Gordon Brown, Prime Minister of UK, while addressing the US Congress said: "America and a few countries cannot be expected to bear the burden of the fiscal and interest rate stimulus alone. We must share it globally."
The open question is- should we? The current fiscal mess is a creation of American investment banks. They extended credit recklessly, by throwing all caution into the wind. Even the American Fed didn't bother to check the ever inflating real-estate balloon. And when it did try to check, the balloon had grown to big in size and the Fed's check caused it to implode. Along with it, the real-estate market has taken down big financial companies and all those people who were lured into buying those fancy financial instruments. The real-estate bubble has sucked out more than a trillion dollars directly from the system. Indirectly, it has sucked more than that, if you consider the financial companies' business plans, based on projected incoming cash flows. And now the situation is that capital supply is scarce but demand is high. So, banks have started charging a premium for money supplied, that to in insufficient amounts.
This is a catch-22 situation. If the world doesn't get its act together, there is a danger of the economy sliding into a long time recession. But if they get together, it is like helping America get back on its feet using global money. Everybody is looking towards the western world to stimulate the entire world economy. The world was progressing on the model where the west consumed while the east produced. A tectonic shift is being predicted, where the west would see itself significantly diminished, while the BRIC nations would have come to the forefront. Inspite of the slow-down, China has returned a 7% + growth in its GDP, while India has a 5%+ growth. If India and China focus on developing their infrastructure to the levels of first world countries, they would end up stimulating a huge section of both, the local and global economy. Imagine Brazil and Russia chipping in with similar efforts. China and India have lots of dollars stashed in their foreign exchange reserves. There is a possibility of using these at least in part to build up the infrastructure. That will stimulate local economies to a certain extent. Keynes was right in a certain extent. The government cannot detach itself from the economy, the way Reagan and Thacther did with their respective economies. Everything in life needs regulation. In the hindsight, the Reserve Bank of India (RBI) did a commendable job by increasing interest rates at the right time and regulating the flow of money. However, it was criticised at that time, when people said that RBI is sacrificing growth at the cost of inflation. Such regulated systems allow the economy to maintain its health, even though it may not grow spectacularly. It also provides a soft cushioned landing when the economy passes through a bad phase. The RBI now has the ability to pump money back into the system to stimulate demand.
Is the west ready to accept such regulated systems? Brown and co. do not provide any answer to this question. So, if the West (especially US and UK) are not ready to regulate their economies in a better way, why should the rest of the world pick up the tab for their recklessness?
The open question is- should we? The current fiscal mess is a creation of American investment banks. They extended credit recklessly, by throwing all caution into the wind. Even the American Fed didn't bother to check the ever inflating real-estate balloon. And when it did try to check, the balloon had grown to big in size and the Fed's check caused it to implode. Along with it, the real-estate market has taken down big financial companies and all those people who were lured into buying those fancy financial instruments. The real-estate bubble has sucked out more than a trillion dollars directly from the system. Indirectly, it has sucked more than that, if you consider the financial companies' business plans, based on projected incoming cash flows. And now the situation is that capital supply is scarce but demand is high. So, banks have started charging a premium for money supplied, that to in insufficient amounts.
This is a catch-22 situation. If the world doesn't get its act together, there is a danger of the economy sliding into a long time recession. But if they get together, it is like helping America get back on its feet using global money. Everybody is looking towards the western world to stimulate the entire world economy. The world was progressing on the model where the west consumed while the east produced. A tectonic shift is being predicted, where the west would see itself significantly diminished, while the BRIC nations would have come to the forefront. Inspite of the slow-down, China has returned a 7% + growth in its GDP, while India has a 5%+ growth. If India and China focus on developing their infrastructure to the levels of first world countries, they would end up stimulating a huge section of both, the local and global economy. Imagine Brazil and Russia chipping in with similar efforts. China and India have lots of dollars stashed in their foreign exchange reserves. There is a possibility of using these at least in part to build up the infrastructure. That will stimulate local economies to a certain extent. Keynes was right in a certain extent. The government cannot detach itself from the economy, the way Reagan and Thacther did with their respective economies. Everything in life needs regulation. In the hindsight, the Reserve Bank of India (RBI) did a commendable job by increasing interest rates at the right time and regulating the flow of money. However, it was criticised at that time, when people said that RBI is sacrificing growth at the cost of inflation. Such regulated systems allow the economy to maintain its health, even though it may not grow spectacularly. It also provides a soft cushioned landing when the economy passes through a bad phase. The RBI now has the ability to pump money back into the system to stimulate demand.
Is the west ready to accept such regulated systems? Brown and co. do not provide any answer to this question. So, if the West (especially US and UK) are not ready to regulate their economies in a better way, why should the rest of the world pick up the tab for their recklessness?
perhaps they need regulation.....i think first thing they can do is make Fed fully governmental organization......i think still some part of it is in private hands....though too many regulatory authorities are also part of its board of directors still....well sooner or later, everyone has to come out of crisis, be it in a joint fashion or individually....and faster it is done, better for the common man.....
ReplyDeletePrateek,
ReplyDeleteYes, it needs to be done as soon as possible. But do you want to move to a system of yesterday, or a better system? If this question is answered, there will be a better clarity on how to clear the mess. People must accept the presence of a watchdog who can take things in his hands when he senses that things are not going too well. Of course, presence of a watchdog doesn't completely prevent disasters, but then fire extinguishers too haven't completely stopped the fires.
Hey!
ReplyDeleteTypical west don't you think!
Some time ago, when food prices went up...George bush said something to the likes of people in India are getting richer and eating more...
West has been rich because the east has been poor...and now when there is some equalization...they want to oppose it
Kaushik,
ReplyDeleteYou are bang on target. For America, nothing exists apart from USA, Canada and Mexico. West Europe is still affected by the colonial hangover, which gives them a superiority complex.
BTW, the west has been rich because the east could provide resources at a cheaper rate. And yes, because of the huge population in the east, the people will take a lot of time to reach high standards of living. So, they are relatively poor. BTW, rich and poor are like relative grading. There exists a 10-pointer only because there are others who are 5-pointers. Thus, there are rich people only because of poor people and vice-versa.