Once again raising the specter of a great Depression, the stock markets today are at fresh 12-year lows. Citigroup shares at less than a dollar and nationalization (by whatever term it will be called) imminent. To rephrase a tired joke, you could have made a million dollars in Citi stocks, provided you had 27 million dollars in April last year. If it is any comfort, the slide continues in other countries too, some of them faring far worse than the United States.
I was struck by the precipitous decline of the Indian Rupee against the Dollar as foreign investors have started pulling money out from India. I previously wrote about the speculation caused by the rising rupee. It looks like the party is over now, though it might take many people time to realize this. This is the first time many young Indian adults are seeing the effects of a bad economy, such as layoffs from previously stable technology companies.
One of the worst hit countries was Iceland which went bankrupt (emphasis mine):
In 2003, Iceland’s three biggest banks had assets of only a few billion dollars, about 100 percent of its gross domestic product. Over the next three and a half years they grew to over $140 billion and were so much greater than Iceland’s G.D.P. that it made no sense to calculate the percentage of it they accounted for. […]
From 2003 to 2007, while the U.S. stock market was doubling, the Icelandic stock market multiplied by nine times. Reykjavík real-estate prices tripled. By 2006 the average Icelandic family was three times as wealthy as it had been in 2003 […]
When their three brand-new global-size banks collapsed, last October, Iceland’s 300,000 citizens found that they bore some kind of responsibility for $100 billion of banking losses—which works out to roughly $330,000 for every Icelandic man, woman, and child. On top of that they had tens of billions of dollars in personal losses from their own bizarre private foreign-currency speculations, and even more from the 85 percent collapse in the Icelandic stock market. The exact dollar amount of Iceland’s financial hole was essentially unknowable, as it depended on the value of the generally stable Icelandic krona, which had also crashed and was removed from the market by the Icelandic government. […]
Now many Icelanders—especially young Icelanders—own $500,000 houses with $1.5 million mortgages, and $35,000 Range Rovers with $100,000 in loans against them.
As the article says, “Iceland instantly became the only nation on earth that Americans could point to and say, ‘Well, at least we didn’t do that.’” Writing about this may seem like schadenfreude, but the state of affairs today is truly tragic for people across the globe. Recent globalization had helped in pulling hundreds of millions of people out of poverty in China and India. This economic slowdown will set back poverty reduction by several years. And the economic crisis will throw millions out of their jobs and houses.
When and if the bottom of this crisis is reached, countries will have to focus on some basics. Most of the growth that we saw in the last decade was a result of bubbles in the financial and real estate sectors. Think about this: When the price of milk or oil increases, we call it inflation and treat it as something to be stopped. Yet when the prices of stocks and houses increased without any relationship to real incomes and underlying financials, it was labeled “growth” and encouraged by politicians, bankers and investors.
We have to get back to fundamentals where price is related to value and not financial gimmicks. Steady, dependable growth is preferable to sudden bursts of wealth followed by mass destruction. Because of the hype caused by rising house prices, millions of people have lost their life savings and are deep in debt from which they will take years to crawl out of. Let’s hope, as a society, we can collectively remember these bad times and prevent them in the future.