Wednesday, October 13, 2010

Tighten Your Belts Folks, IMF Predicts Grim Future

In a recently published world economic outlook titled, Will It Hurt? Macroeconomic Effects of Fiscal Consolidation, the IMF has painted a bleak picture of near depression scenario from the south to the north of Europe including Britain, and in America as well. The world body also predicts that we are in a slump for the long haul.

Following the scandalous affairs of bankrupt Iceland, and riots in Greece, Spain is the new sick man of Europe mired by political upheaval and widespread public protests normally witnessed in the third world countries.

To reign in the harsh financial downturn, the IMF in the past had routinely dispensed the medicine of severe belt tightening in Asia and South America, forcing misery on the hapless poor people of those countries. Nonetheless, when the citadels of European civilization are catching pneumonia, the IMF admits that the measure of austerity is going do more damage than good.

Ah, what a revelation!

It should not take a Nobel Prize-winning economist to grasp that you do not recover from severe recession by further choking social programs and cutting jobs. In fact, Econ 101 says that if people have no money to buy, the consumption would keep on shrinking and production would follow suit in an interlinking chain of events.

IMF says that tightening of 1% of GDP in a country results in a 0.5% loss of growth in two years. Traditionally, countries have come out of economic recession by devaluing their currencies and increasing exports.

Austerity measures have worked effectively for some countries in the past. For an example, Britain has applied that successfully twice, once when it left the Gold Standard in 1931, and then again in 1992. This time the problem is there is no one to pick up the slack. How did we come here?

It is all in distribution of wealth, my friends. Unrestrained human greed gave rise to laissez-faire capitalism, which dismantled all regulations and created giant monopolies. Capitalism lives and dies with free competition; therefore, when giant monopolies are created in the name of “scale of economics,” the very spirit that thrives on capitalism is destroyed. Couple that with tax benefits for the high earning populace and shifting the tax burden to the middle class. Capital shifts from the bottom to the top, creating a few super-rich on one hand, and large number of struggling deprived masses on the other.
The mantra of the capitalists, cutting taxes for the rich and slicing social programs for the poor, is not going to work, as half the globe is now in financial trouble and taking the same measures in lockstep. When the interest rate is nearly zero, and everyone begins slashing expenditures, the downward slump doubles with time.

The leader of the free world, the USA, was supposed to lead by example in such a time. Unfortunately, in Barak Obama, the American people elected a President who neither had the courage nor the will to do a la FDR, as he is busy protecting the very group that brought this ruin on us.

It is apparent that people understand this and there is widespread dissatisfaction at the general level; notwithstanding, what is the solution? People may vote Obama out in 2012, and bring back the GOP and the Tea Party leaders, however, that would be like jumping from frying pan to the fire, because it is the policies of the renegade conservatives that have brought us here.

Thirty years of Reaganomics, embraced and implemented with vigor by subsequent Democratic and Republican administrations since Ronald Reagan have created this situation. The recovery will not be attained on the backs of the poor, as they are already broken.

Hold on to your shoestrings folks, this is going to be a long and hard ride.

Previously published on Technorati