New Delhi: Ruchir Sharma’s latest book What Went Wrong with Capitalism, is an insider’s critique on the excesses of modern-day capitalism. A Wall Street veteran and the chairman of Rockefeller International, Sharma believes that unbridled easy money policy of central banks has unleashed a tidal storm of liquidity, grossly distorting market prices and inflating the financial sector to mammoth proportions. In tandem, governments have developed a fanatical zeal to provide bailouts to private companies at the slightest hint of trouble, stifling innovation and competition. All these habits have distorted capitalism beyond recognition, fuelling an almost global rage against the system.
That said, romanticizing over the imagined benefits of socialism would be the wrong lesson to take away from this. Capitalism still represents the best hope for progress, Sharma says, but only if we allow it to function the way it was supposed to.
Because I think they are all caught in the moment. They think that their mandate is defined as controlling consumer price inflation. So, as long as that is under control, they can use the monetary spigot and do whatever it takes to levitate the economy. Their mandate is seen to be very narrowly focused on consumer price inflation, so they don’t take into account asset price inflation.
The other problem central bankers have had is that a lot of them like this role of being this omnipresent force, dictating what’s happening. And if I can say so, an element of hubris is also involved here, which is that they like to feel that they’re the ones who can stimulate stuff, and thus feel powerful that way.
I also think a lot of academic economists don’t quite realize the connection between easy money and inflating asset prices. They don’t see the connection, or they want to be oblivious to it, thinking that their mandate is controlling consumer price inflation.
The other thing which policymakers have always lived with is this 1929 experience, which is when the stock market crashed first, and that was seen to presage the Great Depression. So every time the market crashes, this fear arises that maybe another Great Depression is coming our way. That’s also another thing which prompts them to just flood the system with easy money.
Absolutely. If you remember a couple of weeks ago, there was a big stock market correction around the world, and it was incredible to see what the reaction was. Everybody was going on television saying ‘the Fed needs to cut interest rates’. Now the market has been going up for such a long period, it falls for just one day, and all of a sudden it’s like ‘monetary policy is too tight! We need to cut interest rates! Let’s rush out the cavalry!’. That just tells you about what the thought process has become.
And I think one of the unfortunate things which has developed is this asymmetry which has crept up in markets, which is that on the upside we have capitalism, but on the downside it’s socialism. The moment there’s too much of a downside, there’s rising clamour for a rescue.
There are two things. One is, if you actually get high consumer price inflation. So, for a couple of years, we saw this, right? When you got consumer price inflation in 2022, then you saw central banks switch, because I think there’s a general recognition that consumer price inflation, if it gets high, cannot be tolerated. However, as I’ve argued in the book, consumer price inflation in general has been restrained because of globalization and technology, so the prices of goods and services have been sort of restrained, but the central banks still see that as their main mandate.
So whenever you end up getting consumer price inflation, like we saw recently because the supply lines got disrupted, and for a while there was too much demand, then the central banks will shift their focus to just restraining that.
The second thing will be if, at some point in time, the bond market throws its hands up and says we can’t keep financing these huge deficits.
As I argue in the book, easy money is a suite of government habits, and it’s not just about central banks. The habits include the tendency to bail out private sector companies at the slightest hint of trouble, the zealousness to micromanage business cycles, etc.
There’s one paradox currently, which is that we are living through this incredible technological revolution, first with the internet and now with artificial intelligence (AI) and other technologies, and yet, if you look at productivity growth in general, it’s been relatively low. That has been the insidious consequence of easy money habits, which is something that is undermining productivity growth. When you have such an overprotective government which has kept alive so many zombie companies at one end of the spectrum, and also when policies help the entrenched, existing players, most of which are big business, all of that ends up undermining capitalism.
Yeah, it’s a bit of that. And the analogy I use in the book is of pain management in America, which is that for the slightest hint of trouble, you give people opiates, and so the whole system becomes addicted to opiates.
Yes, this is where I feel capitalism has gone wrong. One of the fundamental concepts of capitalism in the market is mean reversion, which is that eventually excess profits should get competed away and you should keep getting churn, which is that new winners emerge and the old players keep dying. But this whole concept has been undermined now because of this extensive government involvement, whether it’s too easy money, bailouts or regulations which benefit the big businesses enormously.
I think that’s what’s become a real problem today, that the concept of mean reversion has been distorted. So that’s one reason why, in the US, for example, value investing is dead. Even Warren Buffett I think has underperformed the index for 20 years or something. But even the stocks they buy today are much more of these growth-related stocks.
See, what is value investing? When something gets too cheap and mispriced, you buy it, expecting it to start to rise again. That’s again part of mean reversion. Instead, what we have are the same handful of companies in each sector, which keep on doing better and better. I think that is the problem today with capitalism, which is that it’s become very pro-incumbent and pro-Big Business, whereas capitalism at its core should be pro-competition and pro-churn.
