What is happening to America?

With what little knowledge I have of Economics, I shall try to answer your question.

 

Brief Background

There are several countries in the material world, each independent and peopled.

For various reasons such as climate, availability of natural resources, skill levels and capital, the standard of living differs from one nation to another, and even from person to person as In India. In a competitive world such as exists now, each nation wants to upgrade the level of comfort for its people. Everyone wants everything, but have no means to get these.

The hard-working ones, the one with resources, the skilled sell to others what they have and get in exchange what they need. This exercise used to be called “barter system“. Even now in flea-markets in rural areas of India, people come with fish or vegetables or, other exchangeable (saleable) items and return home with whatever they need such as food items, clothes etc. There are some who only went to sell and not got anything in exchange.

 

From Barter to Currency

To take care of all these situations, someone invented the currency / coinage system. The King (now the Govt.) brings into existence metal or paper currency (a promise to pay on demand the corresponding amount). In India this is the function of the Reserve Bank of India (RBI), a wing of the Government of India.

All the sellers in the market are now able to say that they will take so much money in exchange for what they sell (there is bargaining for selling this between buyer and seller). When all the sellers do this, there comes into existence a common currency system which is backed by purchasing power.

You know you can trade off the currency for buying anything, anywhere in the country. If you are selling perishable goods, like bananas, you will be wiser to exchange them for currency fastest, since the shelf-life of bananas is very short, unlike commodities like grains or metals or cloth etc.

We have now moved away from a “barter system” to a currency system. In the olden days, the currency had to be backed by gold of equivalent value in the Kings/Government Treasury, as that no government prints or circulate more than the genuine value of the back-up gold. This is no longer the practice. Countries keep only a part of gold backing or even no backing at all.

At one time, during World War II, in Italy (Mussolini was ruling then) currency notes were cheaper to use on soft drink bottles than printing labels!

Recently, the Indian Government stopped making coins of, 1, 5, 10 & 25 paisa because the cost of minting these was very much more than the cost of their metal content. Paper currency does not have this disadvantage. You will notice the same thing has happened in most countries over the last few decades.

 

Trading for Profit

All manufacturers’/traders incur cost in procuring what they sell. These are manufacturing or procuring costs. They mark-up the price and try to make a profit, which is a reward for their time spent and services rendered. This applies to all items of sale, including human labour of any kind.

They also have a sense of insecurity with regard to the future life such as health worries and inability to sell their time or skills. In addition, they will enlarge the family size by adding new members, also each one wants to upgrade his life comforts, either by retiring from work, or for working fewer hours, or for having a home, jewellery, excursions etc. Each family is in this mad race for upgrading of their lives. It is a mad-mad-mad-mad world that results.

 

 

The Saving Urge

Man realized that if he had to upgrade life, he should get more value for what he sells and pay less for what he needs. This resulted in bargaining over price, the seller asking for more and more and the buyer wanting to give less and less.
Ultimately, a compromise situation arises, which is a “win-win” for both sides.

Many people were prudent and while they obtained more value for what they sold, they paid less for what they needed. Some even sacrificed some needs, in order to save some money to take care of future needs like marriage, illness, retirement, etc. Thus, arose the concept of ‘savings’, i.e.: money that they did not need now but, only later.

At the same time, there were others who needed money now either to meet a temporary shortage with them. They asked for help from those who saved, and offered to give a price for letting them use their savings. Thus, came into existence the money-lenders, the chit-funds, the banks, etc. Such transactions were backed by a promise to repay on demand, also a collateral security such as gold, property or a worth-while guarantor, and the payment of “interest”.

 

International Trade

All countries of the world went through the aforesaid experience. The spirit of advancement of each nation led to international trade. Initially, this also started on a barter system - Vasco da Gama and others brought gold, pearls precious stones, etc. and returned with hill-produce, etc. from India.
This necessitated universal currency system (the exchange of money between countries). The value of the currency of any country would be determined on supply-demand basis on a daily or even minute-to-minute basis. This is why we have the foreign exchange markets where currencies are bought and sold. If any currency has more purchasing power than another, it will be preferred.

Conversely, if it has very little power, no one would take it. Thus, the Euro, US Dollar or the British Pound became popular because of demand. Not many wanted the Indian Rupee to the same extent. So, while in 1961 when I travelled around the world, the US Dollar was worth only Rs.4.50 and Pound only Rs.13.50, the German Mark was Rs. 4 and the Japanese Yen was 130 for a rupee! Gold was then selling at Rs.5 – Rs.8 then!

Simultaneously, all countries tried to expand trade for their own products in other countries so that they could buy/sell raw materials, expertise /technology /manufactured products, etc. This led to international trade of an organised type.

