The recent drop in the value of several emerging market currencies coupled with the fact that the BOJ (Bank of Japan) has embarked on extreme monetary stimulus and the US Federal Reserve’s unlimited bond buying spree have rekindled fears of a currency war among the currencies of the world. Added to this scenario is the fact that the Chinese Yuan is also depreciating against the major currencies leading to the markets around the world betting on which currency is the next to join in the currency war.

Of particular importance is the sharp drop in the value of the Indian Rupee, the South African Rand, and the Indonesian Rupiah over the last few days. All these moves come in the backdrop of worsening economic conditions around the world, which means that countries intentionally debase their currencies to remain competitive. This and the fact that central banks around the world are engaged in unlimited bond buying and monetary easing means that the surfeit of liquidity in the system is making the currencies lose value because there are too many of them circulating in the market.

The Nature of Currency Wars

A currency war by definition starts when a country intentionally makes moves that lowers or increases its value when compared with other currencies. This is done either as a means to increase export competitiveness or to discourage imports.

Exports earn more money for the same dollar value when currencies depreciate, as the value of the currency is lower when compared to the dollar making the proceeds from exports get more local currency value. On the other hand, imports are made more expensive as the same dollars need more local currencies values to buy the goods and services. This is the reason why many countries usually embark on currency wars because when the global trade and macroeconomic situation is weak, they need more exports and one way of increasing exports is to lower the value of their currencies.

The other reason why currency wars take place is that countries around the world are engaging in monetary expansion, which is a euphemism for printing money. When central banks print money in local currencies to monetize the debt or to convert the debt into assets held by them, the result is too much liquidity leading to the value of the currency being lowered and inflation which is another topic altogether.

The Consequences of Currency Wars

Many economists fear that the current round of competitive monetary expansion would result in a protracted round of currency wars which might even provoke retaliations from other countries and lead to conflicts both in the markets and in the geopolitical sense.

For instance, China has long maintained its value of the Yuan low so that its exports are competitive and it has done this despite opposition from the US and other trading partners who have always expressed their concerns about the Chinese Yuan being undervalued.

With so many countries around the world now jumping into the currency wars arena, it is high time for order to be restored as such chaotic conditions in the currency markets do not augur well for the global economic recovery. This is the reason why the IMF (International Monetary Fund) and the World Bank have called upon member countries to desist from currency wars and have explicitly warned countries from doing so. However, this does not seem to have had the desired effect on the members of the global economic system as can be seen from the recent wild gyrations and fluctuations in the values of the global currencies.

Concluding Thoughts

Finally, in the absence of growth in the global economy, currency wars are inevitable and hence, it is in the interests of all the nations to recover from the crisis without a beggar thy neighbor attitude, which would only worsen the situation for everybody. More than anything else, it is for this reason that currency wars must be avoided.

Demand for a commodity refers to the quantity of the commodity that people are willing to purchase at a specific price per unit of time, other factors (such as price of related goods, income, tastes and preferences, advertising, etc) being constant.

Demand includes the desire to buy the commodity accompanied by the willingness to buy it and sufficient purchasing power to purchase it. For instance-Everyone might have willingness to buy “Mercedes-S class” but only a few have the ability to pay for it. Thus, everyone cannot be said to have a demand for the car “Mercedes-s Class”.

Demand may arise from individuals, household and market. When goods are demanded by individuals (for instance-clothes, shoes), it is called as individual demand. Goods demanded by household constitute household demand (for instance-demand for house, washing machine). Demand for a commodity by all individuals/households in the market in total constitute market demand.

Demand Function

Demand function is a mathematical function showing relationship between the quantity demanded of a commodity and the factors influencing demand.

Dx = f (Px, Py, T, Y, A, Pp, Ep, U)

In the above equation,
Dx = Quantity demanded of a commodity
Px = Price of the commodity
Py = Price of related goods
T = Tastes and preferences of consumer
Y = Income level
A = Advertising and promotional activities
Pp = Population (Size of the market)
Ep = Consumer’s expectations about future prices
U = Specific factors affecting demand for a commodity such as seasonal changes, taxation policy, availability of credit facilities, etc.

Law of Demand

The law of demand states that there is an inverse relationship between quantity demanded of a commodity and it’s price, other factors being constant.

In other words, higher the price, lower the demand and vice versa, other things remaining constant.

