Let’s face it, this is human behaviour - we feel good when our conjecture or hypothesis proves right. And if you remember (if you are regular readers of my essay, are you?), in my last essay - I suggested that organic farming is not a sustainable solution for all the Agri stakeholders including the government. Last week, I learned - Sri Lanka’s decision to switch to 100% Organic Farming was one of the forces behind the current economic catastrophe. This is a sharp warning for the Indian states who are promoting organic farming without considering the consequences. Just wanted to brag about myself (LOL, Sorry)
This essay is not about Sri Lanka and Organic farming. The first part of the essay is a sneak peek of the extraordinary work done by India’s key market participants. And in the 2nd part of the essay explains The Great Depression in four tables and why Fed has learnt nothing from history.
All the signals are giving a clear indication that we are heading towards, probably, the worse economic downturn in human history. I did some digging and realised in most of the historical slowdowns - the madness of developed countries supported by the butterfly effects across the different parts of the world were the responsible causes. But this time, the shape looks different. We all know what is happening currently in Sri Lanka, Pakistan, China etc. There should be no effect of Sri Lanka and Pakistan's economic crisis on the rest of the world, but China’s Realstate bubble seems to be impacting the rest of the world's economy. There are already articles by Bloomberg, Reuters, New York Times etc. However, I applied Bubble Triangle Framework to China’s real estate situation - and it seems the situation is not very good. This means that in human history, for the first time, we might experience two different types of bubble formation and bursting might happen simultaneously among the world's top-2 economic countries.
With so much noise, India is standing super strong, performing better than its peers. Kudos to the government, RBI, and policymakers - their combined efforts have been inspiring. The first part of the essay is a sneak peek of extraordinarily work done by India’s key market participants. And in the 2nd part of the essay, I have drawn parallels and explained why the Federal Reserve Banks seem to be the worse decision-makers by decoding the Great Depression of 1929 in just four tables.
But before, a quick breakdown of the economic power shift among countries in 2036. The world economy would cross $100 trillion by the end of this year. And in less than a decade, the picture of world economic powers could be different. China will be the world's largest, and India could be the 3rd largest economic country with $55.1 trillion and $10.8 trillion respectively. This might seems a significant growth, but if we take this report as a reference, in 2036, India could be a country size what Chain was in 2016.
Here are some other interesting breakdowns:
Chain and India would achieve the world's 1st and 3rd economic positions by 2031.
In 2036, China’s GDP would be higher than the combined GDP of India and the USA.
The Chain economy would be five times of India
But the USA economy could be, only, 4 times of India in 2036 which is currently at seven times.
Overall, India will not be on the fence - it will be on its GROUND. :)
From the Future, we should come back to the present. :)
In all the madness across the world, I have never been getting more inspiration to work harder because what the government, RBI, and policymakers are doing is sort of Inspiration for irrational-optimistic like me. I think this has a root-personal connection with my upbringing.
I have spent 1/5th of my life in my village, Dasaut, Bihar (Considering a life span of 75 years). Dasaut is a village of 300 odd people. And I remember vividly, that we used to see Netas (Hindi meaning of Politicians) from the lens of greedy, selfish, dishonest, corrupt etc. If someone calls you Neta, this means you have no respect. And then Bihar was/is a hub of organized corruption executed by Netas - I am sure someday it shall change. You see, my brain has been taking negative inputs for almost 15 to 17 years. And therefore, it was natural for me to see Netas from a different lens.
But people, as I have started understanding the world, especially India - the work done by the government, RBI, and Policymakers has been inspiring. When I see RBI figuring out ways to reduce the dollar domination for the global trade and taking initiatives. When I see Scientists like Ramesh Raliya inventing the world’s first Nano Urea (Liquid) and giving it freely to the government (IFFCO). When I see IFFCO acting responsibly and in less than a year - creating plans to achieve zero fertilizer dependency. By testing the Nano Urea on 90 different crops, across 11,000 different locations, getting approval nationally and internationally, and filling national and international patents in less than 15 months. A few days back, the government led the stone of the first production unit in Kalol. IFFCO might have a global patent soon, this means India might be the world's biggest Nitrogenous fertilizers exporter.
