Saturday, 31 August 2013

Another financial crisis looms if rich countries can't kick their addiction to cash injection


Five years on from the last crash, quantitative easing remains the weapon of choice for governments unwilling to challenge the current economic model
Matthew Richardson on the world economy
Illustration by Matthew Richardson
Just as people started to think that things were getting calmer – if not exactly brighter – in the rich countries, things have become decidedly slower and more volatile in the so-called "emerging market" economies. At the centre of the (unwanted) attention at the moment is India, which is seeing a rapid outflow of capital and thus a rapid fall in the value of its currency, the rupee. But many other emerging market economies, other than China, have also seen similar outflows and weakening of currencies recently.
This is not necessarily a bad development. The currencies of many emerging market economies, especially those of Brazil's real and South Africa's rand, had been significantly over-valued, damaging their export competitiveness. Devaluation could actually help these economies put their growth on a more sustainable path.
However, people are rightly worried that too rapid flows of capital out of these countries may cause excessively fast devaluations, resulting in currency crises and thus financial crises, as happened in eastern Asia back in 1997. Situations like this can arise because the currencies of the emerging countries have been propped up by something that can quickly disappear – that is, the large inflows of speculative capital from the rich countries. Given its nature, such capital is ready to pull out at any moment, as an increasing portion of it has been doing for several months.
This is a stark reminder that things are still not well with the world economy, five years on from the outbreak of the biggest financial crisis in three generations in September 2008.
We have had such huge capital inflows into the emerging economies mainly because of quantitative easing (QE) by the central banks of the US, Britain, and other rich countries, which injected trillions of dollars into the world economy, in a desperate attempt to revive their moribund economies.
In its initial phase, QE may have had acted like an electric shot to someone who just had a cardiac arrest. But subsequently its boosting effects have been largely through the creation of unsustainable asset bubbles – in the stock market, in property markets and in commodity markets – that may burst and generate another round of financial crises. On top of that, it has caused much collateral damage to developing countries, by overvaluing their currencies, helping them generate unsustainable credit booms, and now threatening them with the prospect of currency crises.
If its effects are at best debatable and at worst laying the ground for the next round of financial crises, why has there been so much QE? It is because it has been the only weapon that the rich country governments have been willing to deploy in order to generate an economic recovery.
QE has become the weapon of choice by these governments because it is the only way in which recovery – however slow and anaemic – could be generated without changing the economic model that has served the rich and powerful so well in the past three decades.
This model is propelled by a continuous generation of asset bubbles, fuelled by complex and opaque financial instruments created by highly leveraged banks and other financial institutions. It is a system in which short-term financial profits take precedence over long-term investments in productive capabilities, and over the quality of life of employees. If the rich countries had tried to generate recovery through any other means than QE, they would have to seriously challenge this model.
Recovery driven by fiscal policy would have involved an increase in the shares of public investment and social welfare spending in national income, reducing the share going to the rich. It would have generated new public sector jobs, which would have weakened the bargaining power of capitalists by reducing unemployment.
Recovery based on a "rebalancing" of the economy would have required policies that hurt the financial sector. The financial system would have to be re-engineered to channel more money into long-term investments that raise productivity. Exchange rates would have to be maintained at a competitive level on a permanent basis, rather than at an over-valued level that the financial sector favours. There would have to be greater public investment in the training of scientists and engineers, and greater incentives for them to work in and with the industrial sector, thus shrinking the recruitment pool for the financial industry.
Given all this, it is not a big surprise that those who benefit from the status quo have persisted with QE. What is surprising is that they have actually strengthened the status quo, despite the mess they have caused. They have successfully pushed for cuts in government spending, shrinking the welfare state to the extent that even Margaret Thatcher could not manage. They have used the fear of unemployment in an environment of shrinking social safety nets to force workers to accept more unstable part-time jobs, less-secure contracts (zero-hour contracts being the most extreme example), and poorer working conditions.
But is this maintenance, or even fortification, of the ancient regime likely to continue? It may, but it may not. Greece, Spain, and other eurozone periphery countries could explode any day, given their high unemployment and deepening strains of austerity. In the US, which is considered the home of quiescent workers, the call for living wages is becoming louder, as seen in the current strikes by fast-food restaurant workers. The British are (overly) patient people, but they may change their mind when the full extent of budget cuts unfolds in the coming months.
All of these stirrings may amount to little, especially given the weakened state of trade unions, except in a few countries, and the failure of the parties on the left of centre to come up with a coherent alternative vision. But politics is unpredictable. Five years after the crisis, the real battle for the future of capitalism may be only just beginning.

