India is the future. I mean that in one positive way and one, slightly negative way. Let?s be positive first. The 21st century will be the Indian century. In this century India will become the largest economy in the world (again) as well as the most populous with India?s population likely to exceed China?s and settle around 1.5 billion people. You think Mumbai traffic is bad now? Courtesy of the one child policy, China?s population will grow old and stabilise around 1.2 billion. It is said that China will grow old before it grows rich. Indeed, being the most populous country is the main reason that India will have the largest economy?income per head will still be lower than in a great many places.
Domestic economic power will bring, slowly, international power. The rupee has a good chance of being the world?s reserve currency? unless the US follows a ?scorched earth? policy and allows a change to the system of single dominant currencies just as the dollar is being booted out. No worry. Being the world?s reserve currency has its downs as well as ups. And India?s rise is probably good for the world, too. Of course, every hegemon considers their hegemony good for the world. Remember Kipling? But America has proved an ill-suited guardian of power: too trigger-happy and too spendthrift. India?s may well succumb to the latter ailment, but its cultural background may save it from the former. Certainly, India?s reasonableness and self-restraint so far in its fight against terrorism is un-American.
This future will be seen more clearly in the second half of the century than the first. The future for the advanced economies looks like India of the recent past. In the future, we will have repressed banking. Much of it will be voluntary. Bankers? appetite for risk has been crushed and replaced with an insatiable appetite for liquidity. In the past banks gave away liquidity; now they are hoarding it. But if any bankers out there were not with the new programme, they will be regulated into line. There will be a regulatory backlash from the crash. It will be morally justified, but it may not be economically or financially so.
There is a false dichotomy presented by commentators as to whether we have too little or too much regulation. We had too much of the wrong kind of regulation and too little of the right kind. We need better regulation, not more or less of it. All of the behaviour that led to the crash was directly incentivised by regulation. It is unclear whether we will get smart regulation, but we will certainly get more regulation and banks will be repressed as a result of it. Regulators will be particularly mindful of the fact that it is national tax payers that end up being liable for bankers? errors and greed and so they will frown upon cross-border banking. This is not good for international trade, though it may be relatively good for outsourcing to India within companies.
Alongside repressed banking and the regulatory backlash, will be directed credit. Remember that governments will tell government-owned banks what to lend for: mortgages in, overseas trade out; lending to small businesses in, lending to foreign firms out; and so on. It all sounds reasonable until you realise that bankers will end up overlending to the approved sectors and underlending to the unapproved sectors and the choices will have more to do with narrow political strategy than thoughtful economic strategy. Unapproved sectors will end up shrinking or relying on even less savoury lenders. Remember the financial history of Bollywood?
Private investment will be crowded out by public debts. When you put up $2 trillion to bail out over-paid, under-taxed bankers, it is very hard to say ?no? to anyone else and impossible to say ?no? to the eminently more worthy, like teachers, nurses, doctors, Democrat-voting car workers or Labour-voting steel workers or practically anybody else. In fact, you would be hard-pressed at the moment to think of any profession that would rank lower in the deserving stakes than bankers. And when expenditure is not galloping away, tax revenues will be imploding from slower growth, fuelling a dramatic rise in budget deficits in the US, UK and elsewhere. Long-term savings institutions will put more of their savings into funding these deficits and less into funding investment and economic activity. The result of all of this is that global growth will not only slow dramatically this year, it will also not return to the dizzy heights of 2002-07 for at least a decade. Slower economic growth will lead to frustrated governments which will start experimenting with the many failed national investment strategies of old or too much monetary ease. None of this is too good for financial markets as a whole. Repressed banking and large public debts underscore the value of those companies which generate strong free cash flows. Buy them.
The author is chairman of London-based Intelligence Capital, governor of the London School of Economics and emeritus professor of Gresham College in the UK