The solution is noting sort of genius - from production, transportation, and application. [While I was writing this, I was moved and had goosebumps - I think this is natural]. In my last essay, I explained the importance of Nitrogen in modern farming. Most of the available Nitrogenous Fertilizer has a Max Nitrogen capacity of 50%. One-hectare wheat cultivation needs 150KG of Nitrogen - farmers must buy 300KG of Nitrogenous fertilizer. The final cost combines - Production, Storage, Transportation etc. But the same outcome can be achieved with 1250 ML of nano Urea (~1,5KG)- Can you imagine the net cost reduction?
Even though I understand the cons of Nationalism - but when I learnt about this, I couldn’t stop myself from clapping, saluting, and finding this as a great inspiration to work extremely hard. I am not a fan of motivation, I don’t think I need any sort of motivation to do what I want to do, but inspiration has been helpful.
Today, when I look around, I can confirm - we are, relatively, doing better than the rest of the nations. Of course, Inflation is the de facto of the current global environment - But it seems, we are in good hands, people. Damn it, I think this essay is becoming super serious - let’s make it lighter. If my 15 years old version would like to appreciate this extraordinary work, he would have used Grand Salute :). Here is a Grand salute to all those who are working hard and inspiring all of us - in this case, Scientists like Ramesh Raliya, the Government, RBI, Policymakers etc.
Now, let’s understand one of the history’s chapters that might signal Federal Reserve Banks as the worse decision-makers on the planet: The 1929 Great Depression, in just four tables.
But before History, a quick recap of the current scenario: We all know the Federal Reserve Banks printed $3 trillion in 3 months. And again $2 trillion under the Biden Presidency. This was in towards reviving the economic downturn caused by COVID-19 - ignoring all the fundamentals of a free market economy. And every single time the world's largest economic nation has tried this historically failed tactic to bring prosperity - its consequences have impacted a large population on this planet. At this point, I am sure - the world should find a way to reduce dollars’ domination of the global market. (These are not my words, I have heard the term dying dollar from many American economists in the past few weeks) There is no way the Federal Bank can keep experimenting with a historically failed experiment - I find this ridiculous. We have never called Thomas Edison a genius if he had experimented the same, the first time, failed experiment 1000 times, could we?
Let’s say, the Federal Bank ignored the example of Venezuela considering that it is a small economic nation. But there is no way they could have ignored its own 1929 depression - that was also because of printing excess money. When I read this and understood this, I couldn’t believe - the foolishness of the Federal Reserve Banks. The problem of inflation is that - it is difficult to spot at the beginning because the excess money keeps offsetting the surge in prices.
But what leads to the aftermath, of carelessness, was devastating - financial crisis leads to recession and that leads to millions of people on the planet in depression. In most cases, it is sparked by the poor judgement of Federal Reserve Banks.
Here is the first quote by Economist Professor Lester Chandler after the 1929 depression: “There can be no doubt that the international situation was the major reason for 1927 easy money policy, that Strong (The head of Federal Reserve Bank) was motivated by an altruistic concern for European countries, especially Britain, and that at least the timing of the policy was related to the conferences with foreign central bankers in early July ”
Before going deeper, we need to know the world economy in 1929 and the impact of the great depression. Using the Compound interest formula, we can find the world economy in 1929. In 1960, the world economy was $1.39 trillion - but we can do our math and find out the world economy in 1929. The average World economic growth for the past 60 years has been - 4%. We are finding the World economy of 1929 - 31 years bank. And we have the compound growth outcome - $1.39 trillion.
Apply the Compound interest formula
A = $1.39 trillion, P = we need to find out, r = 4%, n = 31, t = 1
This brings the World economy, in 1929, to $37.5 billion, and the world population was 2 billion. On that account I would say - relatively, the impact might have been limited but still significant. For a broader understanding - a list.
The impact of the great depression on the world:
It lasted for 10 years (1929 to 1939)
The Great Depression was the longest, deepest, and most widespread depression of the 20th century
Between 1929 and 1932, worldwide gross domestic product (GDP) fell by an estimated 15%
Devastating effects were seen in both rich and poor countries with falling personal income, tax revenues, profits and prices. International trade fell by more than 50%, unemployment in the U.S. rose to 23% and in some countries rose as high as 33%
Farming communities and rural areas suffered as crop prices fell by about 60%.
