Current global financial indicators are not rosy. A new framework is now not only desirable but inevitable
Obviously, there is a new financial architecture emerging in the world, but it is not quite clear what the parameters are like, or for that matter, what the contents would be. However, the child of Bretton Woods has run its life. The current global financial indicators are not very rosy.
Europe is in a deep debt crisis and highly dependent on exports. Due to a rise in wages, there is a big hole in corporate profitability and evaluation in the US. Emerging economies are finding the need to re-align the relationship within themselves and also between themselves.
Of the BRICS countries, news from Brazil and Russia is not encouraging. Indeed, the Chinese economy may be slipping faster that what has been imagined.
Japan has been struggling to get inflation under control. The overall scene is mixed and that itself is an understatement.
The fact of the matter is: People are trying to debate whether a recession is round the corner. There is a good reason for the above.
On December 17, the US Federal Reserve announced a hike in interest rates. The latest rate cut in China, with its resultant ebullience, reinforces the need to negotiate with excessive financial sector debt.
The situation may really be under nobody’s control. There is incomplete and asymmetrical information and institutional weakness. When this is topped with freaks and foibles of human behaviour, one can only wonder, the human mind needs to adjust. We have at hand, yet another occasion to see and appreciate why the solutions cannot be customised.
Woes of sovereign nations are many and large. Greece alone is a tell-tale example. It needs to implement structural reforms, enhanced productivity and growth potential.
When this has to go together with austerity and requirement of immediate financial assistance, the potpourri of reforms required may beat many human conceptions. The Greek story is neither unique nor unusual. It may only be more intense. Many countries like Greece need to re-invent their banking system, not to forget the need for debt relief.
Clearly, a re-born financial system is not only desirable but appears inevitable. The fact of the matter is that there is an over-dependence on the institution of central banks (called the Reserve Bank in India). This dependence is pathetic and even more so, when lead by articulation in a cow boy’s style.
Financial re-structuring itself may be inherent in the situation, if for nothing else, because of the propensity of the system to break at negative normal yields.
It will be a kind deed if China were not to have a hard landing, but then, it should be kept in mind that as a system, it responds very reluctantly to any market pressure. Also, for other countries, it is difficult to be against a massive war chest. The truth of the matter is that China is passing through a middle income transition phase.
Unlike China, in India, middle income groups, in coalition with the upper income groups, are firmly in control of the political processes. Many have been talking of Brazil, Russia, India and China. Also, emerging on the scene are countries such as Turkey, not to forget the prowess of Singapore and the United Arab Emirates.
In neither of the last two named countries are economic and financial challenges compounded by political issues, the way they are in many of the other emerging economies.
Of course, the Congress can be credited for having brought the entire political process of legislation to its knees by simply holding the system to ransom in India.
There is no course in political economy that factors all this. Nor has the last word been said yet. The emergence of terrorism and the inability of the sovereign Governments, to choke the financial channels of funding speak volumes of the emerging political order.
Yet, there is hope. The UAE symbolises it like few do. Dubai alone is splendidly resplendent. It is inhabited by migrants from 200 countries and, instead of going to the market, has brought the global market to its door steps. Its Expo 2020 is poised to be a story like no other.