 

Engines of Growth: Post-War Reconstruction & End of Colonial Rule

As a result of the Second World War and the across-the-board destruction in Europe, Japan, the Far East countries etc., a lot of reconstruction was needed.

To add to this, many of the countries in Asia and Africa gained independence from plundering colonial rule. They needed to begin from the beginning.

However, these countries lacked capital, technology and the required level of managerial expertise For example, India needed more steel and other metals, automobile and other transport facilities, schools, hospitals, infra-structural support.

It was in this context that Germany, Russia and the USA built steel plants at Rourkela, Bhilai and Durgapur. In several other sectors like power generation, industrial plants, technological and managerial skills (the IITs and the IIMs) foreign help and credit assistance came in and Jawaharlal Nehru is to be remembered with gratitude for this significant contribution to the subsequent growth story of the country.

Rupee Devaluation

The Indian rupee would not buy anything abroad, because there was nothing worthwhile then to buy from India other than tea, cotton and hill produce. Naturally Indian currency was devalued on at least three occasions. This meant that, whereas earlier a dollar would only buy Rs.4.50 worth of goods, the first devaluation resulted in the dollar getting Rs.11.50 worth of goods.

Similarly, the other currencies of the developed countries also had the same advantage, and our exports went up and imports were restricted to bare essentials like raw materials, spare parts, medicines and medical equipment.

When there are more exports and only essential imports, India perforce had to make substitutes within the country itself, also produce more of exportable goods. This resulted in greater gainful employment, which in turn created more purchasing power and demand for goods, hitherto not available.

 

Self-Sufficiency Aspiration

More bicycles (Hero), Motor Cycles (Bajaj and Enfield, Api), cars (Hindustan Motors, Fiat PAL and Standard Motors, Ashok Leyland etc). Stage by stage, many industries for ancillary manufacture like Auto parts, castings, machines like Lathes (HMT) came into existence creating more employment, more purchasing power and more demand.

You can see that this is a vicious circle and has to be handled, intelligently. India had a well-conceived regulatory system, for filtering the type of industries, location, import of raw materials, machinery and spares, foreign travel and release of foreign exchange, etc. Under these tight conditions, the Indian industrial base got well established.

With this, growth of most parts of India was ensured. At this time, one American Dollar fetched around Rs. 45 and, other currencies like the Sterling Pound or Euro or Yen buy more in India than before. This is called Devaluation of currency.

From Regulated to a Floating Currency

For some years after our Independence, RBI was keeping a regulated and artificial exchange rate, but soon found that it would be better to allow the rupee to float and find its own exchange level.
To-day, the International Exchange Market decides the value of various currencies, depending on what they will buy outside. So, if India or the USA or Europe is in trouble in the industrial or economical field, currency of such countries is less in demand and their prices go down.

Conversely, if they are doing well, their demand goes up. You will notice that the Indian currency is somewhat stable against other currencies because of its industrial base, the image of Brand India and the availability of goods conforming to International standards for purchase. Since countries depend on one another to meet their requirements of raw material or expertise or products, there is healthy foreign exchange market system.

 

Neck Deep Debt

When the economy is affected, because of lower rate of growth or, fall in exports resulting from lower production surplus - unemployment and bankruptcies are the result. Governments like in Italy, Spain, and Portugal, Ireland or, even the giant USA are suffering because of this phenomenon.

Last month, the world’s largest economy USA was staring at bankruptcy because of its profligacy in fighting non-essential wars elsewhere (they think they are the self-appointed policemen of the World) and, ill-conceived health and welfare measures.

USA owes other countries trillions of dollars because of its borrowing. They can’t pay even salaries to their staff. The scope for additional tax collection is a disincentive. Luckily, the lenders agreed to wait and President Obama is having a close second look at his foreign and economic policies.
They have restricted entry of foreigners for employment, are withdrawing from Afghanistan and other warring countries and, threatening to cut aid to several countries.

 

The Ripple Effects across the Globe

In this situation, if the USA, Europe, Japan even sneezes, countries like India will catch a cold. Indian IT industry, especially, is restless for this reason, also because they bill overseas clients in dollars which fetch fewer rupees.

Similarly, if Wal-Mart reduced or stopped buying T Sirts and other Hosiery from Tirupur because of decline in demand in USA, there is trouble for Tirupur, and thousands of hosiery factories have already pulled down their shutters. This affects India significantly because unemployment arises in such sectors, less money to spend, fall in demand, less production, fewer taxes for Government, less spending by them, less development activities, fall in Growth rate, etc.

Procuring apparels from the developing countries, the latter’s economy would face recession, resulting in glut, unemployment, lack of purchasing power, less consumption, less taxes collected by Government on welfare schemes for the poor etc. In short, countries of the world are concerned not only about what happens in their own country but also on what happens in others, especially the large ones.

