Pressures of Modern Civilisation

29^th June, 2002

The WorldCom debacle has pulverized an already stunned world which was gasping for oxygen after Enron. There is an air of disbelief and skepticism everywhere as people do not know whom to trust. As it is the world economy had been under tremendous pressure since the advent of the new millennium with tumbling indices.

The last years of second millennium 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 was the powerhouse which fueled the world 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 reeks 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 US economy experienced an unprecedented run of 110 months of continuous growth. 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 stock markets, property prices and retail loans.

The IT revolution which re-engineered all processes and the entire supply chain in most critical industries lead to quantum productivity increases which seemingly explained the meteoric rise of the Dow Jones. The internet 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 rates which were far out of sync with that of the GDP and real and nominal interest rates. Everyone sung paeans to the magic realism ushered in by IT – the universal panacea for a world struggling with several harsh existential realities.

The euphoria mounted with the coming of the new millennium accompanied by the Y2K fears which proved to be unfounded mainly to the astronomical amounts invested. The upside of it was that the IT systems all over were stress tested to overcome all eventualities.       

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 correct level of the Dow Jones should be around 6500. But there is too much at stake all round – individuals, HNIs, institutions and corporates – all of them have invested heavily in the stock markets either directly or through the mutual fund, pension or insurance routes. Hence it is 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 the effective demand in the US. This has been responsible to a great extent for the 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. The aging societies in Europe and Japan are primarily responsible for the waning effective demand there. These two economic conglomerations together constitute about 40% of the world’s output. Hence the world’s output has been depressed.

This picture of economic gloom 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. The poor animal has no option to perform till it drops dead. The desperate animal is pushed to fudging its accounts in order to paint lipstick and mascara over its pallid features. The Big accounting firms are only too obliging to help them achieve this end.

There is a sense of 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. Gamely all the players are going through the motions. Nobody wants the referee to blow the whistle. Endgame is at hand. 

 Parameters-wip

Bubbles – stock, property
Human nature – greed , lack of morals
ST expectations – stock prices
EVA, shareholder
Overcapacity
Fall in effective demand
Aging populations
Deflation, recession
Hyper competition
Consumerism
Quarterly increase in share prices
Management accounting
Big 5 – consultants
Dow Jones inflated
Banking sector