Friday, 30 August 2013

This perverse rage against the poor


HARISH KHARE in the hindu
  
edit page statecradft 300813
The Hinduedit page statecradft 300813

With the economic boom petering out, those who benefitted from it are angry with the government for the Food Security Bill because it is paying attention to the needs of the underprivileged for a change


This week’s received wisdom insists that the Indian economy has irretrievably collapsed because on Monday, the Lok Sabha passed the National Food Security Bill (NFSB). The Hindu Business Lineheadline (Aug.28, page 1) said it all: “Re, Sensex sink on fears Food Bill will feed deficit.” The subtext of the lament appears to be that the rupee decline was the market’s way of registering a pointed disapproval of the food security initiative. The Schadenfreude-wallahs are as happy as are the market-reformers that the United Progressive Alliance (UPA) leadership has been fixed so gloriously for venturing into a “populist” course of action. The bandwagon routine has acquired a momentum of its own; even Hindi and other vernacular newspapers have allowed themselves to be mesmerised by the crisis-mongering on television. This, though, is no time to panic. This is the time to strike a balance between short-term difficulty and long-term promises and commitments.

What wrong signals?

Once every few decades comes a moment in a Republic’s life when a few fundamental commitments have to be renewed — or rejected. This is one such week, a time to test our core beliefs. It is also the time to ask a fundamental question: since when in this country has a veto been ceded to the markets and its manipulators, at home and abroad, to decide the issues of equity, social justice and economic fairness? There is something inherently perverse in the suggestion that this much-needed welfare measure would send out the “wrong” signals. Pray to whom? Those half-a-dozen professional financial manipulators in London?

Indeed, economists can always be relied upon to argue that there is always a better way to do anything. Some are competing among themselves to declare that this food security initiative will neither work, nor fetch any votes for the ruling party. Let us make no mistake. Beyond all these sophisticated arguments is a certain class prejudice, resentful that so many resources are being “wasted” for the poor and other socially disadvantaged people, that in this age of “reforms,” political considerations and calculations are being allowed to determine the allocation of societal resources.

This misses the very essence of the concept of political legitimacy in a democratic arrangement. A democracy survives and prospers only when every stakeholder gets an abiding sense of participation, partnership and entitlement. We often seem to keep forgetting that politics is all about who gets what at whose expense. During these last five years, at least for most of the time, the corporates and their policy preferences have been accorded unprecedented acceptance. The time is ripe to strike a new balance. And the NFSB does just that.

Reform by stealth

If we are honest with ourselves, we will have no difficulty in acknowledging that for 20 years, economic reforms have been operationalised without a political mandate. Not until recently when the Congress party held a public meeting to rally opinion behind the Manmohan Singh government’s FDI policy, did any political party have the courage to proclaim openly and boldly its commitment to “economic reforms.” Yet, the “reforms” have been routinely and regularly proclaimed to be “irreversible,” irrespective of the political colour of the government in New Delhi. The process has well been summed up in that evocative phrase, “reform by stealth.”

So now, when we are confronted with a veritable economic meltdown, we are ill-equipped to attend to the more serious and more debilitating crisis of our democratic project running out of its popular legitimacy. India’s democratic arrangements no longer appear to have the requisite social and political sanctions behind them. And we are unable to deal adequately with the systemic overload because our public discourse has been hijacked by a self-serving advocacy crowd and by a professionally disoriented media. For example, a year ago there was carping all around that the crony capitalists and the corrupt politicians were robbing the nation of its wealth, and we staged massive spectacles of resentment at Jantar Mantar; now, a year later, we are ranting and raving that we are not listening to or heeding those who rig the stock markets.

If shouting and screaming every evening could produce solutions to difficult and complex problems, India would have been the most efficacious and working corner of planet Earth. Despite the obvious disapproval of the shouting class, the UPA leadership has gone ahead with the Food Security Bill. Hence, the exaggerated anger.

As social philosopher Roberto Mangabeira Unger points out, a peaceful social order is in itself not enough; “ [S]ociety must be set up in a manner capable of justification in the yes of each of its members.” In political economy terms, each section of society, and every stakeholder gets to determine: what is in it for me? The Democratic Project is a social compact, an indefinable construct, but nonetheless one that hinges on a promise of a fair deal for all. The poor are asking this question with greater urgency — and in the Maoist-strongholds with arms and blood — as decades of “economic growth” have produced new inequities and disparities.

Rather than wait for the next round of the “Maoist” violence to jerk us back to harsh realities, what the Food law does is that at one stroke, it sends out a message that the Indian state has not turned its back on the poor, and that the have-nots continue to have a claim on the collective resources, and that they have not been left to their own devices or to the market’s curative potency.

This message has to be understood and appreciated in the context of the growing preference in some quarters for authoritarian solutions — throw out the encumbering paraphernalia of social equity or fairness, and let the floodgates of enterprise and business acumen be thrown wide open.

Resenting interventionism

A decade of economic prosperity has allowed millions and millions of middle-class families to realise their upwardly revised aspirations and life experiences; at the same time, the UPA saw to it that the welfare state kept expanding the “social agenda,” providing a safety net against the vagaries of the market.

Now, the good days have seemingly come to an end, and there is anger that the state remains equally mindful of the welfare poor. We all thought that the poor have been disappeared from the policy drawing room; and suddenly, they are back with almost a veto. The narrative-controllers resent that. Just when they thought they had successfully defanged the Indian state of its interventionist impulses, here comes the Food Security Bill.