India still needs a lot of international help to upgrade its technology in crores such as power generation, manufacturing, Research and development, Infrastructure development, Capital needs etc.

And, we do not have much surplus of agricultural or manufactured products which could be traded in the international market. Things are changing no doubt, albeit slowly.

Today we have a strong Automobile and IT sector - thanks to technology support from developed countries, and buying support for what we offer.

 

The Credit Curse

The world economy today is a heterogeneous monolith and its strength depends on the economic health of every country. They swim or drown together and there is no escape. No country can shut its doors to others without damaging its own economic health. These can be regulated to some extent but not eliminated.

The present problem in USA is because:

• They overspend money fighting wars in many places like Afghanistan.
• They help countries like Pakistan to grow by giving them aid.
• They support old people etc.with Medicare.

In short, they are a welfare State. If their income by way of taxes goes down and if unemployment rate goes up like at present, they are handicapped in their efforts to reach welfare goals to their people.

They have been borrowing heavily from countries like China ($ 150 billion or so) and their total debts are in trillions. They have also to pay for imports etc.

Today, they are caught in a debt-trap where they have to borrow, even to pay salaries, interest on loans etc. Italy, Spain, Portugal, Ireland all has this problem. Added to this, the mortgage crisis of 2008 – 2009 where people who bought homes / cars etc.stopped repaying instalments.
Credit card payments were also affected resulting in closure of giants like Lehman Bros. Even Citi bank, the largest in the world, collapsed but the Government saved it buying it up. They have now sold it back.

The position, today, in the USA and the other countries is that not many new jobs are created, several lost jobs they had purchasing power and credit rating that have all dwindled. Because of this, developing countries are also caught into this Vortex. For example, the hosiery industry in Tirupur is almost closed. Property values in USA have gone down, real estate and construction business halted.

Add to this, the American habit of impulsive buying and on credit. When you buy anything on someone else’s money, you are eating already into your future earnings, which may or may not arise.

It has a “casino effect “where, in the anxiety and hope of winning a large amount, you lose what little you have. This has happened in all speculative fields like Stock Exchanges also. Americans have enjoyed too much freedom.

 

The Indian Story

Contrary to this India had a huge demand potential where most people owned nothing. This is the ideal condition for growth.

Add to this, the near 30 % saving habit in house-holds with income, reticence to buy on credit or to borrow and the regulatory systems governing economic activities, you have the ideal conditions for growth.P.V.Narasimha Rao and Manmohan Singh reordered economic management of the country in 1991 – when India had no money even to pay for essential imports and had to pledge its gold stock of about 500 tons – opened up the economy to foreign competition.

The removal of irksome and negative controls and regulations in India has resulted in a freer economy, more individual initiative and enterprise etc. Narayanmurti, Azim Premjee, the Ambanis, the Mittals, the TVS group have all demonstrated very convincingly that the sky is the limit for the Indian growth story.

A child grows faster than an adult, until it reaches a limit to growth. Therefore, it has to be ensured that there is no loss of weight or unhealthy. This is exactly what happening to-day is. USA, Europe and Japan reached their summit long ago but are struggling to stay there. Their growth rate is around 1 percent of GDP as against 8 to 9 percent in India and 15 per cent in China!

In USA, people were used to make impulsive purchases, beyond their needs and their own resources. They discovered the Credit Card, (the Diners's Club originated there), the Mortgage and its derivative the Sub-mortgage and other stupid ideas.

You can buy almost anything without having the resources. The purchase of a second home, car etc resulted in non-payment of installments of repayment dues and many a bank and financial intuition went bust.

To-day, in India more and more people want to be on their own, rather than be working for another. In India, for example, you cannot get people to work as domestic help or for farming. Agriculture has been causality here. Ready-made food, catering and event-management enterprises are cheaper by the dozen. This situation has led to a continuous wage increase. In turn, they demand better education for their children, better food and health-care. Which again creates larger employment opportunities. To-day, in India at least, if you have a pair of hands (forget the brain power) a job is waiting for you.

Indians are now finding the world a level playing field, and bringing out their hidden talents into every sector and proving the rest of the World that they are ready and willing to take on any developed country, and this is a significant change. Vikram Pandit, Indira Nooyi Jain etc. could become CEOs of multi-national giants.

India needs to go a long long way, to alleviate its poverty, illiteracy, undernourishment etc. We need better roads and transport systems, better health management systems, ports and airports and all these more and more opportunities and economic activities during this century If corruption and such-like trends are removed and we have a band of honest and dedicated level of politicians, the India Growth story is going to be both challenging and fascinating!