First year anniversary of Economic Recession:

Predictions are a dangerous thing – especially those that pertain to the future. It is with full consciousness of the unfaithful path a forecaster must walk, that will embark upon the dangerous but exciting journey of predicting the economic environment of 2010 and ahead. The recession has probably ended according to leading economists who deal only in probability study and are therefore, seldom accountable for what they said just a minute ago. But that doesn't mean it's time to break out the champagne. The return of up-trending charts may sound like good news for the economy, but it's going to be at least a couple of years before growth picks up in earnest. Figures mask chiseling activity and cannot be relied upon. There is only claim which marginally ratifies the End of Recession and that is, world economy has stopped shrinking further. But it would be the greatest lie of the current time to say that Recession is over. Improvement seen in the backdrop of new surge in unemployment, fall in industrial productions, slashed consumer spending, radical government countermeasures, historical debt burden and fiscal deficits, is a mirage on the horizon.

Whatever little economic growth noticed in recent months is due to temporary factors. The first is the effect of the inventory cycle as companies restart production lines following months of stock liquidation. The second is the fiscal stimulus, which is contributing the majority of the perceived growth. Taken together, these factors represent meager boost that will most likely diminish or disappear in due course of time in the face of continued high unemployment, budget-conscious consumers, and overcapacity in the manufacturing sector and housing market. Sharp people approve Fear of Deflation rather Inflation in the coming period. If there's more housing vacant, rents are likely to come down; if there are more unemployed workers, wages are less likely to go up; if there is more excess capacity in factories, companies are going to have a harder time raising prices .Unfortunately, there's not much that can be done about most of this overcapacity. Factories can limit production, yes, but vacant homes are already built and even people who retired early are being forced back into the workforce by market losses. ILO report said that 27 million people lost their jobs in 2009. The ILO said that there were about 212 million people out of work by the end of last year. But it expects unemployment in 2010 to stay at about the same levels, rising slightly to 213 million.

Post-Recession Fears Facing the World Economy

Price Inflation :

With unemployment continuing its remorseless rise it hardly seems credible to start fearing inflation, as discussed hereinbefore. Yet, there are some reasons to believe that the threat of inflation is just around the corner pointing out an explosion of the monetary base. The monetary base is a narrow definition of the money supply. It includes notes and coins in circulation and commercial bank reserves at the Central Bank. The monetary base is sometimes called high-powered money because a change in the monetary base can cause a large change in the money supply due to the money multiplier effect. In normal circumstances a rapid increase in the monetary base such would be inflationary. However, these are not normal circumstances. If we talk of US, the Federal Reserve is paying interest on these reserves. This encourages commercial banks to hold onto these reserves and not lend them out. The economic climate is discouraging lending. Another fear for inflation is the rise in government borrowing 'financed' by quantitative easing. Money supply increased by printing and offloading more money into economy with production remaining same, price of goods can increase to alarming levels. At the moment, there is a lot of spare capacity in the economy. Fears of Inflation, though not imminent could be a major problem in the future.

Protectionism:

Though big leaders are talking taller than the truth from Davos and other summits, they cannot help remedying their ass -burn after a limit. Protectionism is a government policy aimed at shielding a fragile economy from cheaper or better imports through imposition of high duty rates (tariff barriers), quotas, and/or inordinately stringent or time consuming inspection or quality regulations (non-tariff barriers). All countries practice protectionism in one form or another but, generally, without going to any extreme. This would jeopardize all objectives of globalization which has made deep inroads so far in world economy. Here, it would be sufficient to put forward one single argument that establishes disadvantage of Protectionism verses Free Economy efficiency. Ricardo's law of comparative advantage and Adam Smith's division of labor examples make it obvious that it is more economical to specialize in the things you do best and trade for everything else than to attempt to provide everything all by yourself. Wealth and the standard of living are enhanced by the division of labor, not by trying to do everything by you. Trade is essential to economic growth and restricting trade inhibits growth, which leads to a lower standard of living. Masses are benefited by Free Trade. Protectionist policies hit the developing economies hard. Cost of production increases sharply if productions from low-waged economies stop coming. This subject may be discussed at length at some other point of time. Here, we would take one illustration to understand the implications of the subject. China has a policy of artificially keeping the Yuan undervalued. It does this through exchange controls and purchasing large sums of dollar assets. This weak Chinese Yuan is good for Chinese exporters, but, it creates disequilibrium in the world economy. It leads to a large trade surplus for China and a deficit for the other nations it deals with, mainly U.S. The weak Yuan harms global demand, especially in the US. If the Yuan is appreciated to its natural level, Chinese consumers could buy more imports and US companies would have greater competitiveness in selling to China. This undervalued Yuan is a form of 'beggar thy neighbor' protectionism. It leads to retaliation in the form of protectionism against Chinese imports.