Demand Schedule

Demand schedule is a tabular representation of the quantity demanded of a commodity at various prices. For instance, there are four buyers of apples in the market, namely A, B, C and D.

Demand schedule for apples

The demand by Buyers A, B, C and D are individual demands. Total demand by the four buyers is market demand. Therefore, the total market demand is derived by summing up the quantity demanded of a commodity by all buyers at each price.

Demand Curve

Demand curve is a diagrammatic representation of demand schedule. It is a graphical representation of price- quantity relationship. Individual demand curve shows the highest price which an individual is willing to pay for different quantities of the commodity.

While, each point on the market demand curve depicts the maximum quantity of the commodity which all consumers taken together would be willing to buy at each level of price, under given demand conditions.

Demand curve has a negative slope, i.e, it slopes downwards from left to right depicting that with increase in price, quantity demanded falls and vice versa. The reasons for a downward sloping demand curve can be explained as follows-

1. Income effect- With the fall in price of a commodity, the purchasing power of consumer increases. Thus, he can buy same quantity of commodity with less money or he can purchase greater quantities of same commodity with same money.

   Similarly, if the price of a commodity rises, it is equivalent to decrease in income of the consumer as now he has to spend more for buying the same quantity as before. This change in purchasing power due to price change is known as income effect.

2. Substitution effect- When price of a commodity falls, it becomes relatively cheaper compared to other commodities whose price have not changed. Thus, the consumer tend to consume more of the commodity whose price has fallen, i.e, they tend to substitute that commodity for other commodities which have not become relatively dear.

3. Law of diminishing marginal utility- It is the basic cause of the law of demand. The law of diminishing marginal utility states that as an individual consumes more and more units of a commodity, the utility derived from it goes on decreasing.

   So as to get maximum satisfaction, an individual purchases in such a manner that the marginal utility of the commodity is equal to the price of the commodity. When the price of commodity falls, a rational consumer purchases more so as to equate the marginal utility and the price level.

   Thus, if a consumer wants to purchase larger quantities, then the price must be lowered. This is what the law of demand also states.

Exceptions to Law of Demand

The instances where law of demand is not applicable are as follows-

1. There are certain goods which are purchased mainly for their snob appeal, such as, diamonds, air conditioners, luxury cars, antique paintings, etc. These goods are used as status symbols to display one’s wealth.

   The more expensive these goods become, more valuable will be they as status symbols and more will be there demand. Thus, such goods are purchased more at higher price and are purchased less at lower prices. Such goods are called as conspicuous goods.

2. The law of demand is also not applicable in case of giffen goods. Giffen goods are those inferior goods, whose income effect is stronger than substitution effect. These are consumed by poor households as a necessity.

   For instance, potatoes, animal fat oil, low quality rice, etc. An increase in price of such good increases its demand and a decrease in price of such good decreases its demand.

3. The law of demand does not apply in case of expectations of change in price of the commodity, i.e, in case of speculation.

   Consumers tend to purchase less or tend to postpone the purchase if they expect a fall in price of commodity in future. Similarly, they tend to purchase more at high price expecting the prices to increase in future.

The present global marketplace as well as regional and nations marketplaces are uber competitive and in addition, dominated and driven by rapidly changing market conditions where short term thinking triumphs and the scenario is complicated with the incessant buzz of 24/7 news cycles which add to the “noise” instead of creating value.

While such distractions and disturbances need to be addressed especially when consumers and customers themselves seem to be susceptible to short term trends, the fact remains that the age old principles that govern capitalism and which can be found in any textbook on the topic as well as management related topics, all emphasize longer term value creation as the basis for building truly sustainable and long lasting businesses.

Indeed, in times when it is easy for both businesses and consumers to be “lost” in the constant buzz of the Smartphones bringing alerts and breaking news almost on a real time basis, it becomes difficult for management experts and authors such as we to emphasize the fact that longer term value creation should be the norm rather than the exception if you want your business to last generations instead of you outliving the company.

What is Longer Term Value Creation?

Having said that, one must also clarify what longer term value creation means especially when startups and just launched businesses become Billion Dollar “Unicorns” in no time.

This is especially the case with technology firms that ride the crest of the waves of exponentially accelerating technology and land with “eye popping” market shares leaving even established businesses envious of their success.

