Political observers in the seventies and eighties repeatedly predicted the fall of the Soviet empire. Stating that communism was an artificial construct and suffered from significant internal contradictions, scholars went on to analyse why Communism would never succeed.
Yet when the Communist regimes collapsed the world over, it took even those very experts by surprise.
Likewise many observers have been pointing out to the un-sustainability of the United States' economic model for the past several years. Yet, when the current crisis hit the global financial sector, these experts were surprised by its scale and magnitude.
Scholars have been repeatedly pointing out to the similarities between free market capitalism -- as it has been practiced in the US -- and communism -- as it was practiced in the erstwhile USSR.
Barring ownership issues, perhaps, there is hardly any crucial difference between the two.
American writer and political thinker Noam Chomsky captured the issue at hand rather brilliantly when he pointed out that capitalism would have a Chernobyl-like disaster only for a profit, while communism could afford it at any cost. The thin line between free market capitalism and communism was never as blurred as it is now.
But there is one crucial distinction between the two. Unlike the Communist empire that imploded all at once in the early nineties, the West seems to be exploding. The net impact of this explosion is been felt across the globe.
It is due to this grim scenario that the Bush administration that the US government has proposed a $700-billion bailout package, ostensibly to save its financial markets from complete collapse. Before we proceed to analyse its impact let us get a brief overview of the same.
The bailout package
Given the events of the second week of September that virtually had the global financial markets 'spiralling-in' towards a complete standstill, the Bush administration sought emergency powers from the Congress to intervene in the financial markets. The plan -- also called the Troubled Assets Relief Programme -- is to ensure that the government buys $700 billion of investments that had gone awry for the US financial sector. That is expected to provide instant liquidity to the financial markets.
Experts opine that the bailout figure of $700 billion is a POTA (pulled out of thin air) figure implying one is not sure how this was arrived at the in the first instance. One is uncertain as to how these assets would be valued for the bailout purposes.
If the assets are highly priced, it could be a burden on the finances of the Federal Reserve System. If it is too low, it may be of little help to the financial institutions in the first place. Equally one is uncertain whether the eventual size of the bailout would exceed $700 billion.
Whatever it be, the bailout package could well mean 'worst come, best served!'
While all that is plain skullduggery, the plan, in the absence of the complete overhaul of the financial system in the US, is to put good money after bad.
No wonder lawmakers in America oscillate between cynicism and scepticism. Experts term all this as an unprecedented government intrusion into the markets -- one that effectively turns Capitalist America into Socialist America if not downright Communist America.
Readers may recall that till date an event of this size and nature was often colourfully described as 'creative destruction' -- an inevitable consequence of market mechanism. But that pontification was for others, not for the pontificators.
The size of this bailout plan can be gauged by the fact that it as much as the combined annual budgets of the Departments of Defence, Education and Health and Human Services of the US. Surely the national debt of the US will soar. And when the debt of US soars, one can very well guess the fate of the US dollar.
Be that as it may, in effect, the bailout package as explained by a critic is akin to shifting shit (non-performing financial assets) into cold storage (the US Federal Reserve) and hoping that it not only does not decay any further, but also revives over a period of time!
While that is theoretically possible in the instant case as the asset values could revive over a period of time, for the moment the cold storage definitely would get contaminated with shit.
Given this background, it is natural that one is indeed concerned about the value of the US dollar for it has the potential to affect all of us. As the details of the package get debated over in America, gold, oil and the Euro rose sharply, implying that the currency markets did not favour the package.
Some economists believe that if this plan goes through, it could result in the further weakening of an already weak dollar.
Saving the US dollar or the financial sector?
Commenting immediately after the fall of the Soviet empire, Yegor Gaidar, the then deputy prime minister and minister of finance, put it succinctly when he explained that the Russian economy was 'like travelling in a jet and discovering there is no one at the controls.' Something similar could be said of the state of the American economy today.
As America alternates between bailouts and bankruptcies, there is something far serious that seems to have escaped those at the helm of affairs of the US economy. The US economy has reached a stage where even the combined might of all governments across continents can, perhaps, save the US dollar or its financial system, perhaps neither.
What makes this plan extremely doubtful is contained in the testimony of the US Federal Reserve chairman Ben Bernanke to the US lawmakers. When asked to point out the 'strong rationale for lawmakers to act swiftly' he is reported to have replied, 'The financial markets are in quite a fragile condition, and I think in the absence of a plan they will get worse.' But the plan, in the absence of proper oversight and systemic overhaul, would be the biggest loot authorised by a government in the history of mankind!
Further, he added: 'I believe if the credit markets are not functioning, jobs will be lost, our credit rate will rise, more houses will be foreclosed, GDP will contract, the economy will just not be able to recover in a normal, healthy way.'
Well, that is akin to a person who has murdered his parents claiming clemency on the grounds of being an orphan!
Despite all the emotional arguments made out by Ben Bernanke, the fact of the matter is that the net effect of this plan will result in the annual budget deficit of the US exceed $1 trillion for the next year.
This, coupled with the fact that the US is expected to run in another $700 billion on the trade account, is surely going to put an enormous strain on the global finance and savings as it is we in the rest of the world who have to fund these twin deficits of the US.
Given this scenario, The Economist, in one of its recent issues states 'the risk of being blamed for plunging the world's greatest economy into financial ruin is a good incentive for all sides to reach a compromise. Of more concern is that the plan, if it were approved, would neither shore up the financial system nor save the American economy. On that point there is room for argument, and hence for more uncertainty in the markets.'
And all these make the US dollar extremely vulnerable. Naturally, if the bailout package succeeds then the US dollar is doomed. On the contrary, if the bailout fails, the American financial sector is damned. Whatever is it, as US Treasury Secretary Henry Paulson pointed out, surely it is an embarrassing time to be an American.
Naturally, as the value of dollar declines the US financial system and the global financial architecture risks 'spiralling in' to a complete halt. While one does not seek to hazard a guess on the same, the fact of the matter is that 'peak globalisation' is behind us.
Surely these are extraordinary times when virtually no one is questioning the fate of the dollar. Have the Americans given up on the dollar? Or are they least bothered about the dollar? Or are they planning an issue of a new currency in lieu of the dollar?
Surely, Americans must be having some gameplan. The billion-dollar question is: what is it? One can endlessly speculate on.
Be that as it may, the issue for a country like India can neither rejoice nor be dismayed at these turn of events. If India has to occupy global centrestage, it must play the global game at the global level. And for that to happen Indians must take responsibility in designing a suitable yet sustainable global financial architecture.
A civilisation that has survived over five millennia surely must have much to offer to the world. But if the intellectuals in India feel orphaned with the fall of the US, India can remain a camp follower of the West, at best.
Crucially, if it fails to recognise this historic opportunity, it will once again be condemned to play second fiddle to the next emerging global superpower.
Will the real India stand up and do the needful? At least now Indians need to realise we may or may not require the world, but surely the world requires us.
The author is a Chennai-based chartered accountant. He can be contacted at mrv1000@rediffmail.com