Greed Runs Thicker than Blood

Well !! At least in some boardrooms (if not all) Greed truely does. In the corridors of power all over Silicon Valley and Detroit, decisions to outsource are framed in the most unassumingly harmless manner: -"we are expanding our global footprint", "India/China is a huge market for us and we need to have a local presence there".

CEO contingents will spend countless hours shuttling across the world on Business Class flights to attend conferences in Shanghai/Mumbai only be pampered. They would stay at the most exquisite hotels, dine in the most profligate of manners, skim through pie charts filled with details they know little or nothing of at conferences and lobby late into the night, all this just to reafirm their commitment to their capitalistic ideals.

The latest TIME magazine Cover story from noted journalist Fareed Zakaria doesn't list many new suggestions about what everybody knows Washington should be doing to improve the US Economy. Instead, Fareed gives us a few good takes on how America got into this mess and why it would be an uphill task for anyone to get the country out of this.

A particlular passage that caught my mind was the Middle Class Hollowing out effect we see in America today. Over the last 10 years, since the .com bubble burst in 1999, corporate America has gradually moved into the overdrive mode with outsourcing. One could compare this to the act of chipping away at the bark of the trunk of a tree. Initially outsourcing started as a small trickle. However, as this chipping progressed, it began to make more sense, and more jobs were lost and transferred abroad. Around about 2008, when the tree was totally unstable, a whirlwind called Lehman Brothers provided the final push. 

The sad thing about this situation is echoed by the ex-GE boss Jack Welch,which is that in todays world, technology has made GE more efficient and the jobs they lost during this recession will likely not return. 

One of the causes of the middle class hollowing out is simply the present demand crunch. With demand at an all time low in the US, companies will not hire which would cause wages to drop which in turn would feed the cycle of deflation. However falling wages in this case could effect a whole range of existing beneficiaries.

Consider this. Thousands of H1B IT professionals from India arrive on American shores every year for employment. Some of them work for Giant Indian MNC's while a large chunk of them are employed at shady body-shopping outfits that prey on the Indian-American IT Dream of a lucrative pay packet in America being translated into a comfortable life back at home in India at a later stage.

Is all this about to change now?

Well, studies have been done by various interest groups tracking this phenomenon. Here is one such study that highlights the difference between employing a H1B worker as against a locally skilled American tech worker for the same job. As per American law, H1B workers should be paid as per the same levels as their American compatriots. Somehow though, this is rarely the case since capitalism is the system where every drop of blood is squeezed to service a meagre spoonful of greed. 

The research paper highlights the gap of $15,000 per year as the difference in cost between foreign H1B employees and the American tech worker. To add to this, since most H1B visas are employed at salaries lesser than $90,000 a year, there are lesser taxes incurred resulting in lesser revenue for the government. Till date, the government could always write these off as long term benefits gained at a lower cost and a higher processing cost of the H1B Visa. Well the same excuse may not hold much water any longer.

As real wages drop, the American Middle class will gradually need to take salary cuts in order to remain in business. With so many Americans already out of work (9.6 unemployment), a time may come when this $15,000 gap between the Indian IT worker and his American comrad will get squeezed. In fact, a recent report showed that 20% of Americans wont mind taking a 5-10% cut in pay, given the state their economy is in.  

If this were to happen, The H1B remuneration will have to be more reflective of the current economic situation, or in other words, it will have to decrease to remain competitive. In case they don't, American companies may find it a lot easier and politically correct to recruit local techies and claim the Obama tax benefits than to shell out increased sums of money to hire a H1B candidate. (In fact the senate recently passed a bill that hiked H1B fees steeply).

For the H1B techies still in the US they will have to live with lesser return on investment and a dollar that may even weaken instead of getting stronger over time(not good news for repatriations). Have no doubt whatsoever though, that the grass is still greener on the other side, and there are many who would still pack their bags on short notice if given the opportunity.

The other thing that may happen is that free-market Americans may actually turn racist by seeing the number of rich and successful Asians around them. A small section of Americans did turn anti-turban after 9/11 and it can be argued that a large portion of them are secretly Islamaphobic as well. 