Weakness of Growth

Past growth was based on rising asset prices (especially housing) and a credit bubble. Neither of these is likely to return. Consumers are much more reluctant to spend, we are entering a new era of frugality with higher saving ratios. This has definite benefits but makes a recovery to normal growth more difficult.

False Dawns.

The global economy has suffered its worst years since the great depression of the 1930s. A small improvement in growth could cause a premature celebration of recovery - leading to the removal of expansionary fiscal and monetary policy which could cause a Double Dip Recession.

Budget Deficits

Steep falls in economic output has compounded structural deficits leaving many countries facing record peace-time debt levels. Already some countries like Greece have already had rating downgrades. Others like the UK and Ireland have been threatened with rating downgrades. The need to offer concrete plans to reduce borrowing makes it a difficult balancing act for maintaining economic recovery.

Financial Weakness:

Many banks and financial institutions are still nursing large losses from the credit crunch. It will take time for banks to improve their balance sheets. The prospect of further falls in house prices could still undermine banks fragile bank balance sheets. Forfeiture of Assets and Recovery of Debts are two different things.

Commodity Inflation:

Whilst the fundamental problem is still spare capacity and unemployment, evidence suggest commodity prices are already rising due to strong Chinese and Indian demand. Rising oil prices could cause a return of cost push inflation as seen at the start of 2008. This could complicate Monetary policy which is trying to boost growth.

Still a man hears what he wants to hear and disregards the rest. Leaders, Politicians, economists, analysts have a religious liability to nourish this miniscule desire of people.

Stagflation …..Crossword puzzle for intellectuals only!

Stagflation is an economic trend in which inflation and unemployment rise while general growth of the economy is slow.Term ‘Stagflation’ is developed by combining words ‘stagnation’ (slow economic growth for a longer period) and Inflation to denote the situation in which economic growth stagnate while inflation contradictorily increases. Many governments try to avoid stagflation, by promoting even and healthy growth and attempting to prevent inflation, since it triggers economic recession. Why stagflation occurs? There are two different situations in which it occurs. Firstly, stagflation can result when an economy is slowed by an unfavorable supply shock, such as an increase in the price of oil in the oil importing country, which tends to raise prices at the same time that it slows the economy by making production less profitable. Secondly, it emerges from inappropriate economic policy. For example, central bank can cause inflation by allowing excessive money supply, and the government can cause stagnation by exerting control measures on markets of goods and labor, together, these factors can cause stagflation. It can be difficult to correct stagflation, because focusing on actions of fighting inflation worsen economic stagnation and vice versa, a real typical dilemma for policymakers. It represents a unique and serious economic issue.

Stagflation occurred in several countries in the 1970s, due to oil crisis। High oil prices contributed to general inflation while employment and the domestic economy remained sluggish. Central banks of some nations were ultimately forced to intervene and freeze the money supply and thus trigger a recession, but ultimately the economies stabilized, with the unemployment rate naturally self-correcting while inflation went down. Consumers may suffer greatly during stagflation, as they find goods and services too expensive to afford, while they cannot obtain jobs to pay for basic needs. Since the government may restrict the availability of loans in an attempt to combat stagflation, consumers may have to drastically cut their budgets to survive.

