Japan is already bankrupt, so are nine countries in the European Union (EU). The U.S. is on its way, with the EU struggling on

Tearing Towards Doomsday

By Sanjeev Pandiya |

Mar 27, 2010


The probability of the current economic situation producing a mass-scale catastrophe is huge. But there are pockets of sunshine that carry the potential to save the Earth.

Well, for starters, let us rule out ‘consensus forecasts’. The world will not grow on steroids; a second Troubled Asset Relief Program (TARP) in the U.S. will have dramatically different consequences, possibly triggering a currency crisis of unimaginable proportions.

Deflation, Depression

A bond market collapse looks imminent, if a second TARP is announced. Recently, long-term spreads in U.S. government bonds spiked up to 300 basis points (bps), reflecting inflationary expectations. This could accelerate the U.S. dollar (USD) depreciation pressures, exporting various asset bubbles to emerging markets.

The wrong bubble bursting could trigger mayhem all over again, this time from the currency markets. The last time equity markets were collapsing because banks were going bust, this time it will be currency markets collapsing because countries are going bust. The wrong-est bubble would be China, which is already in trouble-making territory. If China hits (asset-price) deflation, it will be new territory for the giant, and also the last straw for a beleaguered world, looking for some peg to pin its growth on. Five years of deleveraging will create such a serious growth freeze, that there can be no orderly withdrawal.

Most certainly, if such a scenario pans out, oil prices will melt down. Iraq is recommencing production, and there are new assets coming online, so there will be more than enough oil to absorb. Capital flows into the Middle East have already eased, after the Dubai fiasco, so they will have to replace them with oil surpluses. This will trigger ‘cheating’ on production, which is more bad news for oil producers.

Low oil prices are not an unmitigated blessing for India. While the current account deficit (CAD) will come down, so will ‘invisible flows’ from the Middle East. More important, it will start carry trading, if the balance of payments (BoP) turns surplus, which will result in fast appreciation of the rupee. This would cause a bubble in domestic assets, especially in stocks and real estate.

The rupee under attack is one of the scariest scenarios that I have for the coming year, at least as far as India is concerned. I am a big believer in the Reserve Bank of India (RBI), but on the other hand, I have also seen how Australia and then Brazil have seen their currencies appreciate.

Gold looks sure to hold firm, with very little to bring it down, even though its nominal valuations look high. All in all, a pretty downbeat forecast, in the face of high equity market valuations. The joker in the pack would be a second bad monsoon for India, in what is predicted to be the hottest year on record. That would create something like a food crisis in India; anyway, the country better get used to precipitation levels that are much lesser than the 95 per cent of the long period average that we have had, in the last 20 years.

Hyperinflation, Recession

This is the second scenario. Inflation skyrockets in the U.S., the USD depreciates and money supply explodes. Bad for equity markets as well as the domestic budgets, but we will survive.

India may not be so badly off, especially if the monsoons hold up. The real problem would be if the rains fail and food prices continue with their upward trajectory. Bar that, we should survive pretty well.

Virtuous Growth

This cannot be my short-term expectation, but over the medium term, I am hoping that something good can happen. Mostly, I am hoping that the clean energy bandwagon will take off. Last year, very quietly, more money was invested in clean energy ($155 billion) than fossil energy. So, the world as a whole has already crossed the Rubicon of the big trend, of clean energy taking over from fossil fuels. With so much awareness floating around, India too will pick itself up and start to trundle towards a clean energy future. Not that it will impact the world as a whole, but in many small ways, very large industries are coming up in the clean energy space and its applications. A Rs 1,000 crore desalination project is coming up in Chennai, the second in the city. A sewage treatment plant is coming up in Delhi, and two water recycling plants have been announced.

Water is an application of energy, not energy itself. In little ways, you can see it already. The McDonald’s Noida outlet has a waterless flushing system, which recycles urine through bacterial degradation. It saves 10,000 litres of water per annum, and uses no energy in waste disposal.

Water is already an issue, centre-stage. If government support for a water market is forthcoming, we will see a very large recycling and conservation industry come up.

I am not so optimistic about energy trends in India but the energy sector as a whole will drive a lot of growth in the capital goods sector. More important, it will be an accelerator for Asian domestic consumption, which could revive at least the Asian economies. China knows it, but India, as usual, is taking its time to understand the clean energy opportunity.

Clean energy itself will shrink gross domestic product (GDP) directly, but it will act as an accelerator for inclusive growth. Take solar as an example: apart from the extra cost of capital expenditure, the variable cost of solar will drop to near zero; once the capital cost is recovered (or subsidized) from the rest of the economy, the direct cost of energy will drop dramatically. This will reduce nominal gross domestic product (GDP), but as the real cost of energy drops, it will draw in such a huge chunk of poor people into the real economy that it will act as a multiplier to the rest of the economy. This is not well understood by governments who think that clean energy is expensive. Just think what free energy will do for water recycling, sewage treatment and water transportation. And in turn, once these are huge, ubiquitous industries, what that will do for agriculture and the rural economy. And therefore build own operate transfer (BOOT) demand. That is one way. Another may be biotech manufacturing.

The End of the World As We Know It

Japan is already bankrupt, so are nine countries in the European Union (EU). The U.S. is on its way, with the EU struggling on. Lots of savers have to lose their savings, and earn it back again. So, people all over the world will save, the velocity of money will fall and nominal GDP will drop. Unemployment rates will spike up, and lots of older people will quietly die in their homes. If nature punishes us and monsoons fail, lots of poor people need to quietly die in their homes.

I limit myself to economics, and I am confused about politics and sociology. If these people choose not to sit quietly in their homes, then the picture gets fuzzy. What (and who) will survive, why and in what form, is something I cannot guess.

I know for sure that water could trigger mass scale riots in India, followed by unprecedented human losses, which will make Partition look like a party. We need a water recycling industry as soon as possible, and more important, a water conservation culture. In a country where even Priyanka Chopra argues that water should be free, it will take some time to get home the point that something can be ‘free’ only when it is provided by nature. Clean water is no longer provided by nature; even if it is, it has to be treated and moved to the point of consumption. That is an application of energy, and has to be paid for. The costs can be managed, but only if the industry becomes exciting, a lot of smart people are driven into the industry and then innovation drives the real costs down. None of this will come free.

(Sanjeev Pandiya teaches, trades and writes.)