Longer term Value Creation means that businesses and companies can consistently, reliably, and sustainably deliver returns to all stakeholders and not just the shareholders over decades instead of years or months.

We have used the term stakeholders to emphasize the fact that businesses and companies are accountable not only to their shareholders (who are anyway the primary stakeholder) but also to their consumers (who are the reason for their existence) as well as to society at large in terms of their social and environmental responsibilities.

Further, delivering stellar returns one quarter or a year and then tapering off is certainly not the way to longer term value creation. In addition, polluting the environment or disturbing the social fabric is again not a good way to create longer term value and instead, reeks of irresponsibility.

Characteristics of Longer Term Value Creators

Now that we have defined what longer term value creation means, we can look at what the characteristics of such firms are.

To start with, longer term value creators have a strong inbuilt mechanism to survive and weather the “storms” that are so common to capitalism in terms of market turbulence, passing or retiring of the key personnel, ethical misconduct, and general atrophy.

Indeed, firms that create longer term value also need to be conscious of the fact that they must build institutions instead of mere shallow firms that are glorified versions of “fly by night” operators.

Moreover, longer term value creators must also have enough cash reserves for years instead of months, have adequate assets and asset bases wherein the assets need not always be physical since the Digital Economy firms are mostly owners of Intangible Assets though they tend to have physical assets as well.

In addition, longer term value creators must invest in building human capital in terms of investing in their human resources so that they become as prized as their other assets and resources and indeed, more important than the latter in terms of their contributions to their bottom line.

Longer Term Vision vs. the Reality of Being Profitable

Having said that, as mentioned earlier, these days we hardly find companies and businesses who can justifiably and proudly say that they have lasted decades without compromising on any of the aspects discussed until now.

Barring a few exceptions, most firms and corporations have been found wanting on some aspect or the other though some of them have been venerable and respected in their heyday.

Indeed, when scandals strike even firms such as Infosys that were always seen as beacons for corporate value creation, then one starts to wonder whether the basic principles of market economics and capitalism are wrong.

However, it is our view that the uber competitive contemporary marketplace makes even bellwether firms susceptible to losing sight of the Big Picture.

Thus, the central challenge of the Emerging Generation of Business Leaders is to ensure that the firms and businesses they run return to the basics and start focusing on creating longer term value for all stakeholders.

Creative Destruction

On the other hand, there are some management experts who believe that firms must exist to make profits and as long as they are profitable, it does not matter if they are profitable for a few years or a decade and then atrophy. Indeed, their contention is that capitalism works by Creative Destruction wherein periodically, the firms that innovate and are inventive survive and those that are stodgy get left behind.

While this is indeed true, it is our contention that longer term value is also created by what we described as human capital and hence, the fact remains that this is again a characteristic of longer term value creating firms. Thus, we want to emphasize that sustainable profitability is possible whichever view one prefers and hence, to conclude, we would ask our readers who are the business leaders of tomorrow to focus on the longer term instead of being “blindsided” by the short term.

This availability of easy credit has led to a credit binge worldwide. Nowhere is this credit binge more pronounced than in the world’s fastest growing economy. Also, the heavy influence that the Chinese state has on their media has made this topic somewhat of a secret. Fudged numbers, that China reports to the world, have also led to these facts being shrouded in mystery.

The global financial system is ignoring the great Chinese debt binge at its own peril! If critics are to be believed the debt bubble is about to burst and in less than a year, the world will see the catastrophic consequences of letting its fastest growing economy unmonitored.

Unprecedented Levels of Lending

China saw an unprecedented credit expansion in the past 5 years since the 2008 crisis. China now has a debt which stands at 250% of its gross domestic product. Now consider the fact that Chinese GDP is in trillions of dollars and let the magnitude of numbers sink in. Huge expanses of corporate credit have literally been handed out to Chinese corporations. The most recent numbers suggest that the rate of credit expansion is twice the rate of economic growth. This suggests an economy that is at the helm of a massive economic bubble.

Economists have started expressing their discomfort with the Chinese binge in mild terms. Anyone who is looking at the numbers carefully knows that this could very well be the beginning of the end.

Opacity

Public sector banks dominate Chinese banking. Hence, lending in China is more or less dominated by the government. The government being a one party set up virtually runs the banking system unregulated. As a result, the numbers released by them are often incomplete and have a reputation of being untrustworthy.