Here, it is important to understand ‘stagnation’। It is basically a structural shortage of money with those who generate the type of demand that is the major drivers of economies - lower and middle class consumers, and governments. Structural gap arises between productive capacity and purchasing power of these classes derived from actual income and not borrowing. On the one hand, due to technological development, production capacity keeps rising. On the other, lower and middle income groups see stagnation in real incomes, due to a downward pressure on wages caused by increasing national and international competition and the increased mobility of business. To a certain extent, the downward pressure on wages can be compensated by working more hours. Heavy bank loans and earnings in stock markets also allow demand to keep up with production capacity. However, there are limits to the number of hours people can work, the amount of money they can borrow, and the extent to which the stock market can rise. As these limits are being reached, the structural imbalance between production capacity and demand becomes clear. With demand remaining stagnant or decreasing, business is pushed to operate more efficiently by raising productivity and laying off employees. Thus, the gap between productive capacity and purchasing power increases further. Likewise, demand from governments stagnates because, in the drive to lower taxes, government income stagnates or decreases. The situation worsens as the economy slows. Tax income is reduced and social security payments increase, leaving governments with less money to spend on goods and services. That contributes to the further growth of the gap between productive capacity and purchasing power.

All these so called solutions hardly work as they do not address the fundamental problem in the global economy: the lack of purchasing power. The credit of economic growth during last two decades is generally attributed to economic globalization, increasing international trade. It is believed that freeing trade and capital flows, increases competition and allows capital to flow there where it can be used most productively. That increases productivity and efficiency, leading to better quality products and services for lower prices. It also allows new investments and consumption, which further fuels the economy. But this is partly true. Consumers do benefit from competition between producers leading to greater choice, lower prices and better quality. However, no account is taken of the fact that before consumers can buy products they have to earn the money to do so. And that’s where the problem lies. Plea that globalization is a driving force of world economy does not hold anymore with the onset of current recession. In spite of increasing liberalization and growing trade, the economy has slumped. And as most economists will confirm: the main problem is sluggish demand.

Question now arises as to how demand can be increased. Following are the options:

1. Reducing interest rates,
2. Free trade regime
3. and reducing taxes.

However, none have been independently proved effective so far because as said earlier, they do not address the fundamental problem of Lack of Demand from lower and middle income class of people who majorly drive economic growth. Free Trade is good for consumers’ interests, but not for raising demand. Tax Cuts which most benefit upper class or higher middles class does not increase spending and therefore overall demand. Yes, to some extent, tax cuts benefiting this class is supposed to increase investment that creates jobs, earnings and therefore, demand. But, what happens in practice is that the money flowing to rich individuals and corporations is used not so much for productive investment as for speculation; look at the rise in stock markets and the mega-mergers and take-over of the last two decades. Money is sucked out of the "real", productive economy and drawn into a virtual economy that is based on speculation. It is because Profits to be made in that virtual economy are often much higher, or perceived to be much higher, than those of the "real" economy. Even speculation is not a problem as long as stock market is rising because it increases wealth and purchasing or investing power of rich people. However, these effects are temporary: unavoidably each speculative bubble will, at some point, burst. The result of such a collapse is that enormous amounts of capital are destroyed: as stock prices tumble, the corresponding wealth simply vanishes into thin air.

On the other hand, in a stagnant economy the rich are likely to put their additional wealth in financial safe heavens such as gold or real estate. On the other hand Tax cuts are likely to lead a decrease in government consumption and investment, which reduces demand. The problem is, as it is, difficult and seems to have become more obscure in growing economies. Lower and middle class consumers have masked their void of purchasing power by heavy borrowings, but spending more than you earn does not always go well. Even the upper class has multiplied its asset value, but mostly by means of speculation which is bubble that can burst anytime. Free Trade has, inter alia its benefits, the risks of unreasonable concentration of wealth in the hands of few where it is least needed and downward pressure on wages due to international competition. In short, situation is not anyway inspiring one for sustainable development.