So the Hollowing out of the middle class may even result in a gradual shift in the preferences of global knowledge workers, who have always preferred America. A recent student from a top university in China said that she would still prefer to work in the US for a few years after her graduation, return to China to start her company and then Holiday in Europe. 

If you study her analysis it wont be too difficult to understand why. She would choose to work in America for a few years becuse the strong dollar would give her good returns on her fixed peg renmimbi. She would then  loaded with mullah, return to China and start her own company for the simple reason that most of the growth happening in the world is in this part of the planet. Finally the returns she would make in China would allow her to party in the Socialist State of Europe.  

Greed has a new marketplace now. There is a whole sea of Asians waiting to dip their hands into her warchest and follow in the ways of the Fallen, "the American Way". They ought to take a lesson or two from the Frustrated, Impatient and Hollowed-Out Middle-Class American who is now on drips!!     

Brute Force with Best Intentions

Coupling Brute Force with the Best of Intentions in an open market economy sometimes seems like the ideal way of pushing through tough legislation or just simply getting the right thing done. This is after all, a technique which may prove unpopular at first, but necessary in the long run.

2 incidents come to mind in light of recent times. Firstly, the falsified reports emanating from the Intergovernmental Panel on Climate Change (IPCC) which suggested that the Himalayan Glaciers would melt by 2035. Part of the problem here stems from the fact that the drafts of these documents were NOT made public or open to public scrutiny. Its not really difficult to see the actual reason behind this - the urgency factor associated with anything connected to Global warming in this day and age. 

One needs to understand that the predictions that are done by climatologists are usually based upon models onto which past data is fed. In this case, the math behind the science is after all an extrapolation of what the situation might be with a given set of parameters.
This is why the scientific fraternity is so deeply divided on the issue. Today, any evidence that is put forward to substantiate the claims that the environmental degradation we see all aroud us is a direct result of human activity is torn to shreds by skeptics and science lobbies funded by smoke-belching Businesses on the grounds that the models used are way off target.  

Nevertheless Rajendra Pachauri of the IPCC in the Best Interests of the planet pushed these results out to the public and began to press Governments across the world for a deal on cutting fuel emissions. After the crisis broke, Rajendra indirectly hinted that his intent was actually to force governments across the world to come to an agreement on the phased reduction of fossil fuels (something that vested powers of the west seem to have successfully put off till now).

However this brute force method has given way to widespread condemnation of this UN body combined with loss of integrity for years of genuine research conducted by hundreds of its scientists. The outcome is rather regrettable, governments across the world will now be averse to listening to anything from the worlds most renowned body on climate change. This coupled with the slow global economic recovery would mean that the developed world would be loathe to agree on any cuts in emissions. The developing world with their beggar my neighbour policies inherited from the west would act only if the Developed world acts and hence the vicious cycle would continue.

What this means is that Biodiversity loss would continue, the earth's temperature would get warmer, ocean levels would gradually rise over time and our younger generations would be looking at pictures of elephants, dolphins and turtles in their elementary school books to know what animals once lived in our zoos.

The Second example is the Obamacare, read President Obama's Brand of Healthcare. Never before, has an American President been able to push through so tough a bill on Universal healthcare for the American people. Healthcare was an always has been a sticky point for Americans, thousands of whom are denied healthcare every year for a variety of reasons. However, the manner in which this bill was muscled through in Congress seems to have rubbed everyone the wrong way.

There was hardly any debate on the merits/demerits of the Healthcare Bill. Just high pitched soundbytes from both sides. One side condemning the bill as a form of embracing socialism, while the other side heralding it as the need of the hour. What was supposed to result in savings for the American Government down the line, is now being passed down the the consumer as higher Insurance Premiums. 

The Democratic party looks likely to face an uphill battle in the November mid-term elections over this thorny issue of Obamacare. Why? Again, as in the above case, a form of healthcare, completely understood by only a few, was forced down the American Public on the guise of Best Intentions in the long run at a time when the US is already running record levels of Debt. 

