January 13, 2009

Panic deepens economic crisis

Smart positioning and a level head improve chances of survival.

Fear is like an epidemic of its own, and a damaging one at that.

When a person senses fear, for example by seeing it in one’s own eyes, he or she starts thinking. If they start seeing it in the eyes of those surrounding them, then panic sets in. And, as a rule, massive panic can be triggered even without a concrete and serious event. It is often enough for anticipation of trouble, and this alone, to spark it.

Is panic in the wake of the global financial crisis overtaking Ukraine?

According to the statistics, 10 percent of members in any given society are susceptible to panic. For them, the slightest hint of a threat is a sign to run away. It is these “susceptible” individuals who provoke others even if nothing significant occurs.

These are the unfortunate ones. Those who panic always tend to lose. The panic of the majority plays into the advantage of the minority, which remains cool, responds swiftly in unstable conditions and capitalizes. Those who panic in times of crisis, such as investors who sell at the lowest price, lose.

Economists will tell you that the market economy is cyclical by nature. Recessions can be seen as a positive in that they force those capable of surviving to become more efficient, enduring while wiping out the dead weight.

So what is happening in Ukraine, with the currency and why the panic?

A few weeks ago the International Monetary Fund published statistics on a previous global banking system crises that occurred from 1979 through 2007. As it turns out, there were about 124 crises of the kind worldwide during this 27-year period, and 43 of them were accompanied by serious devaluation of national currencies in certain countries. There were defaults or surging state debts accumulated in 100 of these cases.

Why? George Soros, the billionaire currency speculator-turned-philanthropist claims that the stock market world is like the world of medieval alchemy. He surely knows what he is talking about, having made a fortune on the ability to manage panic.

Our psyche is set up in the way that we do not learn from the mistakes of others. I still remember my friends buying dollars during the Russian default in 1998, when the American currency soared to about 28 rubles. They regretted it when the rate returned to 15 rubles per dollar. One of the hardest but vital skills is the ability of waiting for the right moment. Only few have it. Those who do not should avoid gambling.

So don’t buy the hype. The situation on the currency market of Ukraine is nothing but blatant speculation. On the world market, everyone is waiting for the United States dollar to sink. But here in Ukraine, it is growing due to the fact that bank dealers decided to make money by squeezing it out of the population ahead of 2009 when they have massive foreign debts to repay.

So-called anti-crisis measures from President Victor Yushchenko are not directed at helping industry or business, but in propping up the financial sector through these speculations. In addition to currency speculation, they are also squeezing money out of citizens by freezing deposits and unilaterally hiking up interest rates – all at the expense of Ukraine’s middle and lower classes.

While this dreadful policy is giving the banks some breathing room in the short term, it is dangerously putting the pinch on average citizens. Many are struggling to pay foreign currency denominated loans.

Since the news of the global financial crisis arrived in Ukraine, I have not heard any politician tell citizens the blatant truth: “The crisis is here, it will be really hard but it is necessary to live and work on.”

Instead, we hear schizoid neurasthenia coming from the mouths of politicians locked up in a relentless power rivalry. Some are preparing the public with depressive pictures of the notorious famine that hit Ukraine, or just smearing opponents. The fire is being further fueled by Ukraine’s mass media, which is free of censorship but exhibits poor ethical professionalism. Sensationalist reporting is predicting collapse.

There is a joke suggesting that pessimists are well-informed optimists. However, in the modern world, pessimists are just non-creative people. Look at Old Europe, which has sunk into consumerism. Take a look at their top managers from various industries and markets and you will understand that they lack ideas which will save them in this complicated situation.

Yet, don’t forget that the laws of thermodynamics governing conservation of energy have not been repealed. Disappearing in one place it will certainly appear in another. Developing countries, including Ukraine, have suffered a blow from the sudden burst of the consumption boom. But having just recently struggled they are more fit to adjust to difficult new realities. And they have a newly emerging middle class full of fresh, young, active, talented and highly-qualified minds.

These are idea generators capable of developing and implementing novel new ideas. Crisis or not, people will pull through. Even having lost their fortunes today, the majority will make it once again in a year, two or ten.

Some will be hit hard, miserable for a while, foremost those that got too used to profiting on speculation in thin air, such as realtors and spoiled employees seeking high bonuses and raises without going the extra mile. They are not accustomed to work, and believe that everybody owes them – parents, employers and the state.

Just like in the early 1990s, those who wanted to work passed the test and struck success. The weak and lazy were dismissed.

There is a saying in the brilliant book of Funk Style Business: “There is only one way out. It seems to be simple. It is necessary to do something new, something the world has not seen before. Invent something that will make you unique for a second and will give you an exclusive competitive advantage. Then you will be able to set up a new reality.”

Olga Pampukha is the financial director of Princip, a Kyiv-based law firm headed by her husband, Hennadiy Pampukha.