Monday, August 24, 2015

The dragon drags everybody down

It was sheer mayhem in Dalal Street on Monday (24th August) morning. It was dismally colourful too. Even before the brokers could recover from the Monday morning blues, they began seeing red all over the place. It was one of those rare occasions when all 30 stocks in BSE S&P Sensex were in the red.

Dalal Street was not unique. Markets melted all over the world. These markets included commodity, currency and capital markets. Copper, nickel and oil found new lows. It was as if the pit was becoming bottomless. Chinese gravity was pulling everything down.

What was the origin, what is the course and what is the prognosis of this calamity? The epicenter is obviously China. China’s CSI 300 index spurted to 50% over 1st January, 2015 by 30th June, 2015. After that, it was all downhill. Now all the gains have been erased. Overemphasis on infrastructural development resulted in idle capacity of buildings, airports, bridges etc. (Moral: Economics in the long run does not brook any excess even in activities that are good in the short run.) Domestic demand started sliding. Exports slackened because many parts of the world are experiencing distressing fall in aggregate demand.

China is the largest or second largest economy in the world depending on whether you employ PPP (purchasing power parity) or not. Its GDP is about $18 trillion under PPP which is slightly in excess of America’s. It is obvious that any threat to such a massive economy will pose systemic hazard all over the world. This is exactly what is happening. China is a ‘too big to fail’ economy. Any misery in China is a body blow to rest of the world.

India is not de-coupled from China. Companies like Tata Motors and Tata Steel are devastated by the Chinese chaos. RBI Governor’s optimism that ‘the Indian economy is full of possibilities, even as much of the world is mired in pessimism’ is a bit of a stretch.

Are we in for a long term downturn? It is difficult to say. For every silver lining in the cloud, there are multiple forebodings. We were hoping that the US economy is well on its way to recovery. But the Yuan devaluation and its aftermath have thrown a spanner in the works or ,as the Americans say, thrown a (monkey) wrench in the works.

It may sound alarmist to fear that a currency war among various nations is in the offing leading to a Greater Depression than what was witnessed in the years 1929-33. However, let us not forget that uncertainty is the name of the economic game and nothing is ruled out in this age of the imponderables. To twist the Murphy’s Law a bit, even the unlikeliest event may yet happen.

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