries, IFS officials at Ministry of External Affairs, 200+ officers at Niti Aayog, Professors at IIMs, IITs and premier universities in India, and fellows at think tanks in India.]
In December 2017 Gujarat elections, BJP, with 99 seats (against 115 in 2012 elections), was fortunate to win the majority of seats as it won 16 seats from the Congress Party, which won 77 seats, by less than 3,000 votes or less (Gujarat election: 16 Congress candidates lost by less than 3,000 votes, Hindustan Times/PTI, December 19, 2017). Had those seats gone to the Congress Party instead, giving Congress the majority, it would have been a disaster for Mr. Modi and BJP. Although there was a slight increase in vote percentage for the BJP against the 2012 elections, the party suffered a net loss of seats due to a steep decline in BJP votes in rural areas where people revolted against nearly two decades of Modinomics that has largely bypassed the rural areas.
The Functional Autonomy of RBI and FDI
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Dr. Susmit Kumar, Ph.D.
There is a fundamental difference between the US economy and the Indian economy. The US economy cannot survive without foreign investment whereas the Indian economy can. As the US economy is surviving mainly on massive foreign investment, US-based Indian economists such as Mr. Viral Acharya give too much importance to the investors (Government interference undermines RBI’s functional autonomy: Viral Acharya, The Economic Times, Oct 27, 2018). In the last 15 years, the US has received nearly $1 trillion foreign investment a year to fund its twin deficits – budget and trade deficits (please see Table 1 in my paper Part IV – US Bogus Market-Driven Economy and RBI’s Functional Autonomy). Without this much of foreign investment, the interest rate in US would skyrocket, which would cause a meltdown of the economy. It is worth noting that most of the Chinese $3.2 trillion FOREX is in US investment.
Dr Susmit Kumar's Presentations
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Dr. Kumar's Press Interviews:
Dr. Kumar's presentation at 2015 Middle East Dialogues Conference, held in Washington DC (his presentation is after 50:00 minutes in video below) :
Dr. Kumar's presentations on Youtube:
(1) Please click here to view "Islamic Militancy, Islamic Empire and Modernization of Islam" Youtube video presentation.
(2) Please click here to view "Karma, Mind and Quest for Happiness" Youtube video presentation.
Dr. Kumar's latest publication: "The Arab Spring and modernization of Islam: A major step towards the unification of human civilization," in Modern East: Conflict & Reforms, Edited by Mohammed M. Aman and Mary Jo Aman, Westphalia Press, Washington DC, 2014, pp 71-113. Please click here to download the paper . Please click here to buy the book.
Dr. Kumar's coming presentations:
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Western Political Science Association (WPSA) Annual Meeting, Seattle, Washington, April 17-19, 2014.
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International Studies Association (ISA) West 2014 Annual Conference, Pasadena, California, September 27-28, 2014.
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International Studies Association (ISA) South 2014 Annual Conference, Richmond, Virginia, October 25-26, 2014.
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International Studies Association (ISA) Midwest 2014 Annual Conference, St. Louis, Missouri, November 7-9, 2014.
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"Global Islamic Fundamentalism" - Annual Middle East Dialogue (DOMES), Washington D.C., February 26, 2015.
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(i) ISIS Crisis - A Panel Discussion, (ii) Arab Spring and Modernization of Islam - A Paper Presentation, 2015 Annual Meeting of the Southwestern Social Science Association, Denver, Colorado, April 8-11, 2015.
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"Saudi Arabia and Pakistan, to be Devoured by their Frankensteins, IS and Taliban" - Annual Middle East Dialogue (DOMES), Washington D.C., February 26, 2016.
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"Modernization of Islam and Unification of Human Civilization" - The Institute for Defence Studies and Analyses, Indian Ministry of Defence institution, New Delhi, India, March 31, 2016.
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“Reason behind Islamic Terrorism and when and how it would end” by Dr. Susmit Kumar, Society for Policy Studies, New Delhi, India, May 24, 2016.
Please click here to see Dr. Kumar's past presentations
Book Review:
Giving * * * * * out of 5, ForeWord Clarion Reviews commented on Dr. Susmit Kumar's Casino Capitalism book (2012): "Frighteningly thought-provoking ... easily understood ... the Occupy Wall Street crowd will find vindication in this book." Please click here to read the entire review.
For Bihar Development Sake Bodh Gaya Should be made Union Territory for Say 99 years
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Dr. Susmit Kumar, Ph.D.
During the 15 years (1990-2005) of misrule under Laloo Yadav’s Family, the development of Bihar nose-dived, mainly because of lack of law and order. During the same period, the Southern states like Andhra Pradesh and Karnataka became the information technology (IT) centers in India. Since 1990s, IT sector is the main driving force behind the economic growth in the country. Even after JD(U) and BJP combine won two consecutive general elections in the state (2005 and 2010), Bihar was not able to get any IT firm to open their branches to provide jobs, mainly because of threat of Laloo Yadav’s family coming to power again. Unless a business sees stability for next 25 to 30 years, it is not going invest in the state. For at least next 30 to 40 years, I do not see businesses investing in Bihar.
For the sake of development of Bihar, Bihar should give Bodh Gaya and its surroundings, say in 20 miles to 30 miles radius, to the Central government to manage it as Union Territory (UT) for say 99 years, with the following conditions:
