Vijay Kumar Gaba: WWII

Thursday, November 30, 2023

Conquering the guilt and normalizing

Last year, the former Japanese prime minister Shinzo Abe was assassinated while he was addressing a public meeting. This is perhaps the first of its kind of act of violence since assassination of Inejirō Asanuma, the then Chairman of the Japan Socialist Party, in 1960. The visuals of Abe’s assassination may have shattered the image of Japan, most people would be carrying in their mind, viz., the image of most courteous people showing remarkable patience and calmness in their public behavior.

The post WW2 generation had only witnessed Japanese people who were extra polite, patient, courteous, and cooperative. These Japanese were very different from the pre-WW2 Japanese, who took pride in their martial and imperialistic traditions. Political assassinations were commonplace. The Japanese Army was considered one of the most brutal forces. The imperialist Japanese occupied parts of Russia, China, and Korea; plundered their wealth, and enslaved their women. The 1945 nuclear attack on Nagasaki and Hiroshima perhaps overwhelmed the Japanese society, burdening it with the guilt of being one of the main characters in the two disastrous world wars and losing its pride to the allied forces led by the US and Russia.

In fact, this is not only in Japan. After decimation of the manifest fascist forces (e.g., Germany, Japan and Italy) and imperialistic forces like Great Britain and Austro-Hungarian empire post WWII, the world has been a rather peaceful place as compared to the preceding 2000yrs. The conflicts post WWII have mostly been contained. Even during the height of the cold war between NATO and Warsaw Pact countries, and shenanigans of star-wars, there had never been a threat of escalation to the scale of a larger World War.

However, if we correlate some of the events and trends in the past couple of years, the picture that would emerge is not very comforting. For example, consider the following events and trends:

· Assassination of Shinzo Abe.

· Numerous acts of violence across USA and Europe, apparently perpetrated by random people who are not radicalized.

· Blatant violation of international laws by Russia in invading Ukraine, and botched attempts of NATO allies to internationalize the issue (contrary to the containment during earlier Crimea invasion).

· Internationalization of recent hostilities between Israel and Hamas.

· China is aggressively threatening its neighbors’ territorial and economic integrity.

· USA handing over Afghanistan to Taliban.

· Hyper nationalist right aligned leaders/parties winning elections in Italy, Argentina, Netherlands; while hardline leftists won elections (re-elections) in many jurisdictions, e.g., Germany, France, Australia, Chile, Mexico, Bolvia, Brazil, Peru, Honduras, and Columbia, etc. Both the Chinese premier Xi Jinping and Russian premier Vladimir Putin are firmly entrenched in respective offices for as long as they wish, and actively working to polarize the world.

· Reliance of population on governments for meeting basic needs rising exponentially along with the rise in the financial and fiscal vulnerabilities across the globe.

· Frequency of mass public protests rising in various jurisdictions.

· Tendency of governments to overregulate and over govern increasing across jurisdictions.

Besides, the commodity producing emerging economies which felt that they have been at the mercy of the financialized western world due to overwhelming dominance of USD on global trade, have been grouping (expansion of BRICS, BRI of China, etc.) to be in a position to command terms of trade.

I get a sense that the world is now in the last phase of erasing the guilt of the two world wars. In the next two decades, the real threat humanity faces is the threat of the human race returning to its normal self – unabashedly intolerant, violent, greedy, imperialist, as they were mostly in the pre-WW2 era, ending the era of prolonged peace since 1945.

The recent Russia-Ukraine and Israel-Palestine episodes have already demonstrated that territorial occupation is becoming acceptable, just like 19^th century. It is common to hear about imminent alteration of status quo in Taiwan and Pakistan occupied Kashmir. Blatant defense of merciless killing of innocent children and women in Gaza, acceptance of suppression of women by Taliban in Afghanistan, and killing of Uighur Muslims in China indicate the change in global thinking. Regrouping of Arabs with Russia and China alliance against the interest of the western world is also a pointer to the potential shape global order might be taking in next couple of decades.

Where does India stand in this transition of global order and what small investors like me should be doing under these circumstances?

Will share my thoughts on this in the coming weeks.

Thursday, January 5, 2023

USD – Has the Endgame begun?

In the US, banking panic started at regional level in 1930, with many smaller regional banks faced crisis. However, as Great Britain decided to leave the gold standard for GBP on 21 September 1931, the panic spread throughout the country. Foreigners became concerned that the US may also follow Great Britain and end gold convertibility of USD. There was a rush to convert USD into gold. The collateral was that depositors became concerned about the safety of their money and started withdrawing currency from their accounts. A global rush to convert USD into gold and an internal rush to withdraw currency from banks drained out the banking system reserves and choked the money supply – exacerbating the deflation and propagating the great depression. There was a spate of bank failures in the US during 1931-1933.

The Federal Reserve Bank of New York responded to the situation by hiking rates in October 1931, to encourage investors to deposit money in the US banks or buy US bonds. There was an immediate relief, but that did not last long. The Fed started buying bonds from the market in 1932 and hiked the rates again in February 1933. It did not help much in restoring the confidence of investors in USD. In March 1933, the Federal Reserve Board suspended the gold standard for USD; President Roosevelt announced a national bank holiday and suspended all outbound gold shipments. The provisions that allowed the holders of specific treasury bonds to convert their bonds into gold were also revoked (many commentators have implied this action to be a sovereign default by the US).

1931 was the first year in recorded history of the US when both US Treasury Bonds and US Stocks yielded negative returns in the same year. The following two years marked a watershed in the history of the US financial system.

Bretton Wood agreement of 1944, established USD as the reserve currency of the world. The agreement, inter alia, provided that all the participating nations would allow free conversion of their own currencies into USD at all times; and the US will allow conversion of USD into gold at a fixed exchange rate of USD35 per troy ounce of gold. At that time the US manufactured over half of the total global production, as most of Europe and Japan lay shattered due to WWII. Obviously no one objected to the reserve currency status of the USD.

In the next 25yrs, Germany and Japan made substantial progress. The US share in global GDP fell from 35% to 27% during 1950-1969. The US participation in the Vietnam war (1964-1970) took a significant toll on the US economy. Besides, other political efforts like “Great Society” etc., also weakened the US economy. The “reserve USD” became highly overvalued, impacting US exports and causing a sharp rise in trade deficit. The US was forced to print more USD to keep its obligation under the Bretton Wood agreement. This led to a sharp decline in the gold coverage ratio of the USD. The inflation also shot up sharply.

To stem the run on US banks, the Fed had increased its key policy rate to 9.75% by October 1969.

1969 was the second time in recorded history of the US when both US Treasury Bonds and US Stocks yielded negative returns in the same year. Two years later, in August 1971, president Nixon unilaterally abandoned USD peg to gold, hence rescinding the 27yr old Bretton Wood agreement. For other participants in the agreement, it was a virtual default on the part of the US. However, the advent of “petro dollar” a few years later sustained the reserve currency status of USD.

Presently, the USD is arguably highly overvalued. The Fed is hiking rates and reducing money supply. Inflation is high. The economy is on the verge of recession. Trade deficit is rising. Fiscal deficit is at an unsustainable level. The US share in the global economy is shrinking. Large trade partners of the US, like China, OPEC, Japan, etc. are exploring non-USD trade with other trade partners. The US is incurring huge costs in the Ukraine war. And 2022 is the third time in history when both US treasury bonds and stocks have yielded a negative return in the same year.

If history rhymes, we could see some material developments in the US and, perhaps the global, financial system. A sharp USD devaluation, replacement (or supplement) of USD with a new digital currency, end of petrodollar regime (and hence reserve status of USD) are some of the wild guesses I could make.