The loser in both these cases is undoubtedly humanity. Global warming is a real and present danger, one that has been leaving its calling card for the past 30 years at regular intervals. The inability of world governments to agree to a plan that cuts emissions will cost humanity in the long run and we may not even be there to witness it.

In the same manner, the inability of the public to realise the fact that painful legislation passed today could make a better tomorrow, would eventually deprive them of a better livelihood in tomorrows world. 

Sometimes Brute Force is used to push through Necessary evils, but in a world where information is at everyones fingertips and consumer comfort is the luxury of our times, mankind would go through great lengths to preseve this luxury at all costs. The Human trait of procrastinating will eventually leave the impossible decisions for the coming generations. Brute force with Best Intentions was the last weapon in the kitty, that worked.

To put it in a nutshell, we are all seated comfortably in an airconditioned SUV with a full tank headed into the Mojave desert with limited food supplies for 2 days and not a petrol pump in sight. The plan is to camp out in the desert for a week and then to return. The problem is, we may just not return!!

Living on Borrowed Paper

Deficit Spending has become a worthy war cry of the right these days!! "We cannot afford to spend like this", they say. "We are spending our childrens and grandchildrens futures away into mountains of debt".
Statistics have become bits of paper with "trillion" written all over them.

They are now seen strewn all over the tarmac these days with much disdain. Republican Mike Pence from Indiana threw a statistic up in the air when he stated that the total amount of debt over the next 10 years would amount up to 10 Trillion dollars, this works out to  $44,000/- per American. Democrats of course will argue the fact that the number is overstated, and the benefits of the healthcare bill once it starts to kick in will result in more savings to the government in the long run.

That however is just one piece of the jigsaw. Deficit spending in the US, or spending from the money that is borrowed from China (who is still the largest party buying up US Tresuries, so that they can somehow resuscitate their largest trading partner from their downward spiral and get them back to their old good habits of buying their dirt cheap toys quoted with lead) is pretty much here to stay mainly because the other options on the table are barely options.

The Healthcare Bill is something which somehow seems to have rubbed everyone the wrong way. Obamacare was meant to ensure that the uninsured could at least be insured to the minimum and that corporate greed which at times used to deny coverage to Americans on account of an existing precondition could be kept in its place. However the public saw this as the beginnings of an unjustified government take-over of everything  (specifically due to the partisan way the bill was passed) and their trust in the incumbent party began to wane.

Benefits aside and an already huge looming deficit, who was going to finance these new uninsured millions knocking at the door? The cost of the plans was obviously going to rise, as something would have definately had to give. Deficit spending is needed to rebuild the US economy, especially if the private sector is unwilling to loosen its purse strings.

The notion that there is hoards of cash lying with American Businesses who do not want to invest because they do not see a clear direction from Washington is probably hogwash. Here are some of the reasons.

Firstly, most of the money is finding its way into the stockmarkets of some of the Emerging markets and pushing them up to dizzying heights. The reason, well, thats where all the the growth is happening now!! 

Secondly, most American companies that have been doing well on the Nasdaq and NYSE are ones that, you may think have the capacity to spend and hire. Citibank, for one, recently announced that it was hiring thousands of workers : guess where - in China.

So the fact of the matter is, even if there was clear policy direction from Washington as to the policies and where they are headed. Money, as it always has and always will, will chase high!! oh wait: not high but astronomical returns. It stopped making sense hiring tech workers at home, unless they were in a niche skill area, just as it stopped making sense to make fast moving consumer goods, or electronic toys at home in America, when China did it for a fraction of the cost with no labour unions to nag.

Deficit Spending comes through when the private sector is completely clueless, or toothless as they are now. Their lust for corporate greed contributed towards the erection of a society in America that was living beyond its means, and ended up with huge trade surpluses with other major nations.

China is in no hurry to revaluate the renmimbi. India will use its lobby with big business/special interest groups in the US to ensure that its steady stream of business from the US continues despite the downturn. With all countries with their backs against the wall emptying their wallets, and American multinationals overlooking them to take their pound of notes, there is little the average American can look to for help except to the government.

This is when, and why, Government Spending or Deficit Spending makes sense.

I am No Economist, but ..

