Posts Tagged ‘g7’

Fiscal Chemotherapy Masquerading As Cure For Global Economic Crisis

February 4th, 2009 Comments off
During the medieval epoch, the pseudo-science of alchemy arose to enable the primitive economies of Europe, during the Dark Ages, to transcend their feudal limitations. Alchemists claimed they could transmute base metals into gold through their mysterious machinations. It never worked, yet for centuries alchemists aroused the hopes of vast multitudes of the savviest citizens of their era. Flash forward to the dawn of the 21st century, and we are witnessing the emergence of a new pseudo-science as the center of salvation for the ravages of the Global Economic Crisis.

The inept policy-makers and their legions of technocrats, as with the alchemists of so long ago, are claiming that their own permutation of economics will somehow create gold out of thin air, thus terminating the Global Economic Crisis and restoring prosperity. They tried monetary policy, however with interest rates on central bank funds in many major economies at effectively a rate of zero, and the global economy only falling further into the abyss, a new bag of tricks must be offered to the pubic.

The massive debt-driven stimulus spending plans being unveiled with monotonous regularity by the political leaders of the major economies are nothing more than fiscal chemotherapy. With the Global Economic Crisis having metastasized beyond the point of containment, this disastrous flirtation with national insolvency by policy-makers will only accelerate the path to global economic disintegration.

The major proponent of fiscal chemotherapy is the United States, which will in the near future pass a so-called “economic recovery plan” that will initially cost one trillion dollars over two years. However, even without this stimulus plan, the U.S. federal budget is already projected to incur a deficit of $1.2 trillion. Add in the stimulus, plus hundreds of billions of more dollars required for bank bailouts beyond the $700 billion TARP fiasco, then factor in the sharp decline in revenue from taxation as businesses go bankrupt and millions more Americans lose their jobs, and it is clear that the U.S. Treasury will have to borrow far more than even the stratospheric projection of $1.2 trillion. But it gets worse.

Politicians close to the Obama administration, as well as some economists who stand by the Keynesian formula for combating economic recessions, have already strongly hinted that the $1 trillion stimulus package will not be nearly enough to resolve the economic crisis, and will have to be massively enlarged and repeated. What this in effect means is that the United States will be compelled to borrow untold trillions of dollars for years to come. Now, with domestic credit possibilities utterly exhausted, it is to foreign creditors that the U.S. Treasury must look to for financing the profligate budgetary deficits of the United States.

Unfortunately for the U.S. Treasury Department, virtually every major economic actor on the planet is also replicating grandiose deficit spending wrapped up as stimulus packages. This includes almost all the G7 and BRIC countries. More alarming for the U.S., one of those nations is China, looked upon as the major source of available credit by the Treasury Department. However, China currently has its own priorities, now that the Global Economic Crisis is beginning to batter the world’s third largest economy in severe ways. A normally reticent Chinese government has disclosed that the number of unemployed migrant workers in their country now tops 20 million. It is for that reason that the authorities in China have begun a stimulus-spending program currently budgeted at $600 billion, but almost certainly to grow substantially beyond that figure.

The economic contraction hitting China means far fewer surplus dollars generated by Chinese savers. The credit pool in China is now shrinking, and most of those funds will logically be used to finance the government’s operating deficit in China, as opposed to the United States.

If China dries up as a source of credit for the U.S. government, where is the alternative? The Gulf Arab states are also being lacerated by the Global Economic Crisis, as the implosion of oil commodity prices has created severe budgetary constraints in the previously abundant coffers of OPEC. As with China, whatever sovereign wealth or other surplus funds are still available will be directed in the first instance towards enhanced domestic spending deemed necessary to maintain social cohesion.

The essential point is that the fiscal chemotherapy that suggests that, as with a cancer patient, the toxicity of the medicine, in this case budgetary deficits, must be absorbed for the short-term to preserve the long-term health of the patient is nonsensical in the extreme. There simply will not be enough credit in the entire world to finance the budgetary deficits that are likely to arise in the United States as well as other major economies. Rather than pursue the only sane fiscal option available, namely radical budgetary surgery (as with massive trimming of bloated U.S. military spending), the mediocre elites dominating U.S. decision-making circles have chosen to go down the route of fiscal chemotherapy and economic alchemy, which can only result in terminal consequences for the American economy.