Currency Wars on the Horizon

German Economy Minister Rainer Bruederle, is said to have quoted two weeks ago, “"The danger of a trade war has appeared on the horizon," and "The danger is that complaints about currency undervaluing lead to retaliatory measures, which could eventually turn into a trade war".

The appreciating Indian Rupee vis a vis the US dollar has been sending alarm bells ringing in companies in the export dependent IT-ITES sector in the last few weeks. One primary factor has been India’s stock market. The recent spurt in the stock market has been greatly fuelled by influx of FDI. This has been having an appreciating impact on the Indian rupee and the depreciation of the dollar has seen the bottom line of Indian IT companies being hit.

To understand this better, one can see that the rupee has fluctuated from a high of 51.9 to the dollar to a low of 43.9 in the last two years and is currently at 44 to the dollar. Associated with higher cost of operations is the fact that there have been stringent requests by clients to decrease billing rates. Another impact of the heavy inflow of FDI has been that the RBI has been forced to purchase dollars to try to keep the Rupee on track. It is believed that this would have an inflationary impact on the Indian economy making cost of operations even higher.

While this in itself is not good news, there is much more happening. In the background of the currency fluctuation, it should be noted is a trade war going on which has not got the attention it deserves. This is a semi-official trade war in currencies being fought by the Americans and the Chinese, whose effects could be even more costly for companies in the coming months and years.

Global Chinese exports in the year 2009 are estimated to be about $ 1.2 Trillion, of which $ 300 billion were to the US. There has been a raging controversy in the US that unfair currency practises by the Chinese has been hurting American Competitiveness. It is felt in the US that the Chinese keep the value of the Yuan artificially low to boost their exports. It is felt that even if the Yuan appreciated by some %age, Chinese exports would be less competitive, making life easier for American companies. Also the depreciation of the US Dollar is being felt as a tool to become competitive in Trade and thus help to get the US out of the quagmire of economic recession it’s in.

With that background, to indirectly nudge its trading partners, a bill was passed in the US House of Representatives, on 29th September, 2010 titled “H.R. 2378: Currency Reform for Fair Trade Act”, to basically allow “countervailing duties to be imposed to address subsidies relating to a fundamentally undervalued currency of any foreign country.” Another bill which has been introduced is “S. 3134: Currency Exchange Rate Oversight Reform Act of 2010”.

For many of us, this may seem like a trade war to be viewed on CNN. However the implications could be quite substantial to the Export dependent companies. The specific threats from these bills are that:

They propose measures, like charging rebated Value-Added Taxes as an import duty. This implies that if a company gets a rebate on exports in its home country, which most do, then a countervailing duty could be imposed by the US to ensure fair competition in the American Market, as it is perceived that this rebate allows companies to unfairly lower their prices. Another threat is that Congress and the US President could levy taxes “to obtain compensatory tariffs against currency-subsidized imports.”

Such is the concern that Guido Mantega, Brazil's Finance Minister, declared last month that the world is already involved in "a trade war and an exchange rate war," and that Brazil would take action to defend its economic interests.

“To open a shop is easy, to keep it open is an art” – Chinese quote

Chop Shop Statement in perspective

Democrat Senator Schumer from New York during a discussion on a border security bill recently stated:

“The emergency border funds will be paid for by assessing fees on foreign companies known as chop shops that outsource good, high-paying American technology jobs to lower wage, temporary immigrant workers from other countries. These are companies such as Infosys”.

This has created a lot of indignation in India with criticism coming from across the corporate and political spectrum. While the statement itself is in poor light, our reaction should be seen in perspective. President Obama, a democrat won the US elections in November 2008, on the back of a rejection of the economic policies of George Bush. One very important issue in that election was unemployment. Unemployment stood at 5% in April 2008 but had risen dramatically touching 7.5% in October 2008 just at the time of the elections. It further reached 9.5% in April 2009.

Since April 2009 the unemployment rate has remained in a narrow band of 9.5-10% and it is forecast to be around 9.9% in Feb 2011. With elections around the corner in November 2010 there may be many more statements addressed to the American public by its politicians. Politicians will be politicians no matter which country they reside in, and they need to get re-elected, so we should not really get too worked up. This reminds me of some lines from Kahlil Gibran

“The reality of the other person lies not in what he reveals to you, but what he cannot reveal to you. Therefore, if you would understand him, listen not to what he says, but rather to what he does not say.”

