During the Cold War a friend asked me if I knew the difference between communist and capitalist consumers,’ said Francis relating one of his oft told anecdotes, ‘I humoured him by saying no, he explained that capitalists had goods but no money to buy them, and communists had money but no goods to buy!’
Barton had heard it before, though he personally had never set a foot in a Communist country and barely remembered the Cold War. His closest experience with Communism had been in the State of Kerala, in India, where he had met Francis a year earlier. Democratic Kerala had been ruled by a Communist government on and off for half a century, but their version of Communism could not be compared to that of the Soviets.
‘Today all that is changed because of China, a Communist country — at least its government is, with its immense manufacturing capacity it has flooded our markets with low priced goods changing the whole balance of supply and demand.’
‘I can’t argue with that,’ said Barton encouragingly.
‘The only problem is because of our bankers’ sins, consumers have now become extremely prudent, even frugal. Demand has already fallen and prices are also falling, so we’ll probably end up with deflation.’
‘The question is how do you define deflation?’
‘It depends whether you’re looking for an economist’s textbook definition or not?’
‘The simple version,’ he replied with a pleading smile.
‘Alright. The conventional reply is deflation generally occurs with a drawn out fall in the price of goods and services, during which it impossible to earn a return on company stocks which results in the collapse of investment with little or no growth.’
‘But what does it mean for the ordinary man?’
‘Easy, they should hang on to their cash.’
‘You mean if they have any!’
‘Whatever, in any case as prices fall the purchasing power of those with cash increases — theoretically making everything more affordable for them, from the basic cost of living to asset prices.’
‘Basic cost of living — I’m not so sure about that.’
‘It’s like interest in reverse. If prices fall ten percent a year, those with cash earn ten percent in purchasing power.’
‘Very, very, few ordinary families are cash rich, the vast majority are cash strapped.’
‘I suppose so.’
‘So those without cash go hungry?’
‘In a nutshell yes — and those in the UK for example will find it even tougher because in addition they have a high level of personal debt.’
Ominous data in the US continued to sweep in like a winter blizzard from the Western Plains, depressing investors and workers alike. The Empire State Manufacturing Index dropped to it lowest ever recorded level. Christmas was already beginning to look like a disaster as consumer spending was grinding to a halt with disastrous implications for businesses across the country, many of which were already girding themselves for meltdown.
Given the speed and brutality of the crisis, the future of the American economy and that of the world at large was beginning to look grim. The Fed was running for the printing presses in a desperate effort to head off a deflationary cycle, which many predicted would make the Great Depression look like a stroll in the park. Devaluation and even the monetizing of gold was being echoed through the corridors of power; the government’s last card to combat the massive debt being accumulated by the US.
Whatever governments thought about gold Barton’s bet seemed to be working and though his gains were still modest they were infinitely better than the huge losses investors had experience on world stock markets. China was hoarding gold in what could have been a shift to the gold standard, slowly edging the price towards one thousand dollar an ounce as its reserves increased to over one thousand tonnes. Barton told his banker to buy gold.
In the West the bailout showed no immediate signs of miracles, however, it was possible that the worst was over with an uncountable number of billions of dollars thrown arbitrarily at banks, insurance firms and mortgage companies. Perhaps, Barton thought, it would be a good time to put some money into banking shares.
In spite of the dire stories going around business continued, even the Palm Jumeirah in Dubai was completed with the efforts of almost seven thousand workers employed by UK contractors to build the huge billion dollar hotel complex. Extravagantly inaugurated with a galaxy of international stars including Oprah Winfrey, Robert De Niro and Kylie Minogue. The opening finale was a breath-taking fireworks display that recalled George Bush’s bombardment of Baghdad and according to some wags had put the fear of God into the ayatollahs across the Gulf.
But even that success was marred when the festivities got off on a bad foot with a fire sweeping through the hotel’s gigantic lobby just a few days before the opening. Two thousand workers had to be rushed in to carry out repair and decoration work before the opening ceremony that was to be relayed across the planet. As the promoters dream looked like it would be transformed into a nightmare, the Dubai stock market dived, property prices collapsed and exodus of expatriate architects, engineers, surveyors and construction workers commenced.
The Dubai government and its agencies had run up debts of almost one hundred billion dollars; equivalent to more than one hundred and fifty percent of the emirate’s gross domestic product. Its leading property developers struggled to survive, forced into mergers to avoid the looming disaster, visible to all except those who believed in magic carpets and Aladdin.
December
Back in Town