The world, therefore, faces a unique challenge. Not only is the magnitude of the debt huge, but the opacity of policies followed by Chinese banks also makes it worse. Economists have no idea and no experience of predicting how an asset bubble burst unfolds in a complex economy like China.

Unviable Lending

Trillions of dollars have been lent out in China in the span of five years or so! The breakneck speed of this credit expansion is mind-boggling! However, since the lending has happened so fast, there is a chance that lenders may not have conducted due diligence.

The sheer scale of the lending mandates that some of the money has gone to cronies of Chinese government officials, sub-optimal projects and marginalized borrowers. The existence of several unoccupied ghost towns in China is the testimony to this fact.

The single-minded focus on keeping the GDP growth rate above a certain percentage has led to this credit binge. IMF reports have suggested that a large portion of this debt binge can be attributed to the unregulated shadow banking system in China. Also, they have issued a warning that urges the Chinese government to “urgently” tackle this issue.

A small percentage of the Chinese debt is also a huge amount. In many cases, it is greater than the GDP of smaller countries! Hence, if this debt goes wrong, the results can be damaging to economies worldwide.

Interconnectedness

We have already seen that an American crisis can become a global crisis is no time at all. The Chinese crisis can have a similar impact. This is because a Chinese crisis is capable of triggering an American crisis as explained below.

The interconnectedness of the Chinese economy is what makes this crisis truly global. The United States is China’s largest partner. China is also the number one buyer of the United States Treasury bill. This means that a Chinese crisis would force them to dump a huge amount of treasury bills and notes in the market making it difficult for the United States to borrow more money. Since American economy cannot survive without credit, this seems like a perfect storm!

Other developed regions like the European Union and Australia are also connected with the Chinese economy. China being a part of the BRICS nations, changes in its economy also have an impact on developing economies as well. The impact of Chinese debt binge will not be local.

Difficult Measures

The writing on the wall is pretty clear. Remedial measures are the only way forward. However, remedial measures are politically unpopular even in a communist regime like China! These jobs will require displacement of workers in numbers that the world has never seen. In fact, some of it has already begun. Thousands of workers have been laid off in Chinese mining companies. They are finding it difficult to adapt to this layoff culture since they were part of a communist regime before this.

However, delaying the essential measures will only make matters worse. The effects will be far more pronounced as market imbalances will be sustained for a longer duration making them even bigger in magnitude.

Capital Account Convertibility means that the currency of a country can be converted into foreign exchange without any controls or restrictions.

In other words, Indians can convert their Rupees into Dollars or Euros and Vice Versa without any restrictions placed on them. The reason why it is called capital account convertibility is that the conversion of domestic currencies into foreign currencies is allowed in the capital account and not only the current account.

Capital account refers to expenditures and investments in hard assets, physical premises, and factories as well as investments in land and other capital-intensive items. Current account on the other hand, refers to investments that are short term in duration and hence, they fall under the current account head.

As we shall discuss later, there is a significant difference between capital and current accounts as they are different in the period of holding and the kind of investments made.

A precondition for many countries to get IMF (International Monetary Fund) or World Bank assistance is to make their currencies capital account convertible so that foreign investors have the exit option quickly and without hassles in times of economic crises.

Partially and Fully Convertible Currencies

Partially convertible currencies are those where the currency can be converted in the current account. This means that investors can invest in stock markets and bond markets of the target countries with an option to repatriate their holdings.

Further, ordinary citizens can convert their domestic currencies to dollars for expenses like going abroad for work, tourism, and education.

On the other hand, capital account convertibility or fully convertible currencies are those where just about anybody can convert the local currency for foreign currency without any questions or restrictions placed on such conversions.

The key aspect here is that many countries do not allow their currencies to be fully convertible if they do not hold significant foreign exchange reserves. This is also the reason why capital controls are imposed in times of economic crises to prevent a capital flight from these countries.

Many Asian countries have learnt from the bitter experience of the Asian financial crisis of 1997 and the Russian Default of 1998 where full convertibility lead to a stampede of foreign investors fleeing the countries in the aftermath of the economic crisis.

The other aspect here is that even in the European Union, capital controls are being planned to contain flight of capital to other countries as the Eurozone crisis deepens.

Impact on Countries

The previous sections discussed the difference between fully convertible and partially convertible currencies. The impact of convertibility on economies is felt in the way assets held in the domestic country can be repatriated with ease or partially.

