- The world’s reserve currency, political systems, behaviour, are all changing
This is a terrible choice. Especially for a government. It is a choice before every government in the world and the answer is not easy. Because of that, most governments will opt for the middle course.
The problem is that if governments continue with the lockdown, their economies will suffer further and employment, businesses and therefore livelihoods become near impossible. If they end the lockdown then the pandemic will spread and many more people will die, and that’s the end of life. It’s a double whammy. But then, without livelihood, life will decrease if not end. With life continuing as it did in the pre-covid-19 era, life will end at the hands of the pandemic, perhaps faster. So what is the point? Remember the purpose of every government is to improve the human condition and if the human condition declines I ask again, what is the point? Until a vaccine is found and the virus stopped dead in its tracks, there will be no answer. So the middle course will be what everyone is trying to do. Ease the lockdown and get as many people back to their jobs while implementing strict SOPs. The problem is to ensure that the SOPs are followed.
When the lockdown was eased in Pakistan, just look at the crowds that gathered in bazaars without regard to social distancing and many not wearing masks. Obviously the pandemic will spread, hospitals will be even more overwhelmed and governments will be at their wits end. The obvious answer is to manage, not control, human behaviour. That’s easier said than done. You have to be a strict one-party state like China to be able to do that. In a flawed democracy or the pretence of it, you cannot. One would say, you need to educate the populace so that they understand the difference between right and wrong and what’s good for them and bad for them. That’s also easier said than done. So the pandemic will spread, economies will derail until people learn hard lessons. Social distancing and masks and hand-washing and all that jazz will become the cultural norm. It was our government, like others, that was caught between a rock and a hard place– life or livelihood? There is a triple whammy too: a burgeoning debt, huge fiscal and current account deficits, as too a trade deficit. People not paying income tax, a scourge our governments have perennially brought upon themselves by not applying income tax on many sectors of the economy like agriculture. That’s about 23 percent of the GDP that goes scot-free. Add to that incomplete documentation of the economy and you already have an impossible situation on your hands. But let’s not labour the point because in our kind of electoral democracy, if you lose the sympathy of the landlord, you lose his vote in the lower house of Parliament and will not be able to form a government. Obviously this cries out for a change in the system. That’s not all. There is also the humongous annual debt servicing bill and the perpetual bleeding done on the government’s resources by white elephants called the ‘public sector enterprises.’ These have to be rationalized very fast either by closure or by privatization or by selling 26 percent shares to strategic managers. Given these difficulties, the government did a creditable job introducing a Budget at all. There is little room for criticism.
That’s not the only thing that is failing. The great political systems of the world, which are best described as electoral democracies, are about to bite the dust for they have stopped delivering and we, as God says, have to “choose from amongst the best”
Pakistan does not exist in a vacuum. No country does. It should be obvious that the USA is the engine of the global economy and if it suffers, its economy suffers and so does the global economy. And so too does Pakistan and every other country. The centerpiece of the US economy is its currency that they made the global reserve currency instead of gold. So every country is hostage to the dollar and if the dollar goes down, other countries will go down because they will be holding reserves in paper whose value has diminished. I have been saying this in my last few articles but I am not alone. Many American writers are warning of the fall of the dollar. For example, Stephen Roach writes in Bloomberg: ‘A crash in the dollar is coming.’ It would be useful to quote at some length from his article:
“The era of the U.S. dollar’s “exorbitant privilege” as the world’s primary reserve currency is coming to an end. Then French Finance Minister Valery Giscard d’Estaing coined that phrase in the 1960s largely out of frustration, bemoaning a U.S. that drew freely on the rest of the world to support its over-extended standard of living. For almost 60 years, the world complained but did nothing about it. Those days are over.
Already stressed by the impact of the Covid-19 pandemic, U.S. living standards are about to be squeezed as never before. At the same time, the world is having serious doubts about the once widely accepted presumption of American exceptionalism. Currencies set the equilibrium between these two forces — domestic economic fundamentals and foreign perceptions of a nation’s strength or weakness. The balance is shifting, and a crash in the dollar could well be in the offing.
The seeds of this problem were sown by a profound shortfall in domestic U.S. savings that was glaringly apparent before the pandemic. In the first quarter of 2020, net national saving, which includes depreciation-adjusted saving of households, businesses and the government sector, fell to 1.4% of national income. This was the lowest reading since late 2011 and one-fifth the average of 7% from 1960 to 2005.
Lacking in domestic saving, and wanting to invest and grow, the U.S. has taken great advantage of the dollar’s role as the world’s primary reserve currency and drawn heavily on surplus savings from abroad to square the circle. But not without a price. In order to attract foreign capital, the U.S. has run a deficit in its current account — which is the broadest measure of trade because it includes investment — every year since 1982.
Covid-19, and the economic crisis it has triggered, is stretching this tension between saving and the current-account to the breaking point. The culprit: exploding government budget deficits. According to the bi-partisan Congressional Budget Office, the federal budget deficit is likely to soar to a peacetime record of 17.9% of gross domestic product in 2020 before hopefully receding to 9.8% in 2021.”
So there you have it in plain words. It is not just me saying this. But something cannot disappear without something else appearing in its place. Nature abhors a vacuum. And as I have said before, that something else has to be the Chinese Yuan. I have been accused of having a “gilded view” of China, but something that is so obvious would be foolhardy to ignore.
This will be the last great test for an independent Pakistan before we settle down to the new currency regime.
That’s not the only thing that is failing. The great political systems of the world, which are best described as electoral democracies, are about to bite the dust for they have stopped delivering and we, as God says, have to “choose from amongst the best.”
I said that human behaviour has to be managed. When you’re managing something it has to be of a manageable size. This cries out for smaller states that will be easier to manage but that’s a long subject and we will get into it at some later date when I have the time and you have the patience.