Image: Collage by IDN-INPS with graphics von Internet. - Photo: 2019

The Great De(b)terioration in the Offing As Impotent Capital Weds Algorithms

Viewpoint by Jayasri Priyalal

The writer is the Regional Director responsible for Finance Sector of UNI Global Union, Asia & Pacific based in Singapore. This article was first published in the Financial Times, Sri Lanka.

SINGAPORE (IDN-INPS) – We are now in the era of acceleration termed as the Fourth Industrial Revolution [4IR]. In the new era, the impact and relevance of old ethical theories of yesteryear have severe limitations to offer solutions to the complex problems unfolding in the twenty-first century.

Money and Banking business is undergoing a complete overhaul with the introduction of the plastic money, and digital transactions on e-commerce platforms are spearheading towards cashless societies — the digital disruptions are accelerating the fourth industrial revolution era. Lord Mervyn King, former Governor of Bank of England, elaborates extensively about this change in his book ‘The End of Alchemy’.

As we all know Economics is a subject that predicts specific outcomes on probabilities and possibilities in an economy in addressing disequilibrium resulting in allocation and misallocation of primary factor inputs such as Land, Labour, Capital and Entrepreneurship.

Unlike in natural sciences, no economics formulas or solutions can test in a laboratory before being introduced to the community. Many economic theories are based on trust and belief; as lessons learnt from past experiences, and the impact of such opinions on the economy discussed as historical narrations.

One such approach is put forward by renowned Economist; John Maynard Keynes which is popularly known as Keynesian theories. His strategy worked well to overcome the economic crisis in the early twentieth century when the money supply was strictly in the hands of central bankers.

It is unfortunate that we still assess the productivity and performances of businesses and institutions based on the indicators designed for the First Industrial Revolution – when land, Labour, entrepreneurship and capital factors were the productivity driving assets. Performances and productivity returns were measured in terms of returns on capital.

How prudent are we to continue with the same performance and productivity measuring indicators in the current context? In this era, those assets, driving productivity and growth, is knowledge, human capital catalysed with digital and mobile technology. The Capital what is now circulating is fake, impotent – which is leveraged with Debt – investment capital has lost its vigour.

There appears a need to challenge conventional thinking to initiate discussions to come up with new performance measuring indicators that are compatible with the 4IR.  Measurement of Gross National Happiness as practices in the Himalayan kingdom of Bhutan is one such new tool.

Regulatory tightening following the 2008 Global Financial Crisis (GFC) the banks were subjected to stress tests and forced to beef up their capital to cover the weighted risk assets and meet their liquidity requirements. The regulatory tightening was considered as one option to resolve the global financial crisis which originated from the OECD countries. The unethical rent-seeking business culture of the top triple “B” bankers (Big Bonus Bankers) that contributed to the crisis sidelined. The governments in a panic threw lifeboats to rescue the banks and bankers and life jackets were taken away from the real victims of the disaster and forced many to sink, losing assets, jobs and life savings.

Private debt and public debt camouflaged as sovereign debt

Post GFC, commercial banks were subjected to tighter regulatory control, but the Central Banks could print money at will with the false belief to accelerate the growth stimulating the economy. The economist termed this policy option as Quantitative Easing. These unconventional monetary policies termed as Modern Monetary Theory.

Based on this theory, it is reported, that the U.S. Federal Reserve Bank printed US$ 2 Trillion worth of paper money and released to jump-start the economy. European Central Bank issued 80 billion Euros to stimulate economic growth post-2008 global financial crisis.  As a result, the interest rates in the U.S. and Eurozone remain at negative or near zero levels. We are printing paper money glorified with the term quantitative easing the new jargon in Economics. Since 2017 FED started to interest rate hikes resulting in many upheavals in global stock markets.

Economics and politics were two separate disciplines and practised differently in the postcolonisation era by many countries depending on the degree of development. Free market believers clubbed economics and politics together and espoused the neoliberal order since the late nineteen seventies.

The era of an ownership society, driven with the sole aim of increasing shareholder value unleashed, since then coining the new economic order popularly known as Reaganomics in the USA and Thatcherism in the UK. It never ended there; continues with the fake beliefs till recently when Prime Minster Shinsho Abe tried ABENOMICS in Japan.

As a way out of the GFC, the policy makers ventured out to offer subsidies. This time they came up with the quantitative easing strategy – which is printing money – and offered grants to the capital markets to keep the stock markets alive and preventing them from collapse. The unconventional monetary policy is now allowed zero or negative interest rates in the economies reversing the championed formula of market distortions. Prior to the GFC, Grants and economic assistance to the marginalised needy were considered as market distortion forces. and Development Financial Institutions were strict not allowing developing countries to offer subsidies to the marginalized.

Negative interest rates – confiscate capital and discourage savings

Nearly US$ 10 Trillion worth of bonds are trading currently at negative rates in Europe and Japan. The corporate borrowing is high in the USA at rock bottom interest rates. As reported in the Economist [March 16-22,2019] Collateralized Loan Obligations (CLO) in the USA is rising steadily as the Corporates are borrowing at near zero interest rates in the leveraged loan market.

Reports reveal the CLO volumes are almost equivalent to the amounts of Collateralized Debt Obligations (CDO) of 2007 alarming the dangers of sub-prime debt. Banks and financial institutions are forced to hold bonds yielding negative returns to maintain liquidity as per the new regulatory norms.

When the next financial crisis hits, debt defaulters will wipe out a large portion of world savings. The Economist and Central Bankers will run out of monetary policy tools beyond negative interest rates. Instead, the Central Bankers need to use negative interest rates to curb excessive debt, holding the risky borrowers to bear the burden, not allowing the erosion of wealth from savers, shaking the future financial stability.

The other option is to widen financial inclusion in society enabling the real economic actors, producers and consumers to drive the organic growth blending social finance with digital finance. Micro Finance and Micro Insurance business models need to be further strengthened insulating the viability and sustainability of small and medium term enterprises.

The new ROE, returns on ethics

Facts above and figures point out that investment capital circulating in the economies is fake, distinctively different from the Capital that rejuvenated economic growth in the First Industrial Revolution. Therefore, the economist needs to define new performance and productivity measuring indicators in tune with the new wave of 4IR.

Returns on Equity does not sound ethical and scientific to estimate future prosperity. Instead, Returns On Ethics can be a qualitative measuring tool, as all the profits, dividends earned and retained in books will be of no use, when people do not have fresh water to drink and fresh air to breathe in the future.

The fake capital can smoothly integrate with Artificial Intelligence platforms driven with the algorithms and unfold double jeopardy, bridging a link between the ENRON and GFC crisis that erupted at the beginning of the new millennium. This author believes such a situation may shorten the life span of the prosperity indicators the global stock and bond markets inviting the Block Chain technological linked Distributive Ledger System to restore the trust between the producers and consumers in the real economy. Blockchain will become the alternative operating system substituting finance. [IDN-InDepthNews – 20 April 2019]

Image: Collage by IDN-INPS with graphics von Internet.

IDN is flagship agency of the International Press Syndicate. –

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