In fact we should highlight the positive effects commerce with India has brought to the US, something we are really not doing effectively. One prime example is investment by Indian companies in America.

A report released by Congressman Jim McDermott “How America Benefits from Economic Engagement with India” stresses on theses investment in the US. It is a very interesting study as it highlights that between the years 2004-2009, 90 Indian companies made more than 100 Greenfield investments valued at $ 5.5 Billion creating 16,576 jobs. Further the report highlights that the total investment by Indian companies to the US in that same period was to the tune of $ 26.5 Billion which resulted in job creation to the tune of 60,000.

Indian companies and especially the IT companies employ tens of thousands of people in the US and probably pay taxes in the billions. These very same companies have been busy at campus recruitments where thousands of people have been hired. So the statements that high paying American jobs are lost are not entirely correct.

Further while there is indeed a huge unemployed labour pool there is also a shortage of skills within organizations especially in IT, Communications and healthcare. So the need for skilled people will always be there. In that light we should also not look at the raising of H1B fees very narrowly as if it will sink the Indian IT / ITES Industry. NASSCOM estimates that the value of India IT/ITES exports would be around $ 60-62 Billion in FY 2010-2011. If we assume that 60% exports go to the US, we are talking of approximately $ 36 Billion. Now at the other end look at the H1B regime. The total number of H1B’s issued in a year is 65,000 of which traditionally 60% go to Indians. That’s about 39,000. So with increase of visa fees by $ 2000 the net increase in payouts for the whole industry would at best be $ 78 million. Against an export of $ 36 Billion, well......

In the Battle of "isms" have we lost sight of Right and Wrong?

“I am not bound to win, but I am bound to be true. I am not bound to succeed, but I am bound to live by the light that I have. I must stand with anybody that stands right, and stand with him while he is right, and part with him when he goes wrong.”

Abraham Lincoln

In my last two articles I had written about Idealism in the light of the Copenhagen Summit on Climate Change. I received a number of comments and views. A trend seemed to be prevalent that if you were for climate protection you were an idealist and if were on the other side you were a realist.

I felt that at Copenhagen and outside, amongst the cacophony of noise, between opposing camps, the voice of reason has been lost. There was a debate between two opposing camps. There was no debate between right and wrong. Global warming was discussed purely from an economic point of view.

Take the threat of global warming towards the melting of the ice caps and retreat of fresh water glaciers. While this is greatly debated by all, the common man who needs the natural river flow for his very survival is just ignored in the big picture. The BRIC countries might have reached some vague compromise with the US, however what China and India need to realize is that the reduction in fresh water from the Himalayas effects most of Asia, South Asia and South East Asia which is home to almost 50% of the worlds population. If they do not save their fresh water source they have a huge challenge in front of them.

This is not the first type of argument between opposing camps. The end of the Second World War saw the competition between socialism/communism and capitalism. The end of the cold war saw the quiet demise of communism. Even China has forsaken communism for some quasi capitalism, and Russia has embraced capitalism whole-heartedly.

So while capitalism may rejoice in its seeming victory, the recent global depression highlighted the fragile nature of capitalist structures. The unchecked greed would have been very damaging were it not for the common taxpayer who ended up bearing the burden of the follies of a few. So while a vast majority suffered, a few thrived.

All this just highlights one point that most of us are trapped in an enclosed thought process without the ability or the desire to differentiate between right and wrong. What we need to do is look inward and transform ourselves. As the Buddha said:

“All wrong-doing arises because of mind. If mind is transformed can wrong-doing remain?”

If mankind could be compared to Icarus, the similarity would be striking. Just as Icarus made wings of wax to flee Crete and gain Independence, mankind is polluting the world to escape poverty. Unfortunately Icarus had a grim ending, as he rose higher, the sun melted his wings which were made of wax and he plunged to his doom. Will the same befall humanity?

Will he have the sense to differentiate Right from Wrong?

Is Idealism a good sounding word for Reality

Last week I had written an article questioning the strength of ideas. At its roots was the citation for awarding of the Nobel Peace Prize to President Obama.

“For 108 years, the Norwegian Nobel Committee has sought to stimulate precisely that international policy and those attitudes for which Obama is now the world's leading spokesman. The Committee endorses Obama's appeal that "Now is the time for all of us to take our share of responsibility for a global response to global challenges."

“His diplomacy is founded in the concept that those who are to lead the world must do so on the basis of values and attitudes that are shared by the majority of the world's population.”

http://nobelprize.org/nobel_prizes/peace/laureates/2009/press.html

The background was the Copenhagen summit. This was the great opportunity to preserve the idea of protecting Mother Nature. President Obama had his chance to promote “values and attitudes” shared by the majority of the world, the reason for which he was awarded the Nobel Prize. The world expected him to take the lead.

However this was not to be. The idealism of environmental protection came with a price tag. The thought of the economic consequences has given cold feet to all, bringing into play the hard reality of money.

The concept of Idealism is based on values and attitudes which spring from the mind and are focused on sense of fair play and justice. Realism on the other hand is based on the concepts of what exists, or which has an absolute value, like money.

The first Noble Peace Prize was awarded to Henry Dunant, founder of the Red Cross, who shared it with Frédéric Passy. Over the years we have seen that the concept of the Red Cross though very great, is always within the boundaries of its budgets. Only so much can be done for the victims of war and conflict and famine and hunger.

The debacle at Copenhagen just clarifies that Idealism, is perhaps just an image of realism, or as the two meet, in the words of William F. Buckley, Jr.:

“Idealism is fine, but as it approaches reality, the costs become prohibitive.”

Say No to Detroit, Say yes to Dimaro?

“Our country is not the only thing to which we owe our allegiance. It is also owed to justice and to humanity. Patriotism consists not in waving the flag, but in striving that our country shall be righteous as well as strong.” - James Bryce

On Wednesday Fiat Chief Executive Sergio Marchionne became CEO of the new Chrysler Group LLC, which will take over Chrysler LLC. This is another landmark event in the financial crisis facing the world.

With unemployment hitting 7.1% at the end of Q4, 2008 in Italy, (http://www.italica.sm/shownews.php?newsid=0000000455) and an Italian now being the CEO of Chrysler, would it be fair if Mr. Silvio Berlusconi, the Prime Minister of Italy were to exhort Mr. Marchionne to “Say No to Detroit, and yes to Dimaro?”

Some time ago President Barak Obama said 'Say No to Bangalore and yes to Buffalo'. This was an attempt to ask US corporations to create jobs in the US and not overseas. In this whole contention of job creation one question needs to be addressed, “What of the Status of MNC’s”?

This is a question posed to those organizations, or business entities which are global in nature, normally called Multi-National Corporations (MNC) seeking the lowest cost of operations, to maximize profits.

What is their identity?

Who do they owe allegiance to?
Do they have a nationalistic identity as to a reference of the physical location of their headquarters?
Or is their identity derived from the nationality of the top management?
Or is it derived from majority stock holders and allegiance is towards them?

If an MNC shows outward allegiance to one nation, does it risk its credibility somewhere else, and if so who suffers, employees, owners, or the government’s collecting taxes?

Take the example of Sony Pictures Entertainment (SPE). SPE is a subsidiary of Sony Corporation of America (SCA), a subsidiary of Tokyo-based Sony Corporation. Michael Lynton is its Chairman and CEO. Now is SPE an American company because it’s Chairman is American, or is it a Japanese company by virtue of being a subsidiary of a Japanese company?

Can Prime Minister Aso of Japan say “Say no to Hollywood, say Yes to Hokkaido?”

Chrysler Group LLC still has a majority stake held by American Entities (Government, UAW etc) so it is still an American company, but with an Italian CEO now does it become an Italian Company? Or will it become an Italian Company if Fiat gets majority stake in it?

We are living in a global village, as it has been said “No Man is an Island”. In such a scenario MNC’s can ill afford allegiance to anyone but “Profits”.

Illusionary GDP Growth for 2009

“After two years in Washington, I often long for the realism and sincerity of Hollywood.” - Fred Thompson

In these times of economic downturn there is a discussion of negative GDP for the developed world while some countries like China are expected to have a positive growth of 8% and India is slated to have a growth of 6.6% as per their respective governments. Assuming that we will apply the same yardsticks to both sets of countries, it is quite difficult to imagine such a contrast. I would like to explain why.

GDP has been described as the Gross Domestic Product of a country and is calculated on a year on year basis. The most common method is the expenditure method. I would like to quote 2 sources for this:

“The expenditure method is the more common approach and is calculated by adding total consumption, investment, government spending and net exports” - http://www.investopedia.com/ask/answers/199.asp

“GDP = consumption + gross investment + government spending + (exports − imports), or, GDP = C + I + G + (X − M)” http://en.wikipedia.org/wiki/Gross_domestic_product

We should look at each parameter of Consumption, Investment, Government Spending and Net Exports to undertsand the actual picture.

Consumption

With collapsing economies, huge job loses, and tendency to save rather then spend, consumption levels are falling drastically. The unemployment figure in the US has risen to 12.5 million in Feb 09, In China more than 20 million migrant workers have lost jobs, and in India about half a million have lost jobs, but that figure is probably distorted as only 1 in 10 workers in India are in the organized sector. We also see Inflation rates coming down drastically reaching near zero in India, China and the US bolstering the fears of negative consumption.

Investment

Global FDI inflows declined 21 percent last year to 1.4 trillion U.S. dollars because of the negative impacts of the global financial crisis and its economic aftermath, which was likely to further contract in 2009, according to the United Nations Conference on Trade and Development. China in fact saw a decrease of about 21% in the 1st 2 months of 2009. Internal Investments have also fallen with projects shelved, expansions halted.

Government Spending

This is the only bright spot on the GDP parameters, but whatever figures for stimulus packages are being thrown around have too many ifs and busts. Chin has talked of $ 585 Billion plan, but it is suggested that this may be spent over the next 5 years, India’s government spending would remain clouded till the end of the elections in May, and then the actual figures may come out.

Net Exports

Exports have nosedived to such an extent that figures of 30-40% reduction is the norm. While China is dependent on Net Exports (Exports – Imports) at 7% of GDP, India has a negative Net Exports. (http://sunilmohal.blogspot.com/2009/01/effects-of-bric-on-world-economy.html)

There is a steep trend down on all parameters of GDP, so the figures of GDP of 8% for China and 6.6% for India seem to be based on hope rather then reality.

Tax Break for outsourcing AJCA 2004

President Barak Obama has just signed the stimulus Package. One point discussed in the recent legislation has caused extreme concern. This is the removal in Tax breaks for “outsourcing”.

Before going to details I would like to quote Russell Baker.

“An educated person is one who has learned that information almost always turns out to be at best incomplete and very often false, misleading, fictitious, mendacious - just dead wrong.”

There is a fear around the repeal of the tax break for companies outsourcing their work. The first question is was there ever any specific tax break for companies outsourcing their work? And how affected will companies be when the tax bar is raised from 5.25% to 35%.

To answer the first question, no there was never actually any specific law related to outsourcing. What had come about in 2004, many years after outsourcing actually began was a tax holiday to encourage American Companies to repatriate their funds from Overseas, back to the US, under the bill, the "American Jobs Creation Act (AJCA) of 2004. Under US Tax law, overseas subsidiaries have no specific time limit on the repatriation of funds. So they can keep the profits made outside the US indefinitely. In 2004, to encourage companies to bring back their profits, Congress gave a tax holiday and reduced the corporate tax from 35% to 5.25%.

This enabled companies to bring back $360 billion stashed outside. Interestingly about 75% came from low tax areas like the Netherlands and other European countries and Tax havens like Cayman Islands and Bermuda. Also a lot of the profits were from the pharma companies.

It is a misnomer that companies make profits solely by outsourcing. A lot of them are engaged in legitimate business activities like Coke and Pepsi are in the soft drinks business or HP and Dell selling computer products and services. This step might actually hurt legitimate operations of US multinationals making them less efficient.

To answer the second question, repealing the tax break will not necessarily affect outsourcing or increase its cost. This is apparent as these companies are currently not bound to repatriate their profits in a specific time frame. Even if they were, one advantage parent companies have with their subsidiaries is that they can decide how much profits are to be booked under transfer pricing.

In another scenario, if a US multinational outsourced its work to a third party, the profits it made by cost savings was being taxed at the same amount of 35% in any case, so how can we say that a tax break has been removed and outsourcing will become costlier?

Is The European Union on the Verge of Collapse?

Economics is the external force which changes the momentum for society.

The world order has consistently seen change quite often due to social disturbances caused by a depressing economic scenario. We are now witnessing the beginning of another fundamental change.

“We must ensure that federal funds are used to buy American products and to help promote manufacturing in our country” - Sen. Sherrod Brown

The deepening economic crisis is changing the contours of International trade and attitudes. When the crisis was appearing initially, there was a world view that we have to take concerted action globally. It was being said that it was neither a US problem nor a European problem alone but a global problem. Stimulus Plans were made and bail out money given to save countries from collapse, Iceland, Pakistan, Ukraine etc.

The barrel has almost been scrapped clean, and in the next couple of months sovereign debt of more than $ 400 Billion is due from Central and Eastern European Countries. Who will play Santa now that countries are so badly affected that they may not have the funds or inclination to help?

As the above statement shows, there is a hardening of public opinion in favor of “me first”. With no support are we staring at the dismemberment of the European Union between the Haves and Have Not?

A Brief Look through Time

Magna Carta – Signing of the “Charter for Rights of People”

King John, of England due to his misrule and conflict with France, and the pope needed huge sums of money to maintain his armies. In the seventeen years of his rule he raised feudal payments eleven times. Finally he imposed income tax for the first time. His misrule and deep economic deprivations caused the people to revolt, forcing King John to sign the charter of "Magna Carta" in 1215, which proclaimed certain rights to people.

“No taxation without representation”

America was a British Colony ruled by England till the last half of the 18th Century. All taxes and issues related to the colonies were decided in London. The cry for representation and right to resources lay the groundwork for self governing and Independent States. We got “"Life, liberty, and the pursuit of happiness "

Let them eat cake

The leaders in Europe in the latter part of the 18th century were almost oblivious to the aspirations of the ruled and the economic hardships faced. Queen Antoinette’s remark was a grim example of how out of touch the monarchy in France was, and hunger and economic collapse led to the French revolution. From the French revolution we got “Liberté, Egalité, Fraternité”

No amount of political freedom will satisfy the hungry masses.

Vladimir Lenin who famously quoted these words led the Russian revolution and established the USSR. Communist Russia gave us the strong roots for a welfare state, which is what most of Western Europe is today.

Glasnost, Uskoreniye and Perestroika

The economic collapse of the erstwhile Soviet Union led to the breakup of the USSR, and freedom for the Central Asian Republics and the disappearance of the Warsaw Pact.

Is Globalization a Myth? Part II

In response to my first article I got a lot of interesting comments. Most emphasis was on trade and economics. It was best summed up by the following by Michael Manos, PE, PMP,

“Are companies going to continue to push the global boundaries to find talent and economic advantages....yes!” “Are we looking at a world with no boundaries and a common set of laws; No!” ”The world is complicated with different cultures, geography and political history. The interests of agricultural countries are far different from the wishes of fully industrialized areas. Much of that difference has to do with the geographical and cultural differences of those particular areas. Those differences are not going to change.”

In the current context, Globalization is about economics and economic upliftment of the dispossessed by cross border investment. It is not about cultural assimilation. Even the pace of the current pace of globalization finds people equally divided in their opinions.

Going further, in a BBC World Service Poll in February 2008, the following was highlighted:

In 22 out of 34 countries around the world, the weight of opinion is that "economic globalization, including trade and investment," is growing too quickly. On average one out of two (50%) hold this view, while 35 percent say globalization is growing too slowly.

For most people world wide Globalization is all about trade, economics and investment and its effect on their day to day life. While there is a lot of understanding of global trade, perceptions vary from peoples on economic standpoint and its effects on them. For people hit by the loss of manufacturing jobs in the US, its not a great thing. For people whose lifestyles are threatened and traditional ways of life endangered, it’s also not a great thing. For those seeing prosperity touching their lifes, it’s a great thing.

In the economic sense “Globalization” has been in existence since mankind started living in fixed communities. We have seen trade between the early civilizations of the Nile (Egypt), Tigris-Euphrates (Babylon) or Indus (India). Other civilizations have also been engaged in trade like China, Greece and the Roman empires. The Arabs in fact were instrumental in the spread of a lot of scientific and literary content through their trading activities. The spread of European empires in the 18th and 19th century boosted globalization due to their reach and importance for extraction of raw materials from the colonies. In fact the 19th century was sometimes called “the first era of globalization”. However the First World War brought about a brief halt in Globalization.

After the First World War, and the collapse of; and redistribution of colonies, we saw the world economies in a system of flux. The period between the First and Second World wars saw the Great Depression and hyper inflation in Germany. Economic discontentment and the unfair conditions prompted by the Versailles Agreement for War reparation were some of the reasons for the rise of Fascists Forces.

The end of the Second World War saw the signing of the Bretton Woods agreement, to establish rules for economic and financial relations. This was partially due to the push of Cordell Hull the US Secretary of State between 1933 and 1944 who propounded that a liberal international economic system would help in maintaining a durable peace. The Bretton Woods agreement helped establish the IMF and the World Bank.

Globalization has seen its highs and lows as per economic and political realities of the times. The current economic tsunami has proved one thing, Globalization is not a myth, in the sense we are all very much interconnected.

That globalization will find fewer cheerleaders today is self evident, as countries scramble to erect firewalls to protect their economies. However part of the solutions is also going to be coming from a concerted effort by all the major economies of the world and not just by the G8, but by the participation of the G20 as well.

Globalization is definitely not a myth; however it is not a reality either.

Answers on Linkedin:

http://www.linkedin.com/answers/international/internationalization-localization/INT_INZ/345792-564729

Is Globalization a Myth? Part 1

“Globalization is the process by which the experience of everyday life marked by the diffusion of commodities and ideas is becoming standardized around the world.”

The Encyclopedia Britannica

“Globalization is to make global or worldwide in scope or application.”

The American Heritage Dictionary

Globalization is a process by which the people of the world are bound. The factors leading to Globalization are economic, cultural and political. Common global challenges like Climate Change, Food security and economic challenges have seen concerted Global Action.

Economic Factors

From the Economic sense and International trade perspective “The Silk Route” and “The Spice Trade” has been there for centuries. In fact the 19th century was sometimes called “the first era of globalization”. The end of the Second World War saw the signing of the Bretton Woods agreement, to establish rules for economic and financial relations. The Bretton Woods agreement helped establish the IMF and the World Bank. The ITO was a result of this agreement. From the ITO evolved GATT. The functions of GATT were taken over by the WTO which came into existence in 1995.

The most recent rounds of discussion under the WTO, the Doha Development Round are currently stalled due to mutual fears between the developed and the developing countries.

Socio Cultural Factors

Alan Rugman, at the Indiana University’s Kelly School of Business, writes in his book “The End of Globalization”. "Globalization is a myth; it never really occurred anyway". "The vast majority of manufacturing and service activity is organized regionally, not globally. Multinational enterprises are the engines of international business--and they think regionally and act locally."

Rugman claims that there are virtually no truly global businesses, for even giants such as McDonald's and Coca-Cola tailor their products to the local market. From a personal perspective I could not agree more. I was once the implementation head of a group required to “Globalize” the training content for a very large Fast Food Chain, with thousands of outlets world wide. At the start we thought all we had to do was to translate the content on SOPs (Standard Operating Procedures) into the local languages. Simple issues started coming up, different signs and colors in different regions took on different meanings. Red was the color of danger in America or the color to stop, while the same was an auspicious color in China, a signal of good fortune.

This led us to the term “Localization”, which is modifying Global products to suite the local market. So our efforts of Globalization of SOP’s actually became Localization of SOPs. So from a socio cultural perspective we were way off from Globalization. It reminds me of the words of Rudyard Kipling:

“East is East and West is West, and never the twin shall meet”

Political Factors

Another force contrary to the concept of globalization is the nation-state. In terms of concerted global action the domestic opinion over-rides global considerations.

The Kyoto Protocol on Global Warming has still not been ratified. The year 2008 has seen massive protests in countries throughout the world by the massive jump in food prices. Approaches to the use of biofuel in the industrialized nations has been claimed to be the recent cause of surge in food prices. In a report published in the Guardian paper in July 2008 it has been reported “Biofuels have forced global food prices up by 75% - far more than previously estimated - according to a confidential World Bank”.

So on major issues of Economics, Global Warming and Food security while there is a lot of collective debate the work on the ground is still way off from Global Consensus. Culturally we have a long way to go.

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Therefore is it correct to say “Globalization is a Myth?”

The Demise of Laissez Faire, Birth of Social Intervention?

“The market is not an invention of capitalism. It has existed for centuries. It is an invention of civilization.”

Mikhail Gorbachev

Capitalism is an economic system where means of production are privately held. This allows individuals to operate for profit in a “free market scenario”. Though Capitalism in its current form owes its existence from the thinking of Economists since the 17th century, it can pre-date its existence by centuries.

Capitalism in its various forms has been in existence since very early ages. The barter system, the ancient Silk Route from China to the Roman Empire, the Arab trade in spices from India to the West is examples of Capitalism. This trade was characterized by Merchants and hence came to be called Merchant Capitalism. Merchant Capitalism slowly evolved from individual “Merchant” to the partnership form. Mention of this is found in text from the 9th century to the 15th. Partnership or Mufawada, in Arabic, compagnia in Europe and the Vaishya or trading communities in India have been around for centuries. The concepts of Credit, Profit, capital, credit notes etc have all revolved around the early trading systems of barter and gold.

The Industrial revolution replaced the “Merchant Capitalism” by the market Economies of the present Western world. Capitalism in its present form has been characterized by the principal of Laissez Faire. The Principle of Laissez Faire has been around for more than 300 years. It has been derived from a slogan “Laissez faire et laissez passer" meaning 'Let do and let pass'. Another slogan “Laissez faire et laissez passer, le monde va de lui même!" added the words “the world goes by itself”.

Laissez Faire at its core advocated non state intervention and profit as its core. Eminent leaders have all advocated this in present times from Churchill to Thatcher, Reagan to Bush.

“The substance of the eminent Socialist gentleman's speech is that making a profit is a sin, but it is my belief that the real sin is taking a loss”.

Winston Churchill

The issue with unregulated Capitalism is that it discounts certain basic human elements such as blind greed. It also assumes that markets would be able to be self regulating.

“Capitalism is the astounding belief that the wickedest of men will do the wickedest of things for the greatest good of everyone.”

John Maynard Keynes

Laissez Faire has enabled the concentration of wealth which has created the emergence of “Financial Capitalism”. The US economy had been increasingly marked by non intervention of the state in the financial sector as evinced in Milton Friedman’s Economics. Friedman in his book “Capitalism and Freedom” favored reducing the role of government as a means to create political and social freedom. His philosophies greatly influenced the policies of Ronald Reagan and Margaret Thatcher.

Ben Bernanke, the current chairman of the Federal Reserve, is an ardent believer of Friedman’s Economics. He paid tribute to Milton Friedman on his ninetieth birthday “I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again”.

The current crisis caused by the financial meltdown has brought onto centre stage “Social interventionism” as an ideology. This involves the intervention of a government in the affairs of the market. Practically all the major leaders of the industrialized nations are falling over themselves to provide Government funds to tackle essentially “Private Problems”.

Laissez Faire’s demise would have at its root the unbridled quest for maximum profit without any oversight whatsoever, as characterized by Wall street in its actions from the passing of the GLB act in 1999 and the removal of the “Net Capital Rule” in 2004.

To contain the damage from the economic crisis, the EESA has been passed by the US Congress. The Emergency Economic Stabilization Act of 2008 (EESA) is $700 billion package devised to rescue financial institutions by purchasing devalued mortgage-linked assets. A fundamental shift in this package is a proposal to place limits on executive's compensation, another blow to Laissez Faire.


However the questions arise:

Will these funds help save some limited people at the expense of a vast many? Would it by like Fannie Mae and Freddie Mac, Profits are ours, the losses are somebody else’s?

Or is it the end of Laissez Faire and the beginning of a socialist society?

Answers on Linkedin:

http://www.linkedin.com/answers/financial-markets/equity-markets/MKT_EQU/342428-564729