Monday, August 01, 2011

Too Much of a Good Thing

If you want to know about the direction of the world economy, you could do no worse than to look at a story in Reuters and the Hindustan Times, of a Swedish Table Tennis Coach who refused to work for the Indian Table Tennis Federation because they were going to pay him in US Dollars rather than Indian Rupees. He argued quite reasonably that he had bills to pay in Swedish Krona and the US Dollar had only been declining by 25 percent every year against the Krona. By contrast, the Rupee was holding steady – and so he was much better off being paid in Rupees.

How times change? There was a time when the US Dollar was unofficial currency of the Third-World. If you worked in places like Indonesia, Brazil and dare I say India, you made sure that your bill was in US Dollars because if you billed in local currency, you might have the rude shock of finding that the value of what you billed had become worthless by the time you finished your job.

Well, this isn’t the case now. American tourist are finding the world increasingly expensive as the once almighty Greenback takes a tumble against currencies both major (Euro, Yen) and minor (Rupee, Real etc). For the rest of us, the US is starting to look like a cheap holiday destination. For Americans the only comfort must come from the fact that they have their British cousins in the same boat. How my father must cursing me for not going to school in the UK now, instead of when I did – which was ten years ago. Back then, the pound changed hands for three Singapore dollars for every pound. Today, it trades at about one point nine eight Singapore Dollars to the pound. If I was now at school, the Old Man would be saving about some seven thousand Singapore dollars a year just on the exchange rate.

So what’s happening? Over a decade ago, it was the USA and the UK which were booming. Asia was coming out of a financial crisis in 1997 and we relied very much on Western markets to survive. Today things are a bit different. It is Westerners who come over to Asia to look for jobs and not all of them are in high powered positions. Hong Kong had a host of British visitors called F.I.L.T.H (Failed in London Try Hong Kong) doing menial jobs that the locals wouldn’t do. Singapore, being further away from an increasingly assertive China, is a bit less harsh to Westerners. We still love them but there is a decreasing amount of expatriate packages. It’s not an uncommon sight to see Caucasians taking the bus or hanging around HDB estates these days.

A part of it is probably natural. Asia is home to three fifths of humanity and sooner or later, you have to expect the many Asians on the planet to go for some of life’s nicer things. In a way much of this was started by Japan. Back in the 1800s they saw the rise of the West and went out of their way to emulate the technology and the systems that made the West grow. When they were defeated in World War II, they had the good fortune to do so at the time when America was desperate for prosperous anti-Communist bastions. Money was pumped into Japan and the Japanese were prevented from having a military. Japan prospered and when things started getting expensive in Japan, South Korea, Taiwan, Hong Kong and Singapore become the next in-line to plug into and benefit from the global capitalist system. Hong Kong and Taiwan then became engines for China and Singapore became an engine for places like Malaysia and Indonesia (We have been much slower in trying to develop our neighbours than Hong Kong and Taiwan).

A generation of Asians have studied in the West. We feel at home in English and dealing with concepts like the “Rule of Law” are things that our growing generation expects. Contrary to what some of the regions autocrats might believe, we want things like laws, accountability and fairness, not because they are Western but because they are the things that make society prosperous. In most of Asia, this is the growing generation and the momentum for improved governance and prosperity can only grow.

Then let’s take into account the fact that Asia is playing catch up. For most of us, we are at an earlier stage of development than much of the West. As such, there is simply more room to grow. China and India have made headlines with their growth figures. However, the class that has benefited from growth in the Asian Giants are only a minority. Rural China and India remain poor – so much so that entrepreneurs like Polaris’s Arun Jain, who made a fortune in IT doing work for Western multinationals are trying to find ways to apply their knowledge to lift their poor country brethren out of poverty. If you think both these Asian Giants have achieved anything – wait till the vast majority start climbing out of the poverty trap.

Much has been made of the great rise of Asia. What is less looked at is the decline of the West, particularly the USA. Once again, we shouldn’t get too carried away writing off America. American multinationals continue to dominate the world and American universities continue to produce the best scientist, artist etc. However, this is becoming less so and the average American is feeling less secure than he or she did a generation ago.

The key reason for this is simple – bad money management. America remains the world’s largest debtor nation. With the exception of the eight-years under Bill Clinton, every American Administration has run a budget deficit. What is true of the American government is also true of the average American household. Your average American household has something like five-credit cards per working adult and all of them are maxed out to the tune of something like US $20,000. A baby born in America today inherits a debt of a hundred or two thousand.

Such figures are staggering and hard to imagine? How did it happen? Americans were not always like this. My late step-grandmother, Joan was a depression baby – she was conservative with money and avoided extravagances. When she died, her estate was large enough to put my younger brother Max through college with plenty of spare change. For Joan and her generation, money was scarce and therefore something which had to be conserved and treasured. Thanks to such attitudes, the USA had money to underwrite World War II and to provide Marshal Aid to Europe in the aftermath of the War (So much so that when George Marshal went to Westminster Abby, ALL the crowned heads of Europe stood up).