The bill can be seen as the other side of the “stimulus” coin. The 2008-2009 stimulus was used by the super-rich to buy real estate in London and other European cities. At that time, no one seemed to find anything inherently wrong at this massive, disproportionate allocation of resources for so few. None of it was invested here to create jobs; instead, the super-rich petulantly proclaimed that the government was not sufficiently attentive to their “sentiment” and hence they would take their ball (Indian savings and taxpayers) and play in other economies. No one complained; instead, the government was blamed for the corporate sector’s misplaced priorities.

If subsidised food can reduce the food spending of the poor, and place some surplus money in their hands, which would then be spent in India, that may end up stimulating domestic consumer demand. It would be a kind of stimulus lite, for the poor.

A ruling party in India is called upon to fulfil its basic obligation to keep intact the democratic credentials of the “system.” The food security legislation is a partial response to that obligation and must be applauded.

Practise swadeshi, save the rupee

By Kingshuk Nag in the Times of India

The only way to save the rupee and to prevent its free fall is to start practising swadeshi all over again. Yes, you read it correctly. As a nation we are living beyond our means and you can’t continue doing so unless we want India to crash (and not the rupee alone). That is exactly what is happening: the crash of the rupee is a symptom of the problems that ail the economy. Although sarkari economists et al are trying to explain away the problem by changes in the Fed rates in the US and a revival in the US economy this is a very shallow explanation. Just because the Indonesian rupiah, the South African rand and the Brazilian real have been competing with the rupee in depreciating against the US dollar, there is no reason to wish away our problems.

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Gresham’s Law in Present day India


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Next time you bite corn produced in Australia, oranges raised in California and apples from god knows where, think deeply whether as a nation we can afford this. Maybe middle class and upper middle class consumers can afford these imported fruits at an individual level, but certainly not as a nation. When India’s foreign exchange earnings are not enough to cover our imports, it is a no-brainer that we cannot. Stopping such imports and also of other edibles like cheese is not going to make any one worse off. The question that we should ask ourselves is: cannot good quality fruits be grown in the country that we have to spend precious foreign exchange to import them?

In the good old days, students used to travel abroad for higher studies after they completed their MA to take admission in PhD and other such programs in top universities. The learning in these top universities would be far superior to what could be had in high institutions in the country. But things have changed in the last two decades: these days you can find  parents sending their children abroad to do their undergraduate degrees. Why? This is possibly because it has become a fad to send children abroad. Parents say that they have the money so they will send their children abroad. While this may be true, the fact of the matter is that as a nation we cannot afford precious foreign exchange to spend on children studying at the undergraduate level and doing basic technical courses. A pertinent question to ask is whether the education infrastructure is so poor that there are no colleges in the country to impart a basic degree. So the issue is why this fad for a foreign education?  

However you would not have seen any economist or politician who waxes eloquent on TV holding forth on the rupee speak anything about all this. Most of their conversation revolves around the tight monetary policy of the RBI and the decline in growth impetus, etc This misses the real issue. The fact of the matter is that the process of liberalization that was kick-started in 1991 is so lopsided that it promoted the culture of consumption without any breaks. (Editor's comment - i.e. the Kerala model, but Kerala has the advantage of foreign remittances to pay for the consumption culture.) True, before liberalization the economy was in shackles and the consumption in the country was artificially restricted. This was by way of import curbs and by the process of licensing. Thus things like washing machines were treated as luxuries although in reality it was a great boon for families especially those with working women. 

Liberalization provided a great opportunity to break the shackles and set up a modern, efficient manufacturing base in India. Well that really did not happen adequately. Had that happened India would have become a major exporter of manufactured goods that would have been enough to take care of India’s import requirements (of which oil imports is a major component). But India continued to be an exporter of raw material. For example till the ban in exports of iron ore, the country was exporting iron ore to China. A country which is focused on its growth (like China is) would have instead tried to manufacture steel from this iron ore which could have been exported instead. This would have resulted in more foreign exchange earnings. But India had no such strategy in place.

Instead of exporting manufactured goods, India has become an importer of raw materials. A good example is coal that is imported into the country for fuelling thermal power stations. This is in spite of the fact that India sits on reserves of billions of tons of coal reserves. India spent $18 billion in coal imports in the last fiscal year 2012-13. This is by no account a small sum.

But while exports did not go up, imports of not only coal and petroleum products (valued at $169.25 billion in the last fiscal year) but other consumer goods also went up.

World class manufacturing facilities did not come up in India due to many reasons. But primarily the culprit is the policy paralysis in the country for many years that resulted in inadequate infrastructural facilities whether it was electricity generation, port facilities or proper roads. Bureaucratic hassles and widespread corruption in granting permissions played a none-too-insignificant role in this process. 