For instance, in India where the currency is partially convertible, investors cannot liquidate their assets and leave the country without approval.

On the other hand, they can repatriate the money that they have invested in the stock market, as was the case in recent months.

The effect of this is that many foreign companies do not hold assets like buildings, premises, and other items that fall in the capital account. They also tie up with local companies because in times of crisis, they can exit the joint venture easily and get back their monies invested in the merged entity.

As for other countries in South East Asia that were fully convertible, the Asian financial crisis of 1997 was a wakeup call for them as investors fled the country and capital flight accelerated leading to a near collapse of the economies in the region with the exception of Singapore.

Concluding Remarks

Having considered the pros and cons of the issue, it must be said that emerging market economies must consider the kind of convertibility after taking into account the various factors that are internal to their functioning and must not make their currencies convertible because of external pressures.

For much of the 20th century, if you had wanted to study business management, you probably would have enrolled in a course in economics. This was because of the prevailing wisdom at that time that businesses are run according to economic concepts and hence, any aspiring manager would have to study economics as a means of actualizing their aspirations.

However, in the 1960s and 1970s, there was an emerging trend of offering business management programs by leading universities in the world as by then, the field of business management had spawned several sub disciplines like Marketing, HRM, Operations Management, and Finance.

Indeed, it can be said that these sub-disciplines grew out of the basic economics courses that we mentioned earlier. In the current context, many aspiring managers study economics as a compulsory course in the first year of their b-school education, managerial economics, and business economics in other basic courses.

Indeed, managerial economics and business economics are now taught in b-schools distinct from pure economics because the application of economics to business management is what these courses are all about. Whereas the basic economics course introduces the student to micro and macroeconomic concepts, managerial economics and business economics are geared towards equipping the student with the economic concepts necessary to run firms.

Key Themes in Business Economics

This module on business economics is organized around the four themes as described below:

• How to get a firm started
• How to keep the firm in business in the face of growing competitive rivalry
• How to grow the firm into a much larger operation
• And, How to Rejuvenate the firm in the face of declining demand

Considering the fact that there is a separate module on managerial economics, this module deals with the economic issues faced by the firms at a macro level instead of the micro decisions that are taken by managers.

Further, given the fact that entrepreneurship is central to the setting up of new businesses, there is a need to discuss how entrepreneurs make economic decisions. The next aspect of business economics is how consumers make purchasing decisions.

Indeed, the motivations and the decision making process that underlies consumer behavior is an aspect that can be studied through the lens of economics.

The point here is that whereas marketing and other branches of management deal with these aspects according to behavioral and other theories, business economics focuses on how consumer behavior is influenced by economic aspects.

How Students and Professionals can Benefit from this Module

At the macro level, the firms must know how to survive and thrive in intense competition and hence the study of this decision making process helps us gain insights into how firms can earn more profits even during recessionary times.

As mentioned in the bulleted point list, the key decisions confronting the firm right from inception to operation to growth is themes that business economics can explore and which are useful for entrepreneurs and business leaders.

With increasing globalization, the fact that firms now operate in a global arena means that they must have the knowledge of how macroeconomic trends affect microeconomic decisions and hence, one of the topics that business economics studies is the interplay between international trade, exchange rates, and globalization.

As students of management, many of you would have intimate knowledge of these aspects. However, for many professionals well into their careers, sometimes they would need to be refreshed about these concepts. Hence, this module is designed in a manner that would help students engage with the concepts and for professionals to get a primer of these concepts.

Closing Thoughts

Finally, the field of business economics owes a lot to the contributions of Alfred Marshall, Joseph Schumpeter, and Alfred Chandler. Hence, we would be covering their theories in detail in this module. With this brief overview, we welcome the readers to this module on business economics.

There has been a noticeable slowdown in the Chinese economy over the last few months. Coupled with a draining of the excess liquidity that was introduced into the economy through massive monetary stimulus in the wake of the global economic crisis, the Chinese economy suddenly looks vulnerable.

Added to this is the fact that the Chinese economic model is driven by exports and low domestic consumption which means that as the target countries of the West to which China exports slow down, there is going to be a corresponding slowdown in the Chinese economy as well.

Further, the fact that the Chinese economy has been pump primed heavily meaning that the Central bank engaged in massive monetary stimulus has only exacerbated the problem wherein it is now engaged in an exercise to control inflation.