"President Barack Obama is so out of touch with America", "We are handing down a balooning deficit to the coming generations of Americans" and last if all, the statement that I think sums it up the best "now is NOT the time to experiment with Socialism", said by Alaskan Bison Killer and Senator John McCains running campaign mate, Sarah Palin.   How true are these statements that are being voiced on all talk shows these days? Obama's rating is at an all-time low, unemployment is at 9.6% and inching towards the doubel digits. Despite all the TARP money ($800 Billion) being spent, consumer confidence is still at an all time low. The word on every economists lips these days is "the US is heading for a double dip recession with Europe close behind" once the stimulus package expires in November!!   Liberal Democrats hang their head in dismay clueless as to why things havent worked the way they expected it to, despite the billions of taxpayer dollars that have been spent on Government schemes.  Conservatives are so surprised with the mid term gift of a clear chance of winning the senate, that the democrats have gifted to them on a silver platter and .. and .. the first African American President suddenly seems to have lost all his rhetoric when he needed it the most - (to explain to the American people the steps he has taken so far)!!   Lets step back a little and take a hawks eye sweep of the whole situation. Long Before Lehman Brothers fell, much before Fannie Mae went down under, and  Bear Sterns flipped, the American consumer was a rather different person.     The American Consumer, poor Joe, as we may call him, was spending his livelihood away, biting off more than he can chew, living beyond his means .. whatever you want to call it for past decade. He was taking homeloans at ridiculous rates he could not really afford, with absolutely NO due deligence done. To top this off, he had a pocket full of credit cards, giving him the propensity to spend beyond what he could afford!! Did anyone have a problem?    NOT AT ALL!! In fact, the world welcomed it. "The US economy is the engine of growth, they used to say!!" China became the factory for this never-ending demand, India became the backoffice of the same. Millions of jobs were shifted overseas to these 2 countries to satiate the demand of an already over-leveraged population (the US) where the appetite seemed to be heading in only one direction and failure seemed impossible because of the huge stakes involved!!

 

Then came the housing crisis, and foreclosures began to start pouring in. All those homes taken at the prevailing rates and all those Collateral Debt Obligations repackaged multiple times and sold between the investment banking giants (that backed these loans up) were called in for stocktaking and then the can of worms came tumbling out !!

 

Walk Away's (thats what they call it when Amercans just leave real estate they cannot afford to pay for anymore) began to occur with regular frequency and since the prices of houses kept going lower and lower default was in the air. Banking became very tight and liquidity for the industry was like water in a parched oasis in the middle of the sahara !!

 

Suddenly this seemingly prosperous American Consumer, who was the engine of growth for the most of the century became the butt-end of ridicule almost overnight!! All over the western media, Joe (American Consumer) bashing began !!

 

Why have they bitten off more than they can chew? Analysts used to scream!! "What were they doing? Were they even thinking??"

 

Nouriel Roubini got his once in a lifetime chance to stardom with his index finger, "I told you so this would occur back in 2006"!!

 

Suddenly, the tempo changed. I was in the US during the 2008 elections, when the shit had hit the fan and all over MSNBC, investment analysts were taking calls from anxious homeowners/ordinary American people who were anxious about the recovery and the prospects of their future. The advice being doled out to American Consumers was to SAVE, SAVE, SAVE, DONT SPEND UNLESS YOU HAVE TO!!

 

In one case, even China and India were quoted as economies with very high savings rates compared to the US. I noticed cases where Americans were calling in to seek advice for Christmas spending and analysts were advising them NOT to spend and instead, to save the money for when they would actually need it.

 

Well, after all that the American consumer seems to have wisened up. Moreover with employement almost reaching double digits - he is clearly saving his pennies and spending only on what he needs to spend on.

 

Now this has initited a downward spiral of deflation. Analystys are worried that if the US continues on this path - it will eventually head Japans way and end up with the lost decade.

 

So according to the capitalists/republicans/tea party enthusiasts. There is only 1 way out of this mess, or only one way to revive their sagging economy !! 

 

Its called cutting taxes. Cutting taxes to Business, to small employees, to almost everyone!!