Entrepreneurs finding a bleak scenario soon realized that realty was a booming sector where large profits could be made without much hassles. As a result entrepreneurs of all hues and colors turned to realty. This includes top names in the Indian corporate sector. Even many IT companies started dabbling in real estate. With politicians joining in the game, realty became the name of the game. Thus the high growth evidenced in the country in the period 2000-2009 and especially between the years 2005-2008, is nothing but an indication of the rapid growth in the real estate sector that led to bourgeoning cities (never mind the poor infrastructure). But the increase in the growth of the realty sector is an artificial growth that may add to national income yet doing nothing to increase India’s exports. A huge middle class, which has earned moolah through direct speculation in realty or by working in companies whose profits have soared due to their investments in real estate, started feeling empowered. And this empowerment was reflected through increased consumption. This has led to spiralling imports. It may not be out of place that India’s savings rate has plummeted in the last five years. From 36.9 per cent in fiscal year 2007-08, it tumbled to 30.8 in 2012-13 and is expected to go down to 30 per cent by the end of fiscal year 2013-14.

The rupee may have tumbled in the last two weeks, but the signals were there for anybody to see for the last few months. In the last fiscal year India’s imports of gold soared to $50 billion. This was not due to the proclivity of the Indian consumers to own the yellow metal. Rather it was a signal from the market that the rupee could not be trusted to hold its value. Gold was being imported, because people preferred to hold their savings in the form of the yellow metal than in the form of the Indian rupee in banks or investments.

Whether it is an individual, household or a nation, nobody can live beyond their means. You have to cut the coat according to the cloth that you have. Thus there is no other way for India and as Indians we have to learn to live within our means. The time has come to reduce to zero the imports of inessentials and restrict the imports to the essentials. The control raj came with a lot of ills, but independence also comes with responsibilities. From 1991 to 2013, the pendulum has swung from one extreme to the other. It is time to restore balance in our lives, think in terms of age old concepts like import substitution and check the rampant spread of this consumerist culture. Otherwise doomsday is not far away.

Asaram Bapu's moment of reckoning


Dileep Padgaonkar in the Times of India

Every murky controversy that involves a self-appointed dispenser of cures for all physical, psychic and societal ailments sheds a harsh light on two on developments that have surfaced across the world in the late twentieth and early twenty-first centuries: the rise of blind faith at a personal level and of politics rooted in religious radicalism. Both seek to provide an anchor to individuals and communities trapped in a maelstrom of unprecedented change spear-headed by technological innovations and the globalised economy.
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These are perceived as threats to cultures and ways of life, to deeply-entrenched religious beliefs and to moral certitudes. And the riposte of ordinary folk to such threats is to repose their trust in those who claim to have a privileged access to God. Indeed, even when such individuals are caught with, so to speak, their pants down, the faithful are willing to overlook their trespasses. The yawning gap between what they preach – austerity, abstinence, altruism – and what they practice – an opulent life-style, sexual promiscuity and a no-holds-barred acquisitiveness – is of little concern to them.
The case of Asumal Harpalani aka Asaram Bapu is significant in this regard. Ever since he was accused of molesting a minor girl, the media have unveiled his trajectory from his birth in a family of modest means in the Sindh province of British India to one of the country’s most prosperous and influential ‘spiritual’ gurus. It tells a fascinating story of the transformation of a bootlegger – whose family arrived in Ahmedabad after Partition -into a figure who has built an empire that is conservatively estimated to be worth more than Rs. 10,000 crores and who, according to his official website, has twenty million followers in India and abroad. 
These followers have apparently not turned hostile to Asaram despite the contrasts between what he preaches and what he practices. He owns a posse of expensive cars, travels business class, ensures that he isn’t frisked by security at airports and continues to expand his real estate empire. Neither the cases of land-grabbing nor the cases of four youths who ‘disappeared’ in his institutions – the mutilated bodies of two of them were later found on the banks of the Sabarmati – have diminished his appeal.
That explains why most politicians take care not to rub him the wrong way. To take him to task is to alienate a sizeable section of the Hindu vote. Or so they reckon.  Congress leaders have yet to pull him up for his alleged sexual assault on a minor girl. But it is the BJP that takes the cake. Leaders like Uma Bharati and Pravin Togadia have rushed to his defence. In videos that have gone viral on Youtube other worthies of the Sangh Parivar have hailed him as a genuine saint. And the ‘saint’ himself has called the latest allegations a political conspiracy to frame him while son and presumptive heir has dubbed the minor girl as ‘mentally deranged.’
Armed with this support, Asaram has been able to defy law enforcers with impunity. On the grounds that he was engaged in meditation, he kept police waiting for several hours before he deigned to receive a summons to appear for questioning. He then grandly declared that he would not appear before the concerned authorities right away since he has a busy schedule until September 18. And he has continued to visit his scores of ashrams and educational institutions, address the faithful, heap scorn of the media and denounce his critics in a language that suits not a spiritual leader but, well, a clandestine seller of adulterated spirits. Such are the methods of the proponents of a Hindu Rashtra – the very ones that are dear to the proponents of a strident, Islamic rule in Muslim-majority countries or to literalist Christian evangelists in many parts of the world.
The only hope in this sordid saga is that the girl who has accused Asaram of molesting her will stick, along with her parents, to her courageous stand to expose him for what he is: a charlatan who tarnishes the uplifting traditions of Hinduism with his questionable conduct. Should the police do their job and arrest him without delay and haul him up before the courts, the victim would be vindicated.
The parties that swear by the rule of law will then fall in line while those who place their religious faith above the law and the Constitution will be shamed to follow suit. By and by, his blind devotees, too, would realise that the ‘saint’ they venerate is a man of straw. Keep your fingers crossed.