But today, when the world economy is ~$100 trillion, and there are 8 billion people on the earth. The Federal Reserve Banks acting as a cause and catalyst for the global recession is unacceptable. We, as a society, have made this incredible progress because we TRUST each other without shouting, trust me, trust me. And when a market participant breaks that trust, shouldn't we punish them, this is debatable?
But first, let’s have a deeper look at the 1929 great depression: We will understand this just by looking at four tables. I have deliberately planned to keep it brief.
Federal Reserve Discount Rate: The interest rate at which a bank can cash out securities. We call this Credit expansion.
Call Rate: The call rate is the interest rate paid for the money borrowed to buy or hold stock exchange securities
New York Prime Commercial Interest Rate: The interest rate at which a business can borrow money from banks in the name of business activities.
I am assuming you understand the working system of Central Bank - Federal Reserve Banks for USA and RBI for India - National Bank, the decision to print money etc. If you don’t - you can refer to Wikipedia articles on these topics, it should be enough.
The growth in the economy follows only one framework - the net +ve framework. It says the economic growth of a nation/organization/startup is nothing but the reduction in resources and growth in production. Now there are methods to reduce resources and increase production. Almost all the physical and Digital (Technological and Non-technological) progress and developments are with a mindset to reduce resources or increase production. But the rate of these developments solely depends on the circulation of those net output.
Growth in the economy = G
Reduction in resources = -R (I have used -ve to keep a check that this should be going down)
Growth in Production = P
G = (-R) + P ………………. (1)
G would increase in any case either an overall value of (-R) or P or both. At the beginning of humanity, there was less focus on (-R), and it was all about P - because resources were available in abundance. And we assumed the value came from land - that was true to some extent. But as the natural resources started shortening and our cognitive understanding surpass a threshold it was inevitable to reward “Reduction in Resources” as well. And again, we rephrased and said Value does not only comes from land, it also comes from Labour.
And therefore, if you scroll through the economic growth chart - at the beginning it was slow. As the natural resources started decreasing, the only way to fast track and make net growth in the economy (G) was to produce (P) more through fewer resources (-R). And subsequently, we reached a time where the net economic growth was all about reducing resources, except for a few industries.
Let’s take an example: One of the Space companies - Pixxel: Building a health monitor for the Planet. Pixxel’s space Settelite captures hyperspectral imagery of the earth's surface efficiently. This data is allowing the company to improve the agricultural output - it is amazing the level of detailing they have about the entire agricultural activities.
Since Pixxel was the first company to identify this space. It was all about production. But suppose there is a new company that would like to offer the same service, it would not be any more about production. The investment would only make sense if that new company is doing the same/more production at lower resources (In this case, the cost of building, sending, collecting, and making it actionable should be lower). In this example, if there are investments made further just to have more companies who can capture hyperspectral imagery without considering (-R) and P - it would create a net -ve growth.
This is a super simplified example, there are multiple edge cases and variables. Let's consider the Pixxel example only. The target market of Pixxel is massive, and one company alone can’t serve the entire market, therefore investment in multiple companies to satisfy the need make sense - and it would create net +ve growth. But there would be a tipping point where the next investment will make sense, only, if it is making the same or more production at lower resources. In the letter scenario as well, the investment would start creating net -ve once we achieve the tipping point. At that point a new company might find better technology - that’s how this whole system work.
This entire scenario can be represented in equation (2).
The reduction in resources (-R) was only possible by bringing new technology (T) through innovations and developing physical infrastructures (PI).
(-R) = T + PI ………………(2)
But T and PI both were only possible by investing money in advance and expecting to achieve breakeven and surplus in a time period. And initially, investing money did bring economic growth, created prosperity, and more jobs. But then to bring accelerated growth, the federal reserve banks started printing excess money and started distributing it at a Discount Rate below the Call Rate and New York Prime Commercial Interest Rate. This allowed National Banks to land money to brokers and business operators and still make a net profit without worrying about net -ve growth.
Let’s take an example: We are in 1928, I have $2 million, and I wanted my money to create money. My colleague suggested that the stock market has recorded constant growth in the past few years, and I should invest my money in the stock market. They enlightened me that I only have to contribute 20% of the investment amount rest of 80% can be landed by the Bank, at an 8% interest rate. I decided I shall invest $1 million - $200K personal money and $800K borrowed from Bank at 8%. I did my math and speculated in the next five years my $1 million investment will create a surplus. I locked my decided stock and purchased the securities. After landing money to me, the Bank went back to the Federal Reserve Banks and converted those securities at a 5% discount rate - making a net profit of 3%. You can visualise a similar example for business cases. Millions of spectators like me started following the same path speculating future profits even after the tipping point without knowing it was creating net -ve. I was rational, and only invested 10% of my wealth. But millions of speculators invested their entire savings and borrowed easy money from the bank, hoping to make larger profits. The outcome of the stock market is the function of buying and selling leads to skyrocketing stock market price/value.