Moreover, the statistics put out by the Chinese government about its economy are suspect leading to doubts over whether there is really growth happening now or it is just creative accounting, which is a euphemism for window dressing of statistics.

Japanese Style Monetary Easing

The Great Japanese experiment in Quantitative Easing or pumping extraordinary amounts of money into its economy looks like it is a failure, as the growth that was expected has not materialized.

In other words, despite massive monetary stimulus, the GDP (Gross Domestic Product) hardly registered an increase and this was the reason why many experts are predicting that the present policies of the Central Bank of Japan would be a failure.

Apart from this, there has been a noticeable slowdown in other Asian economies with only a few countries being the exception. These Vietnam, Cambodia, and Malaysia are now being considered as the additions to the list of emerging markets.

The point here is that despite many Asian countries indulging in monetary stimulus, the effects are hardly visible and though many experts blame the global slowdown for this, the fact remains that the Asian countries are still in a situation where the economies are not mature enough to handle high deficits and inflation.

Of course, Japan cannot be considered as part of this since it is considered a developed country. However, the fact remains that Japan has been unable to manage its economy properly leading to many observers questioning whether it has its priorities right.

Repeat of the 1997 Asian Financial Crisis?

The preceding discussion indicates that a repeat of the 1997 Asian Financial crisis cannot be ruled out, as the conditions now are similar to the conditions at that time.

In other words, with high deficits, falling currencies, and rampant inflation, Asian economies are also beset with high levels of corruption and crony capitalism.

All these factors make for a lethal cocktail of dangerous dimensions that can easily translate into a crisis of the highest order. This is the reason why many experts believe that despite the claims of the policymakers in the Asian countries, the reality might be otherwise.

The irony of the situation is that the Asian economies do not seem to have learnt the lessons from the previous crises and are going down the same path that they have taken earlier. This is the tragic situation as it exists and therefore, one must be wary and weary of the claims made by the policymakers in these countries.

Added to this is the fact that all these countries have gotten used to cheap money flowing from the US courtesy the Federal Reserve with its loose monetary policy. Therefore, any tapering off the Quantitative Easing in the US will lead to serious repercussions in Asia.

Concluding Remarks

Finally, whether there is going to be a repeat of the 1997 Asian financial crisis or otherwise, the fact remains that the people of this region are paying the price for the perverse macroeconomic policies pursued by the policymakers. Therefore, it is high time the policymakers did something that is in the interest of the ordinary citizens of these countries.

The gloomy economic conditions all over the world have prompted governments to cut back on social spending and curtail budgetary expenditures on sectors like health, education, and provision of basic services. The intention behind this entire pullback from spending is to promote fiscal discipline and impose austerity on the peoples of the world.

This age of austerity means that citizens in the developed west including the US and the Europe can no longer look to the state to take care of all their needs and to provide them with social security nets as well as subsidized services. This has major repercussions as until now Europe and the US were held up as role models for providing basic services at dirt-cheap rates.

The situation is especially dire in Europe where for much of the 20th century, the people were used to the state looking after their needs. Therefore, the latest round of austerity has not gone down too well with the people of Europe who are protesting in large numbers in almost all the peripheral countries of the Eurozone where Austerity is being implemented. This has led to prolonged periods of social unrest punctuated by strikes and large-scale protests by labor unions and citizen movements.

Arguments for and Against Austerity

The argument made for austerity is that the good times are over and especially so when one considers the rather easy life that many in the West got accustomed to, the point being made by the governments is that it is time to buckle up, tighten belts, and ensure that growth is given priority over reckless spending. However, the same argument is being contested by the people who point to the fact that they got used to the welfare state model and hence, did not plan for this situation where they are being forced to contend with unemployment, reduced salaries, and cutbacks to social schemes.

The case of unemployment is especially telling as many youth are without jobs and without state support, which is turning into a deadly cocktail that can degenerate into social chaos and spell trouble in these countries.

Further, the people are also angry at the prevailing situation, which they blame on the bankers and the governments who got them into the present sorry state of affairs. Whichever side one belongs to, it is clear that the Age of Austerity is here to stay and therefore, the people in the West have to get used to an austere lifestyle where most luxuries that they took for granted earlier have now been taken away from them.