Thursday, 29 August 2013

We should have been traumatised into action by this war in 2011. And 2012. But now?

Robert Fisk in The Independent 29 Aug 2013

Before the stupidest Western war in the history of the modern world begins – I am, of course, referring to the attack on Syria that we all now have to swallow – it might be as well to say that the Cruise missiles which we confidently expect to sweep onto one of mankind’s oldest cities have absolutely nothing to do with Syria. 
They are intended to harm Iran. They are intended to strike at the Islamic Republic now that it has a new and vibrant president – as opposed to the crackpot Mahmoud Ahmedinejad – and when it just might be a little more stable.  Iran is Israel’s enemy.  Iran is therefore, naturally, America’s enemy.  So there is nothing pleasant about the regime in Damascus.  Nor do these comments let the regime off the hook when it comes to mass gassing.  But I am old enough to remember that when Iraq – then America’s ally – used gas against the Kurds of Hallabjah in 1988, we did not assault Baghdad.  Indeed, that attack would have to wait until 2003, when Saddam no longer had any gas or any of the other weapons we nightmared over.  And I also happen to remember that the CIA put it about in 1988 that Iran was responsible for the Hallabjah gassings, a palpable lie that focused on America’s enemy whom Saddam was then fighting on our behalf.  And thousands – not hundreds – died in Hallabjah.  But there you go.  Different days, different standards.
And I suppose it’s worth noting that when Israel killed up to 17,000 men, women and children in Lebanon in 1982 in an invasion supposedly provoked by the attempted PLO murder of the Israeli ambassador in London – it was Saddam’s mate Abu Nidal who arranged the killing, not the PLO, but that doesn’t matter now – America merely called for both sides to exercise “restraint”.  And when, a few months before that invasion, Hafez al-Assad – father of Bashar – sent his brother up to Hama to wipe out thousands of Muslim Brotherhood rebels, nobody muttered a word of condemnation.  “Hama Rules,” is how my old mate Tom Friedman cynically styled this bloodbath.  Anyway, there’s a different Brotherhood around these days – and Obama couldn’t even bring himself to say ‘boo’ when their elected president got deposed.
So what in heaven’s name are we doing?  After countless thousands have died in Syria’s awesome tragedy, suddenly – now, after months and years of prevarication – we are getting upset about a few hundred deaths.  We should have been traumatised into action by this war in 2011.  And 2012.  But now?  Why?  Well, I suspect I know the reason.  I think that Bashar al-Assad’s ruthless army might just be winning against the rebels whom we secretly arm.  With the assistance of the Lebanese Hizballah – Iran’s ally in Lebanon – the Damascus regime broke the rebels in Qusayr and may be in the process of breaking them north of Homs.  Iran is ever more deeply involved in protecting the Syrian government.  Thus a victory for Bashar is a victory for Iran.  And Iranian victories cannot be tolerated by the West.
And while we’re on the subject of war, what happened to those magnificent Palestinian-Israeli negotiations John Kerry was boasting about?  While we express our anguish at the hideous gassings in Syria, the land of Palestine continues to be gobbled up.  Israel’s Likudist policy – to negotiate for peace until there is no Palestine left – continues apace, which is why King Abdullah of Jordan’s nightmare (a much more potent one than the ‘weapons of mass destruction’ we dreamed up in 2003) grows larger:  that Palestine will be in Jordan, not in Palestine.
But if we are to believe the nonsense coming out of Washington, London, Paris and the rest of the ‘civilised’ world, it’s only a matter of time before our swift and avenging sword smiteth the Damascenes.  To observe the leadership of the rest of the Arab world applauding this destruction is perhaps the most painful historical experience for the region to endure.  And the most shameful.  Save for the fact that we will be attacking Shiite Muslims and their allies to the handclapping of Sunni Muslims.  That’s what civil war is made of. 

Tuesday, 27 August 2013

Is it time to rewrite the laws of physics?