 

Actually the republicans suffer from chronic myopia and their all time solution to any economic issue has always been this.  

 

Why is this a vialble solution !! Well, because, cutting taxes will make people spend. This is wishful thinking. In my opinion, cutting taxes will certainly encourage people to spend, it however does NOT mean that they would spend. Moreover if we think that cutting taxes and encouraging people spend will get American out of this mess, then we are forgetting what got America into this mess in the first place !!

 

Many analysts have said that this is going to be a long U shaped recovery, so the age of limited/controlled spending is here to stay for sometime. This is a fact that should be accepted. 

 

However, recognizing the fact that spending to some extwent has to be ecouraged, Obama's Small Business Bill was signed into Law 2 weeks ago, a bill that offers huge tax cuts to small business in an attempt to boost the situation of sagging demand. Now this would probably go some distance if not all the way.

 

The bill was held up in congress for the past couple of months - and do you know why ?? Because these tax cuts (unlike the Bus tax cuts) exclude the 5% of the large corporations and their profligate ilk!! In other words tax the filthy rich to pay for the recently-arrived-middle-class-poor. 

 

Given the status quo in America this may not be such a bad idea. I watched a CNN Interview with Donald Trump last week. As usual he was condemning the policies of Obama (you can only expect fat cats to do that). He was against these tax cuts not being extended to the filthy rich !! He said if the government levies tax on the rich and wealthy, they wil leave America in droves !!

 

This is something I find unnerving. These same fat cats brought both Wall street and an unwilling Main Street to their knees 2 years ago with their avarice. They were then bailed out with a multi-billion dollar program that was intended to avoid a depression. Last year, while America was struggling with the economy, these fat cats were taking home pay-hikes and NOW they're crying fowl when asked to cough up the extra tax !!

 

Coming back to the topic, the solution does not really lie in raising tax or dropping it. A paradigm shift is the need of the moment. Americans have gone from spenders to savers and NOW have to go to Producers again. Exports have to be their drive, for in an economy where only so much can be squeezed out of the local market, gains are often better attained elsewhere.

 

Here is where the huge problem lies. The American economy has painted itself into a very tight corner with their policies of the last few decades and allowing Big Business (large American Companies) to dictate everything.

 

Firstly, the US has to pressurize China to allow its currency to appreciate. The trade balance there is really distorted and yeah - Big Business has been part of the cause for this. The renmimbi has been slowly appreciating over the past few months but this should also be accompanied by reforms in china's labour markets due to the ridiculously low wages that are paid there.

 

Next, if this doesnt work, the US should raise tarrifs on China made products and bring them almost up to parr with the local American goods. Under the GATT aggrement, a country is allowed to raise tarifs on an importers products if it finds that the prices of the imported goods hurt the local industry. Of course, such a step needs to be done with caution given the fact that China is holding so much of US Debt.

 

Secondly, the US needs to reclaim its pride and place in Innovation. Some of the best labs are available in the US. However, most of the cutting edge developments that are happening in science now are outside the US, in countries such as Japan, Switzerland, Singapore (Stem Cell Research). The US will need to go back to its own article of deceration crafted by the founding fathers to realize that the foundations of the nation were on secular grounds and not the church alongside state agenda that the republican party preaches to its voters. Religion belongs in churches, temples and other places of worship. It may also belong at home, but it needs to be kept far away from government decision making machinery.

 

Thirdly, a lot of money has already been spent, the US debt has gone up considerably into the trillions. Obama, as much as I favour his policies, should realise that Americans are too capitalistic to allow in the spirit of Maynard Keynes, the government to expand just because the private sector is holding on to their purse strings tightly. There are huge funds sitting with American Investment banks and they are not investing because they dont know where the economy is headed. This is probably where the president needs to be seen and heard more.

 

Obama has been till date not too keen on shedding his anti-business outlook. The fact that he has loaded his cabinet with academicans and little or no representation from the captains of Industry leaves many with the opinion that he truely is anti-business.

Obama needs to engage with Big Business and lay out his plans as to what he plans to do for the economy, as America appoaches its worst winter of dissent.