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Economy Feb 11, 2013

Time for global economic ‘permabears’ to crawl back to their caves

By Venky Vembu

If a week is a long time in politics, it is evidently an even longer duration in economics. Just last week, European Union leaders reached a seven-year budget agreement that was well-received by the markets. But the euphoria has already dissipated, with finance ministers of EU member-countries slip-sliding back into their customary despair with much hand-wringing and breast-beating.

"We don't know yet how we're going to get out of the crisis," Wolfgang Franz, chairman of German Chancellor Angela Merkel's council of economic advisers, told a German newspaper. "If the crisis is a marathon, we've got two-thirds of the course behind us. But the last third is always the hardest."

Reuters

More alarmist predictions about the US economy too abound. Reuters

More alarmist predictions about the US economy too abound. Bond market guru Bill Gross of PIMCO has run out of earthy metaphors to describe how precisely the US financial system - and the larger economy-will implode. So, recently, he has taken to invoking themes from the science of astrophysics to predict the imminent 'death' of the US 'star'.

The US financial system, Gross noted in a recent investment commentary, is like a supernova that was expanding so rapidly now that in the far future it would end in a "big freeze."

"Our current monetary system seems to require perpetual expansion to maintain its existence," Gross wrote. "The advancing entropy in the physical universe may in fact portend a similar decline of 'energy' and 'heat' within the credit markets.

But all this over-the-top, out-of the-world imagery cannot hide the fact that Gross has been frequently wrong on his calls -even on the bond market; worse, there are those who say he is merely "talking up his book". Of course, with a surname like Gross, he lends himself readily to lampooning in headlines such as this one. And he's been so wrong that when you begin to key in his name on Google, the first autofill prompt you get - which is entirely in keeping with the short-fuse nature of commentaries on the Internet-is that he is an "idiot".

All predictions - on the market and on the larger economy-reflect an epic tug-of-war between the bulls and the bears. Both have had their moments of glory, when they have got their calls right, but in equal measure, both have a record to defend of times when they have fallen flat on their faces. Yet, permabears tend to be perceived as "smarter".

Today, however, it appears that the permabears of the global economy are themselves in a bear market. For all the structural issues that both the US and the European Union are grappling with - and they admittedly have some painful restructuring to do - the experience of other countries (which too were similarly mired in debt/solvency crises and have managed inventively work themselves out of them) offers inspirational examples for countries on both sides of the Atlantic.

Already, observers from far-off India, who are given to taking the long view, are seeing signs of optimism in both the US and the eurozone.

India's richest man Mukesh Ambani, who confessed to being "more optimistic than most others" about the global economy, reckons that the US is on the threshold of a game-changing "energy revolution" that will rewrite the rules of the economic game. Ambani told Fareed Zakaria GPS that in his estimation, the US will realize its dream of being "energy independent" because it is living through a "fundamental transformation in the energy scene by tapping non-conventional energy from shale oil and gas.

"Realistically, I can tell you that it is my judgment that the US will be independent of foreign imports of energy in the next five or seven years," Ambani asserted with the weight of his domain expertise in the energy space.

Such a milestone moment would have enormous significance not just for the US economy, but would change the rules of engagement of the geopolitical game. Reduced reliance on oil supplies from West Asian countries would whittle down the disproportionate influence that these countries, typically headed by despotic regimes, enjoy today.

Grim prognostications about the enfeeblement of the US have traditionally overlooked the resilience of the US economy, and the innovative edge that that country enjoys even in this day and age. As Zakaria observes,"America has always done well in innovation, but in the past 60 years it's been off the charts... We're now dominating the world as nobody else has ever done."

For sure, political gridlock and a sharpening ideological polarization in the US is forcing cutbacks in "investments" in areas of innovation, and yet it isn't exactly at risk of falling off the innovation map anytime soon.

Likewise, surveying the eurozone landscape, which gave market watchers much cause for agony in 2012, market maven Ruchir Sharma sees room for optimism that things are on the mend. Writing in the Economic Times, Sharma reckons that the long view suggests that "things are getting less bad. Economic surveys show a steady improvement in business conditions and it is likely that the stalled eurozone economy will grow again by the second quarter. Even traditionally inefficient southern economies are starting to liberalise rules that restrain competition in their labour, product and service markets, which will help raise Europe's growth potential. It remains highly improbable that any member state will leave the Eurozone."

Sharma points to the experience of Asian economics which responded to the 1997 Asian financial crisis by fixing their balance-sheets, and particularly their current account balances, and worked their way out of crisis. In his estimation, most of peripheral Europe is approaching a similar "critical point". Spain, Portugal and Italy, he points out, are on track to record surpluses this year. Ireland has recorded the first current account surplus in the region, at 9 per cent of GDP, up sharply from an 8 per cent deficit.

All this is a different tune from the "death of the euro" chant that we heard for much of the past few years, and although there remains much to be done by way of structural reforms for the European economies to work their way out of their crises, the experience of some of the Nordic states, which experienced similar debt crises in the 1990s, shows just what countries can do when they are not bound by ideological rigidity.

As the Economist noted recently, the four main Nordic countries - Sweden, Denmark, Norway and Finland - today top the global league tables of everything from economic competitiveness to social health to happiness. Even though these countries are famous for their "big government" - and high taxes - they have reinvented themselves since their own crises of the 1990s and are today offering a blueprint of how to reform the public sector, and make the state far more efficient and responsive.

The Nordics, the magazine pointed, have pushed far-reaching reforms past unions and business lobbies. It offers proof that you can inject market mechanisms into the "welfare state" to sharpen its performance and that you can put entitlement programmes on sound foundations to avoid beggaring future generations.

But, it adds, you need to be willing to root out corruption and vested interests. "And you must be ready to abandon tired orthodoxies of the left and right and forage for good ideas across the political spectrum." The world, it notes, will be studying the Nordic model for years to come.

Far too often, permabears offer the grim view that politicians - and governments - can never do the right thing. Recent experiences of governments and politicians - in the US, the Eurozone and closer home in India - may have validated the deepest sceptiism on this count. But, as is often said, politicians will get around to doing the right thing - after exhausting all other options. At that time, the permabears, who are on the prowl today, will likely crawl back into their caves.

by Venky Vembu

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