'Time is an illusion. Lunchtime doubly so,” said Ford Prefect in Douglas Adams’s The Hitchhiker’s Guide to the Galaxy. For the past century, mainstream physics has agreed with him. To most of us, it seems obvious that the world is moving steadily forward through time, from a known past, through an active present, into a mysterious future. But, as Einstein said, “physicists believe the separation between past, present, and future is only an illusion, although a convincing one”.
“Mainstream physics basically eliminates time as a fundamental aspect of nature,” explains Prof Lee Smolin, a physicist at the Perimeter Institute for Theoretical Physics, in Ontario, Canada. “It does that in various ways, but the most common is the so-called 'block universe’ picture, which is derived from general relativity.”
Under this system, what is actually real is not our passage through time, but the whole of reality at once. “Imagine taking a movie of your life,” says Prof Smolin, “and laying out the frames on a table, and saying: that is your life. There is no now, there is no change.”
He thinks that it is high time – so to speak – this view was overturned. In his new book Time Reborn, he makes the case that time is a fundamental reality of the universe, and that without it, too many of the big questions of physics are left unanswerable.
The question of what time is, and whether it is real or illusory, is an ancient one. Even before Plato, Greek philosophers were debating whether, as Heraclitus said, you cannot step in the same river twice, that all is flux and change, or whether Parmenides was right and that change is an illusion, that the universe simply exists as an unchanging lump.
The first person to address the issue in depth, according to Dr Julian Barbour, author of The End of Time, was St Augustine. He was baffled by it, and said as much. “What then is time?” Augustine wrote. “If no one asks of me, I know; if I wish to explain to him who asks, I know not.” Still, he did make an attempt to explain it, coming to the surprisingly modern conclusion that there could not have been time before the world, because there would have been no change, and without change, time is meaningless.
Sir Isaac Newton, a thousand years later, disagreed. He held the common-sense view – instinctively shared by the rest of us – that time is absolute, marching on regardless of the doings of the stuff of the universe. It was Einstein who showed that it was no such thing. According to his theories of relativity, time and space are part of an interwoven fabric: the presence of matter changes both, stretching the fabric like a weight on a sheet.
His theories are counterintuitive – arguing that someone who is travelling ages slower than someone who is standing still, and that time goes faster the further we get from the surface of the Earth – but at least, in his universe, there is such a thing as time.
“Einstein, in a way, makes time something real – with the idea of space-time, he makes it as real as space,” says Dr Barbour. But there is a fundamental difference, which leads us to one of the great problems with our concept of time: “We get the impression that we are always moving through time, when we can perfectly happily sit still and have no impression that we are moving through space. That’s a very big mystery, because the laws of physics work exactly the same way whether you run them forwards or backwards.”
Clearly, that is not how we perceive the world. We see babies be born, grow old and die; water flowing downhill; and wood burning to ash. “If you drop an egg on the floor, it breaks, and there is no way you can put that egg back together again,” says Dr Barbour.
This is due to a property called entropy, or disorder. The second law of thermodynamics dictates that the universe will move from ordered, low-entropy states to disordered, high-entropy states: ice will melt and coffee will cool, until everything is the same temperature, and everything is mixed together in an undifferentiated mass. “According to the fundamental laws of physics as we know them, it shouldn’t make any difference which way you look at them. And yet it is clearly the case that entropy increases,” Dr Barbour says.
That leaves an awful lot of questions unanswered – which is where Prof Smolin’s ideas come in. “The second law dictates that any system in disequilibrium should come quickly to equilibrium,” he points out. “But our universe, even though it’s more than 13 billion years old, is very far from equilibrium.”
This is due to particular facts about the laws of physics – such as the strength of gravity, or the precise set of particles we observe – and the very specific way that the universe began. But Prof Smolin points out that we still do not know why those laws are as they are, or why the universe should have started in its particular way: “There seems to be no simple principle that picks out the standard model of particle physics from a vast number of equally likely possibilities.” Uncountable billions of other universes could have existed in which there would be no stars, no planets, and no us.
Prof Smolin’s point is that, for modern physics, in which time is treated as an illusion, this question is unanswerable. “The initial conditions and laws, in the block universe model, are just part of the universe. It would be like asking a computer to explain the program it’s running.” But if we treat the laws as things that could have been different had history gone differently, or that can change with time, “then time has to exist prior to those laws, and then it has to be real in a way that the block universe doesn’t allow”.
There is a risk with much of theoretical physics that it strays into a realm of philosophy, away from the science of experiment and reality. Prof Smolin insists that this is not the case: his idea of “real time” includes hypotheses that make testable predictions. One such experiment might be to use quantum computers, which, in theory, will be able to detect the evolution of physical laws. Dr Barbour (whose book tends to support the time-is-an-illusion school of thought), says that observations of astronomical phenomena called gamma-ray bursts might also show violations of Einstein’s laws at the universe’s smallest scale – although so far, he says, they have proved remarkably robust.
If Prof Smolin is right, he believes that it will have implications far beyond academic physics. “A lot of our thinking about many things, from the nature of being human to political and environmental problems, are poisoned by the belief that the future is already determined and that we can’t find truly novel solutions,” he says. “For example, in economics, the insistence that the laws are formalised in a timeless mathematical setting, like Newtonian physics, leads to some incorrect ideas, which helped contribute to the economic disaster of 2008.” A model of the world in which “the future is open, and the universe can discover novel structures, novel ideas, creates a very different idea of our possibilities” – and could lead to some very different thinking.
Whether he’s right or not, only time itself will tell. Certainly, physics has done away with the concept of time for so long that simply saying that it is real feels almost revolutionary.