What’s different is that this has lasted for much longer now. Also, the number of regulations we have today is far greater than anything we had in the past. The cost of compliance with regulations has gone up 10 times. So now, when you have such huge regulatory costs, then only the big businesses can manage that. In the US today, the confidence of small and mid-sized businesses is very low, but that of large firms is high. Did you know the US today institutes 3,000 new regulations a year, while the number of regulations they’ve withdrawn over the last 20 years is just 20 in total. This asymmetry in Europe is worse, by the way.
Yeah, that’s right. Someone gave me a nice phrase, that Europe is the Silicon Valley of regulations.
I think its potential is huge. This could be the one thing which lifts productivity as well. The issue I have currently is that all these companies are throwing so much money at it. If you read some of the statements coming from people like Mark Zuckerberg to Sundar Pichai, they’re all saying that currently we have to spend without thinking about the consequences.
So my reading is that this question will eventually come: who’s going to make money out of AI? How are you going to monetize this, and how long is it going to take? Because even with the internet tech revolution, it took many years for companies to surface and be able to monetize it. With AI too, my fear is that we will go through a similar phase. Also, if you get a downturn by any chance in the US, the first thing people will cut spending on will be AI and related areas. So I think this time, the tech sector and AI will be much more sensitive to the downturn.
Yeah, but as that old line goes, history doesn’t repeat itself, it rhymes. The difference with the dotcom bust is that this time the big spending is happening by companies making lots of profits. They’re spending like crazy, but they also have much more room to do so.
First, the allocation of capital will not be that productive, because so much capital has been allocated to one sector. Secondly, that also feeds inequality as allocating so much capital to the financial sector boosts asset prices and people who own assets tend to be the rich. The bottom 50-60% people in the US barely own any stocks, real estate or any such assets.
If you read the surveys today, two-thirds of Americans say their country is moving in the wrong direction. This is for the world’s leading economy, which at the surface, seems to be doing well. And most young Americans today say they would rather have socialism than capitalism.
Not at all. At heart, I’m a capitalist. I have worked on Wall Street. And yet, I have written this book, which is like an insider’s critique of capitalism.
The book starts off with my journey with socialism in India. I think we can’t go back to that, we have a memory of how that panned out. But as I say in the book, let’s allow capitalism to work, because what we have today is not capitalism. Some people say capitalism fuels greedy behaviour, too much materialism, etc., which are some side effects we can lament. But I’m saying capitalism is still the best hope for progress, but can we please practice capitalism the way it is supposed to be practiced?
There are only two bull markets in the world today — US and India. Capital has gotten overly concentrated in these two places. In the US, the distortion is incredible. The US economy today is about 26% of the global economy, but its stock market capitalization is more than 50% of the world market. And within that, the top 5 or 10 companies are dominating like never before.
Similarly, in emerging markets, the only bull market has been India. In fact, India’s bull market has been a true standout because it’s much broader than the US bull market, and it is being driven by domestic money.
I have great faith in the ‘India story’ broadly, but the fact that it is the only bull market among the emerging markets is also what strikes me as odd. So for the next three to five years, I would like to allocate capital to diversify outside these two places. There are other emerging markets like Indonesia, Philippines, Poland, Mexico, Vietnam, Greece etc.
I feel diversifying to some other countries, and diversifying away from the dollar is the way to go. Investment is about looking ahead, it’s not about celebrating the past.
A crash is too hard to predict, but I don’t see any triggers for a crash. I’m just advocating diversification as the way to go currently.
The economy has done decently, but not like, let’s say, China. In the book, I had said India’s growth rate will be 6-7%. At that time, to suggest that India would grow at less than 8% was almost considered a heresy.
But if you look at the growth rate from that time to now, it has been 6% on average, which has become the new equilibrium. It’s not as if India has broken out from an economic perspective. But the stock market has been a different story. There has been no stock market like India in the world. This has been the only true bull market in the world this decade.
A bit, but flows haven’t quite shown that, it’s more concept at this stage. Yes, it has benefitted somewhat, but not as much as you would have thought.
What are the main fault lines in the development path that India has chosen?
Firstly, we were spending too much on welfare compared to capital expenditure for creating infrastructure. A developing economy can’t do that. The current government has corrected some of that imbalance between the two. Secondly, if the growth model becomes too financial sector-oriented. There are some signs of that, but not too much as of yet.
But the single biggest faultline I feel is complacency, which is the feeling that we have achieved, we are now in cruise control, and there is nothing for us to do. We should remember we are still a developing country, and there’s a lot to be done.
The single most important thing at present is the dollar weakness. I think there are some signs of the dollar beginning to weaken globally, and if that happens, capital will begin to flow out of the US and there is plenty of opportunity across emerging markets, and India will be a beneficiary of this.
Second, I think the AI boom and the huge investments will come under more serious scrutiny.
And thirdly, attention will turn at some point in time to the US economy’s unsustainable path, given the amount of debt in the system.