Need for Austerity

Apart from this, Austerity is also needed from a fiscal prudence perspective as well as from the diminishing returns from growth perspective. To take the latter aspect, it is clear by now to many people the world over that the growth rates seen in earlier decades are not going to be actualized anytime soon because of depleting resources, overpopulation, and a general rate of return that follows the law of diminishing returns where growth hits limits and even productivity jumps cannot make up for it.

As for the fiscal prudence angle, countries that have overspent their money and indebted the future generations are now realizing that more debt is not the answer to existing debt and hence, they must cut back on spending and ensure that their budgets are balanced and in tune with the harsh economic realities. This is the crux of the argument that governments in the West are trying to tell their people that for the sake of future generations, they must sacrifice something now.

Concluding Thoughts

Finally, the austerity versus spending debate has only intensified in recent months and we would be looking at the theoretical basis for the debate as well as the social consequences of the same in subsequent articles.

It would suffice to state here that once people get used to an easy life, it is difficult to make them adjust to hardships and hence, the governments and the policymakers must take this into account when try to impose austerity on their citizens.

According to Economic Theories, Free Market Economies work best when they are left to themselves and be guided by the Hidden Hand of Markets.

In other words, what this means is that any capitalist economy works towards optimal outcomes as long as market forces of demand and supply determine the equilibrium, without outside intervention.

Another tenet of modern Economics is that markets work best when there is “free and fair” competition between the economic actors without distortions and perverse incentives.

What this means is that economies work towards equitable outcomes when they are free from outside interventions.

In addition, markets work well when governments do not interfere either in favour of particular firms or due to excessive regulation that stymies and throttles genuine economic activity.

However, in recent years, this has not always been the case as governments worldwide have tended to interfere and regulate the markets in favour of certain firms at the expense of others.

This leads to a situation where Monopolies are formed that help and harm the economy at the same time. Therefore, it is our argument that monopolies are economically harmful.

Why the Indian Economy is Moving towards Monopolies and How it is a Bad Thing

For instance, consider the case of India that in recent years has seen the rise of many Monopolies.

When the country opened up its economy in the 1990s and liberalized its rules and regulations paving the way for a capitalist economy, many believed that the “Shackled Elephant” was being let loose and it was only a matter of time before it started to lumber its way towards a genuinely pro growth and free market system.

However, what we have seen instead is the formation of a few huge business houses that control the economy due to the fact that successive governments have favoured them over others.

This leads to a situation where the absence of competition leads to these business houses determining prices and more importantly, setting narrative of what happens in the broader economy.

Indeed, when Ambani and Adani control the economy, there is precious little that other businesses can do except to follow their lead and agree to whatever prices that they are setting for the consumers in addition to constraining the choices that consumers have.

This is where such monopolies harm the economy and lead to situations where there are distortions and disincentives for the economic actors.

How Monopolies Benefit Consumers in Certain Situations and Harm Them in Other Ways

Having said that, there are some benefits of monopolies and it is that the scale and efficiencies tend to be higher than in a market that has several players.

When a handful of players control and dominate the market, they can achieve the Efficiencies of the Economies of Scale and the Synergies of Integration thereby benefiting consumers.

For instance, Reliance controls the End to End Supply and Value Chain of Petrochemicals leading to cost reductions and consequently, price decreases that accrue from scale and synergies.

This leads to a situation where consumers benefit from the existence of monopolies. Moreover, there is always the guarantee that they would be around for many years to come due to their size and this means that consumers do not have worry about insolvencies and bankruptcies of such monopolies disrupting supply and value chains.

Of course, there is the flip side as well since consumers are at the mercy of few players and in the absence of competition; they cannot switch to other firms.

This is the classic situation as described by Henry Ford, who remarked, that You Can Have any Car as Long as it is Black that effectively leaves consumers with zero choice.

Why Emerging Markets Have Monopolies and How Regulation is the Need of the Hour

This is the reason why monopolies ought to be regulated despite some benefits as outlined above. While the United States and Europe have strict Anti Trust laws and rules that limit the monopolistic tendencies, many developing and emerging countries are yet to have such regulations or worse, tend to ignore such laws in reality.

For instance, South Korea, which is one of the Asian Tiger economies, has large business houses known as Chaebols that control the economy.

India is moving in that direction with Ambani and Adani groups now on the way to control all sectors of the economy.