None of the experts saw India's debt bubble coming. Sound familiar?


India's economic problems reflect a global boom-to-bust pattern. Why do policymakers act surprised?
india bubble
'The Indian economy has been in trouble for quite a while already, and only wilful blindness could have led to ignorance on this.' Illustration: Daniel Pudles
So now India is the latest casualty among emerging economies. Over the past 10 days, the rupee has slid to its lowest-ever rate, and the Indian economy may well be on the verge of a full-blown currency crisis. In this febrile situation, it is open season for rumours and pessimistic predictions, which then become self-fulfilling.
This means that even if there is a slight market rally, investors quickly work themselves into even more gloom. Each hurriedly announced policy measure (raising duties on gold imports, some controls on capital outflows, liberalising rules for capital inflows and so on) has had the opposite of the desired effect. Everything the government does seems to be too little, too late – or even counterproductive.
These are all classic features of the panic phase of a financial market cycle. This doesn't mean that a crash is inevitable, but clearly it is possible. The real surprise in all this is that investors and Indian policymakers are surprised. For some reason, they apparently did not foresee this turn of events, even though the story of every financial crisis of the past, and many in the very recent past, should have caused some nostrils to twitch at least a year or two ago.
The Indian economy has been in trouble for quite a while already, and only wilful blindness could have led to ignorance on this. Output growth has been decelerating for several years, and private investment has fallen for 10 consecutive quarters. Industrial production has declined over the past year. But consumer price inflation is still in double digits, providing all the essential elements of stagflation (rising prices with slowing income growth).
At the moment the external sector is the weakest link. Exports are limping along but imports have ballooned (including all kinds of non-essential imports like gold), so both trade and current account deficits are at historically high levels. They are largely financed by volatile short-term capital. This has already started leaving the country: since June more than $12bn has been withdrawn by portfolio investors alone.
This situation is the result of internal and external imbalances that have been building up for years. The Indian economic boom was based on a debt-driven consumption and investment spree that mainly relied on short-term capital inflows. This generated asset booms in areas such as construction and real estate, rather than in traded goods. And it created a sense of financial euphoria that led to massive over-extension of credit to both companies and households, to compound the problem.
Sadly, this boom was also "wasted" in that it did not lead to significant improvements in the lives of the majority, as public expenditure on basic infrastructure, as well as nutrition, health, sanitation and education did not rise adequately.
We should know by now that such a debt-driven bubble is an unsustainable process that must end in tears, but those who pointed this out were derided as killjoys with no understanding of India's potential. Something similar is occurring in a number of other Asian economies that are also feeling the pain at present, such as Indonesia – while the Brazilian economy shows some similar features. The current Indian problems may be extreme, but they reflect what should now be a familiar process in all major regions of the world.
The typical story, which was elaborated half a century ago by Charles Kindleberger, goes something like this: a country is "discovered" by international investors and therefore receives substantial capital inflows. These contribute to a domestic boom, and also push up the real exchange rate. This reduces the incentives for exporters and producers of import substitutes, so investors look for avenues in the non-tradable sectors, such as construction and real estate. So the boom is marked by rising asset values, of real estate and of stocks. The counterpart of all this is a rising current account deficit, which no one pays much attention to as long as the money keeps flowing in and the economy keeps growing.
But all bubbles must eventually burst. All it takes is some change in perception for the entire process to unravel, and then it can unravel very quickly. The trigger can be a change in global conditions, or a sharp slowdown in domestic income growth, or political instability, or even economic problems in a neighbouring country. In India Ben Bernanke of the US Federal Reserve is being blamed for bringing this on, but it could easily have been some other factor. Once the "revulsion" in markets sets in, the very features that were celebrated during the boom are excoriated – by both investors and the public – as examples of crony capitalism, inefficiency and such like. The resulting financial crisis hits those who did not really benefit so much from the boom, by affecting employment and the incomes of workers.
This is what has just started to happen in India, and is also likely to happen in several other emerging markets. But essentially the same process has already unfolded many times before in different parts of the world: Latin America in the 1980s, Mexico in 1994-95, south-east Asia in 1997-98, Russia in 1999-2000, Argentina in 2001-02, the US in 2008, Ireland and Greece in 2009, and so on.
Why are we so startled each time? And why do we never, ever, see it coming?

Sunday, 25 August 2013

Countries are now being held to ransom by special-interest factions

Power is fragmenting. But what is the true cost to democracy?

