The Conundrum of Economic Growth in Highly-Leveraged Economies I am taking the liberty as a commoner not very well-versed with the latest on economic theories and not well informed on the latest on public finance as relates to many important countries of the world, to express the sense of bewilderment over the increasing irrelevance of Classical Economics in the guidance of a world turned topsy-turvy. The standard Classical economic theories predicated on Keynesian Economics stimuli through budget deficit or curtailing spending to manage the gyrations of contractions and expansions in the typical cyclicality of the Western Capitalist business model; and Milton Friedman’s Supply-Side monetary theory; both theories are facing huge challenges of validity and relevance to a rather changing and a very chaotic new age of our time. Hard realities ravaging the industrialized world and along with them the rest of the world are rendering both Keynesian Economics and Friedman’s Monetary Theory, in many ways, at fault and incapable of providing permanent solutions to the world’s spiraling endemic economic problems. It seems that the excesses of “Leverage” entailed in the Reganomics and the Thatcherism of unregulated financial markets launched on the force of Friedman’s Monetary Theory in the decade of the 1980s, unleashed speculative excesses and the packaging of all kind of financial gimmicks and products freed from the discipline of the long adhered to discipline of the observance of a balanced trade-off of Risk-Return in the design and management of financial products. Besides, the absence of more stringent regulations, in turn, caused laxity in the observance and the adherence to more conservative management of acceptable levels of debt. The US, as is equally true, to a lesser extent, of EU Countries, is constrained by a highly indebted public and private sectors, beside individual consumers. This mitigates the prospects of stimulation of economic growth through fiscal deficits and increase in money supply, the standard long tried options. Highly indebted US Government is caught in the catch-22 syndrome; for, to lower the public debt to alleviate worsening Government’s deficits and mitigating the crowding effect that deprives the private sector from having easier recourse and access to finance and investment capital, the Government needs to ensure significant increase in tax revenues that can only be realized through significantly higher rates of economic growth than the paltry 1.2 – 2.0% experienced by most of the industrialized Western countries. Besides, increasing the levels of Government revenues, higher economic growth would cause the lowering of the rate of unemployment that in turn would cause further savings on government outlays earmarked to the disbursement of entitlements and public social spending. Besides suffering from constraints of high debt, Governments and consumers in the West are equally suffering from the loss of economic competitiveness and increasing loss of the share of international trade vis-à-vis the rising economies of the countries of the BRIC; this a structural change that would weigh heavily on the potential to regain the levels of growth long attained by the industrialized countries of the West. The inevitable positive outcome of the non-sanguine scenarios presented above is invariably mostly political that would contribute in the long-term to a more peaceful and a more stable world. The structural problems faced by the Western economies, foremost the US economy would lead to major cuts in the State Defense budgets and would consequently lead to the exercise of higher restraint before jumping into military adventures. The evidence in this vein is amply demonstrated in the signing of Western-Iranian Agreement over the Iranian Nuclear Program in lieu of opting for military initiative as was for long contemplated as a potential alternative. Another positive outcome of the non-Sanguine scenario presented above is the enhanced probability that the Western Industrialized World and Japan on the one side, the OECD group, would seek to establish long-term collaborative relations with the other new economic behemoths of the world, the four powerful members of BRIC, to seeking solutions to serious universal challenges. Much at stake to warrant the establishment of a new paradigm in this vein, foremost, agreeing to an acceptable fair system to address the chaos ravaging the international monetary system; facing up the challenges of fast deteriorating environment; Global Warming; large scale poverty; population explosion; food shortage; fighting money-laundering and combatting international crimes and “International Terrorism.” Rajai Masri Monday November 25, 2013
Posted on: Tue, 26 Nov 2013 03:15:25 +0000
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