What happened since then? How did America go from a creditor nation to being a debtor nation within a generation? Part of the answer is circumstances. During the Cold War, America the Super Power in the West and it had a need to spend heavily on things like defence and propping up allies in various parts of the world. Militaries are expensive and the Americans spent heavily to keep their military machine going. Today, one of the biggest expenditures in the American budget is for the military. The US spends more on defence than the European Union and China combined. You might argue that part of this was necessary. There was the “Cold War,” and most recently there’s the “War on Terrorism.” However, even then there are ways of saving money when you fight wars. George Bush I did it best.

He waited for Saddam to invade Kuwait. Built up an alliance of Arab Nations and limited the military adventure to getting Iraq out of Kuwait. At the end of the day, Old Man Bush could send the bill to Saudi Arabia and Kuwait, who were more than happy to pay for a good portion of it.

By contrast Bush II decided to invade Iraq despite the objections of the rest of the world (You are with us or against us) and not finishing a job in Afghanistan (His Dad finished Noriega in Panama before looking elsewhere). As such the Americans have continued to foot the bill for two wars. The only way that America pacified Iraq has been to bribe various fractions who are likely to kill each other and Americans when American money runs out.

Stupid military expenditure is only part of the reason. The key component in America’s lack of financial discipline is cultural – which is ironically one of America’s greatest strengths. We, the rest of the world, love America because it remains one of the most optimistic and therefore innovative societies. Think of most of the great inventions of the day like the Internet – these are all American inventions.

Not only has America been at the forefront of scientific invention – it has also been at the forefront of financial innovation. In a way this has been a blessing. Entrepreneurs in the USA have easier access to credit than in most places. Bankruptcy laws are relatively lenient. As such, it is easier for an aspiring entrepreneur to get things going – fail and start again until he gets it right in the USA than any other part of the world. Americans have a high tolerance for failure provided the failure gets up and tries again.

If companies cannot get bank loans, there’s a market to raise funds. For big companies there are the financial markets. Now, small individuals can go onto the internet and get loans or loan money to people at an agreed interest rate. When I worked for GE Commercial Finance (South East Office which has since been sold to Standard Chartered Bank), I found a myriad of ways to raise funds – ie equipment leasing, factoring and so on.

This is good in as much as anyone with a dream has an option of raising money to make that dream come true.

There is however, a downside – namely when the lines between tolerating mistakes and condoning bad behaviour blurs. It’s one thing to help a guy who had a run of bad luck. It’s another, when you bail out obvious criminal activity – just think of Enron when you had a huge multinational, which was obviously cooking the books and everyone turned a blind eye to it until there was no more money to keep the show going.

Yes, in business, credit is important. There will be times when you need to pay bills and you have yet to be paid. You cannot tell your suppliers that they have to wait till you get paid simply because they deal with you not your clients.

However, easy credit can be very addictive. Why bother watching the pennies when the bank is more than happy to provide you with a never ending credit line? In business debts can be a good thing if you do things like buy assets or invest in something or other. On a personal level this is not bad too – most of us have a mortgage to buy a house, which becomes our biggest asset once we pay off the bank.

Debt becomes dangerous when it goes into things like buying the stuff that you don’t need. It’s one thing to take a loan to buy a house or put your kid to school. It’s quite another when you use it to live in a spa or buy fast cars. Things like this go down in value and when they do, they are worth less than the loan you took out to buy them. Unfortunately the easy credit which made it easy for businesses to start up mostly went into buying things that have no real value.

Furthermore, the finance industry got extra creative. Creativity in itself is an asset. However, when carried to far this can be dangerous. For example, a mortgage is good loan for both sides in the sense that the borrower is using debt to gain an asset while the creditor knows that if there is a default, he gets something in return – an asset. It’s a totally different story when you make a loan that isn’t backed up by anything other than high interest rates. Fine while the guy raising junk bonds can pay the interest and principle. It’s a different story when things go belly up.

In short, the finance people found so many clever ways of raising money; they didn’t even understand what they were doing. A lot was said about the “new” finance models which reduced risk and maximised returns. It reached a stage when the wisest investor of all time, Warren Buffet declared that these new products were “Weapons of Financial Mass Destruction.”

Mr Buffet has been proved right. The entire American nation forgot about risk as well as returns. Nobody thought it was worth teaching the young that money was something to be conserved. The idea of getting ready for a rainy day never crossed anyone’s mind – then it stormed.

American policy makers are now very upset with China for having the audacity to save. Apparently this is bad for the world because it leads to an economic imbalance. However, you can’t blame the Chinese for wanting to preserve themselves and take care for the days which may not be so rosy.

Isn’t it time for a culture change?

No comments: