Written around 2001/02
Recently President Bush
addressed the US in the aftermath of startling disclosures from Merck that it
has overstated its revenues by $ 14 bn. This comes in the wake of the WorldCom
debacle which had stunned the world which had not recovered from the Enron
fiasco. These continuing corporate disclosures are strengthening the fear that
we could be possibly be witnessing a spiraling economic crises of which these
disclosures are just the tip of an iceberg. There is an air of disbelief and
skepticism everywhere as people do not know whom to trust. As it is the world
economy has been already under tremendous pressure since the advent of the new
millennium with recessionary forces spreading their tentacles all over the
world, evidenced by deflationary and tumbling markets which are defying all
hitherto accepted economic prescriptions.
The present crises in the
corporate world may be mainly attributed to the relentless shareholder pressure
on corporates the world over to perform quarter after the quarter for ever
higher returns. This intense competition should be viewed against the backdrop
of overcapacity which has been building up over the past few decades aggravated
by decline in effective demand
The
last years of previous decade – the cusp between two millenniums were heady
ones with the markets booming everywhere and it seemed as if humankind was on
the verge of the promised land of milk and honey. The United States, with 31%
of the global output, was the powerhouse, which fueled the world’s growth.
Capitalism was at its peak. Communism and socialism breathed their last in the
80s with the fall of Soviet Union. The Chinese brand of communism was a mutant
converging towards capitalism. Thatcher had set in motion the privatization
process during the 80s where the state sector enterprises which had become a
drain on public exchequer were handed over to private ownership. The rest of
the Europe and the world followed her footsteps. No doubt, it was the most
rational strategy for Governments everywhere. All this seemed to vindicate the
triumph of capitalism.
The
Dow Jones, one of the holy cows of capitalism, rose by over 200% during the
90s. Wall Street was the center of the universe. The financial markets led by
the giant investment banks with their rocket scientists were spinning out
innovative instruments based on financial engineering and technology advances.
The US economy experienced an unprecedented run of over 110 months of
continuous growth under Clinton. Unemployment had declined to historic lows.
Consumer spending was on the upswing based on the feel good factor of ever
increasing wealth due to the “irrational exuberance” of the stock markets,
property price bubbles and compounding retail loans. The virtues of free
markets were being bandied about.
The
IT revolution which helped in re-engineering all processes and supply chains in
most critical industries lead to quantum productivity increases which seemingly
explained the meteoric rise of the Dow Jones. The rise of the Internet had
spawned thousands of dotcoms given birth to by eager venture capitalists.
No
one ever questioned as to how the stock market indices could rise at incredible
rates which were far out of sync with that of the GDP and real and nominal interest
rates. Everyone, except the venerable Economist, sung paeans to the “magic
realism” of soaring markets ushered in by the allocative efficiency of capital in
free markets epitomized by the US. The euphoria mounted with the coming of the
new millennium.
The
good times came to an end with the dotcom balloon getting pricked. But the Dow
Jones recovered which was rationalized by the intrinsic strength and resilience
of the US economy. According to an analysis published in the Economist, the
rational level of the Dow Jones should be around 6500. But there was too much
at stake all round – workers, high networth individuals, institutions and
corporates – all of them had invested heavily in the stock markets either
directly or through the mutual fund, pension or insurance routes. Hence it was
in the interest of all concerned that the markets must be propped up at any and
all costs.
The
feel good wealth factor has been driving the consumer markets and effective
demand in the US and elsewhere. This has been responsible to a great extent for
keeping the wheels of industry and commerce running in the US. One of the major
reasons why effective demand has not flagged off in the US is that the average
age in the US is lower than in Europe or Japan due to immigration. The aging
societies in Europe and Japan are primarily responsible for the waning
effective demand there. These two economic conglomerates together constitute
about 40% of the world’s output. South American economies are in the dumps.
Though Southeast Asia has apparently recovered to some extent from its crises –
it is still fragile. Hence the world’s overall demand / supply equation has
been under pressure.
This mixed picture of
economic gloom and boom has not been very conducive for the markets. Hence
there has been immense pressure on all listed companies to keep performing
continuously quarter after quarter in order to keep their shareholders happy.
The tyrannical markets have been flogging the horse endlessly with great
expectations. The poor animal has no option to perform till it drops dead. The
desperate animal is pushed to painting lipstick and mascara to mask its pallid
features and hence fudged its accounts. The pursuit for better numbers was
rationalized by EVA and balanced scorecard and what have you. The Big
accounting firms have been only too obliging in helping them achieve this end.
There
is a sense of catatonic disbelief now all over. Nobody would like to upset the
apple cart. There is simply too much at stake. No body knows how deep the rot
has permeated. The SEC in US wants the top 100 corporates to certify their
accounts. Gamely the players are all going through the motions. President Bush
is putting up a brave charade. He is still talking of setting the market in
motion. Which way? Where do we go from here? Nobody wants the referee to blow
the whistle. Is there some way out of here?
There must be some way out of here
Said
the Joker to the Thief
There is too much confusion
I can’t get no relief…
No comments:
Post a Comment