The British Intelligence Agency, MI5, once warned policymakers that the United Kingdom was “just four meals away from anarchy”. Made in the context of anticipating societal disorder and unrest in case of a Black Swan event (low probability, yet, high impact), this cautionary warning is indeed applicable to every country, worldwide. In essence, nations can collapse if the citizenry goes without food for more than two days. As we watch our neighbourhood where entire countries are either on the brink of collapse or heading towards one, I wonder if the Srilankan Crisis can happen in India and how prepared are we to stave off potential unrest and breakdown of the social contract.
The economic crisis in Srilanka has many causes. Right from the heavy indebtedness to China, to the fall in tourism revenues due to the pandemic, and the ill-advised move to shift to wholesale organic farming, without much Due Diligence, and above all, a plundering elite that left nothing untouched in their greed and avarice. Indeed, one can say that all these factors were building upon a Perfect Storm of crises, the pandemic being the last straw that catalyzed the storm. Perhaps, this is the Ugly side of the Coronavirus, not sparing lives, livelihoods, and now, entire nations.
This can happen elsewhere as well. For instance, the Ukrainian War and the unprecedented sanctions against Russia that ensued, have made a Russian Default very likely. Indeed, markets are estimating a nearly 90% probability that Russia would default on its Dollar Denominated loans in the next few months, with some forecasting this event as soon as this Month-end. While the Russians have lived through economic crises, and the breakup of the erstwhile Soviet Union, this anticipated default is historic as it would be the first since the Bolshevik revolution of 1918.
While Srilanka, Russia, Pakistan, and Nepal, are considered lightweight economies, that are anyway vulnerable, the biggest fear is about China, with its Zero Covid policy and the collapsing real estate sector, poses a bigger risk to the global economy. The brutal lockdowns add to the worries about Evergrande and other property developers, along with the critical supply chains. on which we all depend for almost everything and anything, now clogged and held up, threatening the nascent economic recovery. So, MI5’s warning cannot be dismissed, no matter how big or small a nation is.
The global economy is flying into turbulence and over the next few months, one can expect more dominoes to fall. There are signs of distress from Turkey and Lebanon as well while the anyway fragile Middle East is almost always “four meals away from anarchy”. With consensus among economists that a global recession is inevitable, chances are that even the West would not be spared. Already the United States reported a contraction of the GDP (Gross Domestic Product) for the last quarter. And, with the UK grappling with border controls and the backstop, Post Brexit, perhaps it can heed its own spy agency’s warning more seriously.
Added to this, the Fed is hiking rates, as are other Central Banks, and this is a sure recipe for markets to crash. Even the so-called “bright spots” that Raghuram Rajan mentioned with regards to the Unicorns, are in danger much like the Dotcom bubble which burst in the 2000s when the Fed last hiked the rates by this much. Moreover, India has always been a functioning anarchy, and recent events suggest social unrest is not even four meals away but, can be spontaneous as well. While we can boast about being the “world’s fastest” growing major economy, there are many puzzles and paradoxes at the heart of the Indian Economy, that can unravel quickly.
Indeed, there is a sense of the world spinning out of control, much like in 2008 before the onset of the Great Recession, and my guess is that the next 2-3 months are crucial, though the extreme uncertainty obviates any longer-term planning, leaving us wondering every night, If Tomorrow Comes!! I remember the same feeling at the height of the 2008 crisis when the converging food, commodity, oil and financial crises, led to a near breakdown of the Global Financial System!!
On top of all this is the news about the new variants of the virus, which raises the stakes again and diminishes any return to normal, and by this time, all of us are fatigued about each Normal being the New Normal, and so on. So, here we are, hoping that the rest of the year would be more placid, though, for all those who thought 2022 would be better than the preceding years, I offer this post, which I wrote as a New Year’s prediction.
Enjoy your weekend!!
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