It was a pleasure to listen to one of the best thinkers and well-wishers of India in the United States?Thomas Friedman?at the Express Adda on Friday. His talk initially sounded like a marketing pitch for his latest book That Used To Be Us, and it probably was. However, it was during the question-answer session, which Shekhar Gupta made sure was from an assortment of notables in the audience, that Tom really came on his own. He shared his innovative perspectives in an even more innovative vocabulary. Incidentally, because terms like ?flat world? and ?globalisation? are now attributed to Friedman, he gives the impression of having gone a bit overboard in concocting new slogans, jingles, metaphors, slangs and jokey catchphrases. His verbal excesses remind of Sidhuisms in cricket. Sample these, ?America is waging war on math and physics?, ?Homework x 2 = The American Dream?, ?The age of average is over?, etc. His tautological diarrhoea would have made somebody else appear too tongue-in-cheek, much like Navjot Singh Sidhu, if his viewpoints weren?t genuinely powerful. But they really were. He forcefully articulated as a ?frustrated optimist? the problems that the US faces in a ?hyper-connected? world and the ?ethical bankruptcy? of the powers-that-be.
Apparently, he came to India to understand ?technological innovation? and the ?Anna Hazare movement?, apart from, of course, quietly promoting his book. From the picture he painted, it looks like the US needs an action group like Team Anna.
Much as we may disagree on the ?my way or the highway? approach of Team Anna, everybody agrees that they have constructively contributed to bringing the debate on corruption to the forefront and quite rightly so. From Friedman?s thoughts on America, it is evident that the focus there needs to be on another C-word: Credit.
The credit problems that the US now has with a national debt bigger than its GDP were not built in a day. The problems started with Reagonomics in the 1980s. Ronald Reagan tripled the gross federal debt, from $900 billion to $2.7 trillion, during his eight years of presidency. The value system on which Reagan operated was ?borrow and spend?. Our ancient scriptures say, ?yatha raja, thatha praja??as the ruler, so the ruled. We don?t know if in modern societies where the ruled (s)elect their rulers, do people?s representatives reflect the value system of the citizens, or is it the other way around. Nonetheless, almost simultaneously, households in the US shifted from their traditional lifestyle of ?save and invest? to that of ?borrow and spend?. There was a huge proliferation of credit and the industry which deals in it?banking?inevitably grew too fast too soon.
Until the 1980s, banks in the US were just intermediaries. They channelled the savings of households who were net savers, to corporations who took loans to invest in new projects and ventures. With the ?borrow and spend? generation, households shifted from being net savers to net spenders. Credit became an asset class in itself with new innovative financial instruments that could package anything from credit card receivables to car loans. Banks could do this only because there was a huge proliferation of credit?household credit had quadrupled in a generation. It?s doubled just in the last 11 years. American households today owe $13.3 trillion, more than the combined household debt of all other nations. The credit craving reached its crescendo when a generation wanted to own houses without actually having the wherewithal to pay for it. Banks lent recklessly and packaged them into innovative instruments that could be distributed to the larger economy. From a net lender, like the households, the federal government became the largest debtor history has ever known.
All of them?the federal government, banks and households, are now trying to wriggle their way out by transferring the credit burden to everybody else. The government is monetising its debt. The banks are furiously lobbying to socialise their losses. Households are canvassing for debt concessions. All of them are trying to minimise short-term pain and, in the process, may be maximising long-term misery.
What the US needs now is an action group that would bring the focus on credit. The ?Occupy Wall Street? movement is a good starting point that might raise serious questions about the banking industry and may do a course correction for the Wall Street. But the problem extends beyond the walls of the Wall Street. Households and the federal government are swamped in debt up to their nose and then some. A movement is urgently needed that would make all realise that it is better to spend tonight like there is no money, than to spend money like there is no tomorrow. As Friedman points out in the book, the current crisis can have a happy ending, but it is up to the Americans to determine whether it is fiction or nonfiction.
The author, formerly with JPMorgan Chase, is CEO, Quantum Phinance