#45 QSQT of Finance, Culture vs. Planning
Armageddon AI image via Craiyon
QSQT* of Finance
Though this century has barely matured into adulthood, it has already seen three financial crises.
It was birthed in one, as the dot-com boom fizzled into a bust; the NASDAQ composite equity index, the poster-child of the first IT boom, flamed out from 5000 in early 2000 to 2500 by year-end, only to halve again by mid-2002.
In 2008, the Global Financial Crisis hollowed out the US financial system, and the Dow Jones Industrial Average (DJIA) almost halved, from just under 14000 in mid 2007 to 7250 by March 2009.
Then just over 2 years ago, the onset of the COVID pandemic shut down the world’s factories and marketplaces, and knocked between 30 and 40% off most global markets.
Each of these Qayamats, or catastrophes, could have led to financial Armageddon if central banks had not acted faster, pumping money into banks and markets, lowering yields, and playing their avowed role as ‘lenders of last resort’, when all trust had vanished from the normal lines of credit bankers and businesses use.
Since the world of central banking is dominated by the US Federal Reserve, the simple way to track this massive injection of liquidity is by following the growth in US money supply (M2). In Jan 1990, as the last decade of the 20th century began, M2 stood at 3.17 trillion dollars. Over the next ten years, responding to the growth of economic activity, it ticked up at a steady rate of 4% per year, hitting 4.66 tn. when this century began.
When the dot-com crash threatened to bring down the financial markets, the US central bank slashed interest rates, pushed money into the banking system, and ring-fenced the rest of the financial markets. As a result, M2 grew almost 7% in 2001, and 9.7% in 2002, at roughly twice the average of the normal rate.
Along came the Global Financial Crisis of 2007-08, sparked by the housing bust in the US (NL 10 ). The familiar toolkit was used - bond yields were pushed down from 5.5 to 2.2%, banks were bailed out, and money supply allowed to rise 10% in one year. By 2009, equity markets were roaring again.
Monetary economists warned that so much money would spur inflation, but year after year, they were proved wrong, as the cost of living rose only moderately. The only price inflation was in asset markets, and this suited most folks just fine.
When COVID paralysed economies around the world, central bankers knew exactly what supplies to bring into the emergency room. US banks were allowed to access funds at zero interest rates, and in the single year of 2020, US money supply soared by almost 4 trillion dollars. The pace of money creation dropped in 2021, but was still formidable, at above 2 trillion dollars. For some perspective on the scale of money-printing, consider that in 2020 and 2021 alone, the Fed created more US dollars than had existed at the beginning of this century.
Once again, asset markets were rescued from a short swoon. Once again, the monetary nay-sayers warned of inflation. Once again, only share prices and home prices surged.
Till late 2021, that is, when the realisation gradually dawned - that inflation was not dead. The US Federal Reserve took its time to react to a surge in the cost of living; but once it began, the Fed has been unrelenting in pushing up interest rates, with three consecutive hikes of 0.75 per cent each.
The impact on global financial markets has been savage - US equities have lost 22% since their peak in January this year, the UK bond markets came within hours of an implosion last week, and currencies are being beaten down as funds flow into the perceived safety of the dollar. We can’t know how long this disorderly behaviour will last, and which market will be the next to succumb.
What we do know is that the primary concern of the Fed is with its own home turf, the US economy, where it is mandated to control price levels. This September, US consumer prices recorded an 8% gain over last year, 4 times the Fed’s target rate of inflation. Till this comes under control, the Fed will do what it takes. The impact of interest rate hikes on the rest of the world will be collateral damage.
While the pace of US interest rate hikes may slacken off, the Fed will begin to work directly to reduce money supply, which levelled off at 21.7 tn dollars in January of this year. The plan - subject to change, of course - is to let bonds mature, roll down the Fed’s balance sheet, and shrink money supply. This will create a scenario with which the world of finance is not familiar.
This plan is called Quantitative Tightening, or QT - quite apt, given the title of this piece. When this kicks in, hang on to your seat belts.
*QSQT is the popular acronym for the 1988 Hindi film, Qayamat Se, Qayamat Tak, a romantic hit.
No financial institutions were damaged in the filming of QSQT.
Culture vs. Plans
“On the edge of Delhi, a dynamic cultural scene takes shape”, reported a New York Times article* last week. The writer, Finn-Olaf Jones enjoined readers to head south, to Hauz Khas village, Lado Sarai, and Mehrauli's ‘Style Mile'.
The Hauz Khas village was the first of South Delhi’s villages to be gentrified. Socialite Bina Ramani is credited with having been the first mover of HKV, as it is widely known; Suresh Kalmadi, Congress politician, had a restaurant perched at the top of narrow stairs, with a commanding view of the ‘Hauz’, or artificial lake; closer home, my son learned to drum at the Parikrama school of music, run by the late Sonam Sherpa, and named for the iconic rock band.
In the ‘90s, Delhi’s indie rock scene was spawned at the Friends of Music, a regular happening at the foot of the Qutb Minar, a stone’s throw from Style Mile. Two decades later, Blue Frog made a valiant effort to revive the live music scene here; it didn’t survive for long, but the narrowing stretch of road is home to a glittering collection of fashion studios, and expensive restaurants, including a personal favorite, Olive Garden.
Lado Sarai came up later, but in the last two months, I have viewed one excellent art exhibition there, and previewed ensembles which fashion designer Sonam Khetan will show in Paris. Similarly, at the northern end of my ‘colony’, Panchshila Park, lies the sprawling urban village of Shahpur Jat, which houses my carpet dealer, my shoe maker, the studio where I learned tai chi, and a vibrant communication design practice with which I briefly engaged. Independent publishers have offices at one end, and one lane, called Fashion Street, is given over to shop windows filled with sequined wedding costumes.
What all of these cultural hotspots have in common is that they lie outside the purview of Delhi’s building byelaws, which are stifling in their detail. The term lal dora, or red thread, originates in village land records maintained during the British era. When the Delhi Development Authority (DDA) was set up in 1957, it began to acquire agricultural land for urban development. In the negotiations with village communities, it was agreed that, while the writ of urban planning would rule over the newly developed areas, the traditional abadi, or habitation, of Delhi’s villages - the lal dora areas - would be exempt from these planning stipulations. In 1963, the Municipal Corporation of Delhi passed a notification to this effect.
My architect and contractor are (hopefully) just putting the finishing touches to an extensive renovation of my Panchshila Park home. Located in an ‘authorised’ colony, subject to every millimeter of building bye-laws, it took us 8 months to complete all the paper-work and obtain official sanctions. When others flout these laws, presumably in collusion with the authorities, it gets my goat; there is an aesthetic comfort to living in a planned colony, with wide service lanes, effective drainage, and construction set back from the lanes.
That's great for those who have gotten used to suburban-style oases in the heart of a great metropolis. But art, and design, and experimental cuisine need a great deal more flexibility to craft new spaces, grow, and morph, as they respond to their inner urges, and engagement with their consumers. If its this kind of cultural vibrancy you want, you’re better off being free of the dead hand of the state.
https://www.nytimes.com/2022/09/25/travel/delhi-neighborhoods-art-bars.html1