We should come back to the present.
Even though easy money was creating net -ve (inflation) it was not visible for a very long time - because there was net +ve production (P). However, the prices were not lowering because the net +ve production was not at -R but rather +R. Fundamentally, the price should have been reduced.
But there were some warnings by the economist about the Broker's debt, the Federal Reserve Banks offering money at a discount rate below the Call Rate etc. but Cognitive Dissonance clouded the Fed and White House judgements.
It is time for Table 2:
This is also a great example of how World leaders are not being honest with a larger public - or their thoughts are clouded by cognitive dissonance.
Another two quotes by the president of the USA a few months before the depression - one was a public statement, and another was private to the economist who warned the Federal Reserve Bank about the lower discount rate.
On January 4, 1928, an announcement was made to the public that bank loans on collateral to stock exchange brokers and dealers had increased by $341 million and currently stand at $4.4 billion - this leads to a sharp drop in the stock market.
As soon as news broke to the public on 6th January, the White House released a statement that was reported in the New York Times: “Although loans to borrowers and dealers…reached unprecedented heights…President Coolidge does not see any reason for unfavourable comments…The President, it was said at the White House Today, believes that increase represents a natural extension of businesses in the securities market and see nothing unfavourable in it”
But when Economist Professor H. Parker Willis - who warned Fed about the lower discount rate - met with the President in private, President Coolidge said: “If I were to give my own personal opinion to it, I should say that any loan made for gambling in stocks was an excessive loan.”
H. Parker Wills replied: “I wish very much, Mr President, you had been willing to say that instead of public statement you did”
Why do you say that? “Mr Coolidge queried. "Simply because I think it would have had a tremendous effect in repressing an unwholesome speculation, with which, I now see, you have no sympathy”.
Mr Coolidge thought this over for a moment and then he said: "Well, I regard myself as the representative of the government and not as an individual. When technical matters come up I feel called upon to refer them to the proper department of the government which has some information about them and then unless there is some good reason, I use this information as a basis for whatever I have to say, but that does not prevent me from thinking what I please as an individual.”
This got me thinking, isn’t it the job of a leader to take the final call based on intuition and data. If I am the CEO of a company, my decisions or statement should be based on personal intuition and data - rather, than be a puppet of some department. I can argue on this confidently because I hear individual departments/folks' suggestions, and I let them go because I know from where it is coming. Anyway, we should move further.
You can see the red boxes in table 3 - where debt to stock brokers went almost double after the White House statement on Jan 6 1928. Our almost zero understanding of TIME limits us to check the shape of the world if the White House have not released that statement on 6th Jan 1928. But, we all can certainly learn - there is no way we can prevent the consequences of our actions against fundamentals.
It is time for Table 3:
A single scan of table 3, and it is clear - there was net +ve production, but prices were almost the same. The prices of some items were even higher - a signal of inflation. But in a free market (natural extension), net +ve production reduces prices - fundamentally.
As we have already learnt, there is no way we can eliminate the consequences of market activities against the fundamentals. The bubble finally burst in September 1929. The impact of the Federal Reserve Banks' madness bring history's biggest economic slowdown - we called Great Depression.
Let’s have a look at Table 4 (The USA after the Great Depression):
In 3 years, The Federal Reserve Banks bring down the Quantity of Money to $30 billion. And Discount rate (2.5%) was higher than the Call rate (1%) and New York Prime Commercial Interest Rate (1.5%). And things started coming back to Normal - But I don’t think there would be any.
In the past few years, the Federal Reserve Banks repeated the same failed experiment, and almost every nation on the earth is experiencing the heat of that. At this point, I can safely say: The Federal Reserve Bank is the dumbest decision-maker on this earth.
This is a wrap of this long essay. If you find my essay informative, please share! And let’s inspire each other to work harder - we have a lot of progress to make! <3
Book reference: Understanding Dollar Crisis