Countries are now being held to ransom by special-interest factions – look at the Tea Party in the US or Ukip in Britain
Supporters of Wikileaks founder Julian Assange
Supporters of Wikileaks founder Julian Assange, wearing Guy Fawkes masks: 'The digital age, globalisation and higher levels of education have equipped more people to become insurgents or to form single-issue pressure groups.' Photograph: Will Oliver/AFP/Getty Images
Power is leaching from the centre, even as the complexities of national and international challenges multiply. It is the hallmark of our times. Whether political or religious leaders, CEOs or five-star generals – all are more constrained in what they can do.
This is a pattern across all societies. The digital age, globalisation and higher levels of education have equipped more people to become insurgents or to form single-issue pressure groups. It is a world where the opportunities to be a Julian Assange, Beppe Grillo, Osama bin Laden, George Soros or Nigel Farage grow by the day. Power is draining away from those in whom it is formally placed, but with no obvious substitute in sight.
As Moisés Naím writes in The End of Power, there are three interrelated dynamics gnawing away at formal power structures – what he calls "the more revolution, the mobility revolution and the mentality revolution". There are more literate, educated people worldwide than ever before who refuse to be regimented and controlled as they once were. They are mobile, migrating and exchanging information to an unparalleled degree. Moreover, fewer will take anything for granted: they expect their voice to be heard, whether on the streets of Cairo, on social media in China or in anti-fracking protests in Sussex.
Naím is the first to concede that the dispersion of power is frequently a force for good. One obvious benefit is that autocracy is on the wane. In 1989, Freedom House reckoned that only 69 countries could be counted as democracies: today, the number has reached 117.
It is also good that the chances of mass war on a 20th-century scale are shrinking: in a world of declining power,, as US generals are relearning in Afghanistan, war is won differently today. It is the fast-moving insurgent who can capture hearts and minds or the terrorist cyberhacker who ends up ahead. But as Naím wryly remarks, the decay of power even undermines the insurgent terrorist groups themselves. He reports that 26 of 45 terrorist organisations dissolved, not from being beaten militarily, but from internal strife and challenge. Al-Qaida's greatest weakness is its own factionalisation, as will be the Taliban's.
It is this tendency to fragmentation and the chorus of often irrational voices insisting that their demands be met that most concerns Naím. It may be easier to establish a single-issue NGO, a religious movement or a political faction, but that does not mean that the consequence is necessarily always beneficial.
There is now certainly hyper-competition from new religious groups, or from blogs, tweets and websites trying to sway your opinion. But the consequences can be perverse. The rise of charismatic religion may challenge centralised, formerly powerful religious groupings that have lost their way, such as Catholicism, under increasing siege from the rise of Pentecostal churches in Africa and South America. But religious fundamentalism's grip on logic and rationality is even more tenuous.
Similarly, millions of blogs and tweets have forced news consumers to fall back on trusted, established sources, aiding media concentration rather than diminishing it.
But the "more, mobility and mentality revolutions" have their most obvious malign impact on politics in general and the political party in particular. Naím observes that parties are the engine room of democracies: they gather a constellation of interest groups around a common set of principles that offer a compass for government. Everywhere, political parties are succumbing to the rise of uncompromising single-issue pressure groups, lobbyists and funders, and the corresponding decline of supporters who want common values expressed. It is now not just parties but whole countries that are held to ransom by a faction or interest group holding a simplified but impossible view of the world – Naim's "terrible simplifiers".
One obvious example is the US Republican party, now in thrall to the Tea Party movement, which sees no value in compromise, but instead worships at the altar of an imagined US constitution that allegedly guarantees a nightwatchman state. Another example is the emergence of the Pirate party in Sweden and Germany. However, interestingly, Naím sees Britain as the laboratory that conclusively proves his point. The rise of Scottish and Welsh nationalism and Ukip, along with the hollowing out of both the Conservative and Labour parties, make the country increasingly hard to govern .
This must, in part, explain the collapse in Labour and Conservative party membership over the past 50 years and the consequent weakening of their capacity to create formal and informal coalitions of a broad set of interest groups around common values.
Ed Miliband's and Labour's failures predictably get the most attention from the press – identikit pieces about his lack of forcefulness, clarity and too much equivocation – as if a new leader could magically solve the problem, but with no understanding of the much wider context in which any political leader now operates.
The Tory party's problems, driven by similar forces, are arguably even more acute. At any other time, David Cameron would be seen as a classic mainstream Tory. Today, he is marginalised by as many as 200 backbenchers owing their position to constituency association selectorates, some of no more than 100 activists, in thrall to "terrible simplicities" on tax, Europe, immigration and welfare.
Any genuinely tough call – to put property taxation on 2013 rather than 1991 values, accept the need for immigration, cigarette packaging or even build the HS2 train line – is made incomparably harder or is simply off-limits because of the veto of a single-issue pressure group that a party is no longer strong enough to take on.
It is the decay of power. The centre fragments and power devolves to myriad new forces that often exercise their power with narrow obsessions in mind. Who now speaks for the whole? Who keeps a macro view, mediating competing interests and conflicts and has the courage to make decisions based on a strategic view of all our interests, not just sectional ones?
Parties have to fight back –arguing better, crystallising policies better, running primaries to select their candidates to widen their appeal – as does our democracy. Representative government was a great invention. It now has to be saved from the single-issue, monomaniac, simplifying, self-interested vandals – a much more interesting position for Mr Miliband to take than a belated "me too" conversion to a referendum on the EU.