It is largely opportune to keep money in the real economy, where it can generate demand among lower and middle income groups and governments. Major public investment is needed in such fields as the reduction of energy use and pollution, protection of natural environments, and sustainable land and water management, public education, health care, safety and infra-structure. Ideally, Government should raise funds for these expenses by increasing taxes. But, tax increase may weaken the industry’s competitive strength in global trade. Besides, politicians don’t like to raise taxes because often even a minor hike is political suicide. Be it a recession or any other public detriment, everybody now realizes that the lack of regulation is the main cause of all the bad effects arising from different theories or remedy options. Nobody would deny that the politicians are paid to deregulate. They are accepting enormous campaign contributions from corporations, banks, hedge funds and financial institutions. Why it is often criticized that bailouts are declared to support influential class which is actually responsible for recession? It is so because, politicians may bargain highest package in return at future point of time. Even within politics, republicans would never want that Obama succeeds in his regime to combat recession. The Great Depression 1929 is a recorded history. So, this is the name of the Game. The politicians, self-centered idiots, know it well to protect their interest, but they truly do not know that meltdown is the cause of their monstrous deeds. In addition to this, mainstream media try to horrify the situation announcing that bailout of $700 billion is not enough? Have they ever warned governments or even people about the possibility of stock market decline, inflation or credit crisis?

To be true and honest, Bailout is nothing but an attempt of flogging a dead horse and that too is mostly driven by political motives. Using long, drawn-out processes to put money into circulation to meet an emergency is like mailing a letter to the fire department to tell them that your house is on fire.

Here is one comic example about it……………………………।

Friends were chatting leisurely at coffee counter in New York.
“The federal government is sending each of us a $600 rebate.
If we spend that money at Wal-Mart, the money will go to China.
If we spend it on gasoline it will go to the Arabs,
If we purchase a computer it will go to India,
If we purchase fruit and vegetables it will go to Mexico, Honduras, and Guatemala,
If we purchase a good car it will go to Japan,
If we purchase useless crap it will go to Taiwan…

…..………………. This is the ground reality of US economy…The only way to keep that money at home is to buy prostitutes, beer and cigarettes, since these are the only products still produced in the US.”

All and all, even if the situation improves and demand picks up somehow, there are more problems ahead. Enormous debts of the government run up in attempts to boost the economy may evolve in a major economic and financial crisis. Then there is the indebtedness of the United States that like Japan can lead to a major financial and economic crisis. For several decades, an important part of the growth in the US has been financed by foreigners: through direct investment in the United States, buying U.S. securities, and purchasing dollars. The corresponding inflow of money has allowed Americans – consumers, companies, government - to spend more than they earn. Every month imports exceed exports by tens of billions of dollars, and each year itself seems to bring new highs in the gap between the two. Today, USA is the biggest debtor of the world; some economists say its’ bankrupt. If for some reason dollar sinks in value and inflow of money stops coming to US, it would be a grinding halt for world economy . Ironically, US government default is no more unthinkable in the present situation.

Third, in the longer run, graying populations in Europe, Japan and US will demand such increases in pension payments which public and to a lesser extent, private pension funds will be unable to pay out.. The outlook is especially worrisome for countries where pensions are paid from current accounts rather than savings. For some countries, it has been estimated that by 2020, three working people will have to "maintain" one retiree – as against today’s five or six. To fulfill its obligations towards pensioners, governments will have to reduce pensions, cut public investment and borrow heavily. All these measures will have a depressing effect on demand and thus, overall economy. So what must be done to reboot the economies of the rich nations, and avoid the economic crises that may be in store in the coming twenty years? Answer lies in generating extra demand for goods and services through a large-scale public investment program aimed at converting to a socially equitable and environmentally sustainable society. That can be done by accumulating money through cost-cuttings, progressive taxation, IMF etc. Apart from these, there are many imminent problems facing world economy. Premature celebration of economic recovery followed by meager improvement would lead to utter disappointment.

Where did you reach at the end of day? You returned to a place from where you had started traversing the way in the morning. Sheer Nullity!