Moreover, monopolies are also formed due to political patronage and this has become pronounced in recent years in many countries worldwide.

This is the reason why many protests are happening across the world and especially in India, where farmers are up in arms against the alleged takeover of the farm sector by corporates.

This is more the reason why monopolies ought to be regulated and free and fair competition should be encouraged.

Again, monopolies in some sectors where huge capital investments are needed are ok and it is the other sectors where small operators tend to thrive that they are harmful.

Economies Should Work for Consumers

Last, economic theories often point to how free market systems allocate resources and distribute gains in an equitable manner.

Therefore, there is nothing wrong with capitalist economies as long as the governments and the regulators ensure that fair play is the norm and unjust business practices are not allowed.

So, it is incumbent upon political parties not to let certain business houses flourish at the expense of others and also to regulate the economy in such a way that consumers benefit.

After all, economists often say that the Consumer is the King and hence, economies should work to their benefit.

In this article, we hope to provide a breakthrough revelation to the readers. We hope to educate them about the nuances of the new global financial order.

The World Has a Fiat Money System

Not all money is the same. The basic nature of money has undergone a change. The rules that were passed down by your grandparents are relevant to what we can colloquially refer to as “old money”. Modern societies have “new money”. The technically correct terms for old and new money would be “commodity money” and “fiat money” respectively.

Commodity money is money made up of commodities like gold, silver or other metals. This money has value in of itself. It can therefore be exchanged for other things of value. For most of recorded history making has been using commodity money. All the rules passed down from generation to generation are fit for commodity money.

Fiat money, on the other hand, is paper money. It derives its power and value from the government that backs it. On its own, the paper money has no value at all. Therefore if the US government were to collapse the US dollar would have no value at all. This has happened several times across the globe.

Historical Precedents

History is rife with instances wherein fiat money systems collapsed. In fact historical analysis will show that fiat money has a 100% record of going to its original value i.e. zero.

Prehistoric cases include the Chinese empire and the Roman empire, both of which fell because of the excessive greed of their governments which led these governments to debase their money and steal from their own citizens.

Modern precedents include the hyperinflation in Germany in 1933 which caused Hitler’s rapid rise to power. Also, the Zimbabwean hyperinflation is a wonderful case in point.

In each of the above mentioned cases, savers were the ones who lost the most. All the money kept in a bank account was simply wiped out of existence!

Printed Money is Losing Value

Printed money does not lose value only in doomsday scenarios. Instead, printed money loses value, almost on an everyday basis. Most governments that issue fiat money are in debt. They finance the excessive spending simply by printing more money. Hence, when more money is printed, each unit becomes less valuable due to the inflation that is being caused. Steadily mounting inflation causes savers to lose value. Even though it may appear that banks are compensating savers for their loss by paying them interest, the real rate of inflation in the economy is far greater than the meager interest that if offered by these banks.

Hence, if a person buys stuff today, they get to pay the money back with cheaper dollars tomorrow! The savers therefore end up losing value whereas prodigality is rewarded. This is one of the many bizarre outcomes of the modern monetary system.

The Alternative

Saving is rewarded only when one saves in commodity money or old money. The government cannot print more gold and cannot debase its value. This is evident from the fact that the United States dollar has lost close to 94% of its value in the past 100 years whereas the purchasing power of gold remains unchanged. Therefore, if someone had saved their money in cash, they would have lost value despite the fact that compound interest started accruing on the same sum of money. On the other hand, if one had purchased real assets such as gold, silver and real estate, they would have been sheltered against this inflation and would have preserved their value.

The Problems with the Alternative

Investing in gold and silver is a good idea in general. However, like other markets, gold and silver tend to get inflated too! The rise of gold has been steady but not at all linear. Like every other commodity, gold too has got its share of booms and busts. Hence, entering the gold market is not a straight forward decision that will always pay off.

In finance, the key to success is doing the opposite of what the crowd does. Hence, investors should save cash and convert them into gold and silver when the stock markets are booming. A booming stock market sucks the money out of other markets and gold and silver are no exception. It is during this phase that the market plummets and investors find a good bargain.

To sum it up, traditional saving i.e. saving money in bank accounts is doomed for failure. The government is printing and will continue to print more notes and will steal the value from you. Instead, real commodities like gold, silver and real estate provide a hedge. The objective therefore is to convert cash into commodities at regular intervals.