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Governments
across the globe are using Keynesian stimuli to revive drooping economies.Even
George Bush has presided over the greatest stimuli n US history,
with a projected fiscal deficit of $1.2 trillion and monetary injection of
almost $2 trillion by the Fed.
But is the recession Keynesian? Trillions of dollars of stimuli have failed
to end the downswing. Keynesians argue that even trillions are not enough.
Really?
The current recession looks more Hayekian than Keynesian. A Keynesian
recession represents a sudden fall in demand, and can be remedied within six
months by pumping enough purchasing power into the economy. A Hayekian
recession, however, is caused by misallocation of resources over a long
period, driven by unrealistic interest rates, ending in a bust that requires
years of structural adjustment. Such a recession can last a decade (as in Japan in the
1990s).
The many recessions between World War II and the oil shock of 1973 proved
amenable to Keynesian remedies. But 1973-80 witnessed a Hayekian recession,
caused by excess pumping of money into economies in an attempt to stimulate
them. Rising trade union demands meant that the stimuli translated into
higher wages and inflation, not higher production.
After this era of stagflation, economists could hardly utterly the word
‘Keynesian’ without a snigger — it had become a joke.
However, the recessions of 1991 and 2001 were mild affairs remediable by
Keynesian stimuli. Keynes was back in fashion. So, when the subprime mortgage
crisis hit the US
in 2007, it responded with Keynesian nostrums. But to no avail.
Politicians want to be seen as quick and effective. They love Keynesianism,
which puts them in the driver’s seat, allowing them to portray recessions as
caused by greedy business villains, and paint themselves as rescuers.
But Hayekian recessions occur when politicians themselves distort the economy
for years, creating misallocations of resources that ultimately prove
unsustainable. The consequent bust cannot be ended by pumping in more money.
Rather, the entire economic structure must change to correct the historical
misallocations, and make future growth sustainable. This involves wrenching
changes in individual, corporate and political behaviour. Neither the public
nor politicians are quick to acknowledge a Hayekian recession.
They would rather hope it is Keynesian, remediable by pumping in more money.
Yet at some point somebody will surely declare that Emperor Keynes has no
clothes.
The current recession is deeply structural. For a decade, the US has run the biggest trade deficits in
history, matched by corresponding trade surpluses of China, Opec,
and other Asian countries. After the financial crisis of 1997-99, many Asian
countries swore to build large forex reserves to avoid another debacle. So
they deliberately undervalued their exchange rates, ran large current account
surpluses, and so generated large forex reserves. This had to be mirrored in
correspondingly large current account deficits in some other countries. The
biggest turned out to be the US.
This defied conventional economic logic. Normally, rich countries run trade
surpluses, and send their excess savings to poor countries with scarce
capital that are running trade deficits. This normality was turned on its
head by Asian countries determined to build large forex reserves after the
trauma of 1997-99. These forex reserves went mainly into US gilts.
Suddenly the world was flooded with money. The US
trade deficit sent a flood of dollars into Asia
and Opec, which then flooded back into US financial markets, mainly through
forex reserves. Bernanke called this the Asian savings glut. The flood of
dollars drove down long-term interest rates, especially in the US, and drove
up asset prices. It became highly profitable for Americans to borrow cheaply
to invest in houses, stocks and commodities. Even when the Fed raised
short-term interest rates in 2006, long-term rates remained low because of
the flood of money from Asia. Innovations in
the US
financial system, some productive and some mere con-games, encouraged
leverage by everybody — individuals, corporations, banks, speculators. This
was classical Hayekian misallocation.
This misallocation yielded mouth-watering short-term gains. It proved a huge
stimulus for the global economy, which grew at its fastest rate in history in
2003-08. Record US trade deficits sucked in record imports of manufactures
from Asia and oil from Opec. Asia in turn
bought record quantities of commodities from Africa and Latin
America to be converted into manufactures for export. Thus the
whole world economy boomed as never before, and so did asset prices.
Yet the boom was patently unsustainable. American households, who
historically saved 6% of disposable income, started saving nothing at all,
and dipped into their wealth to spend as never before. Today, this seems
terribly irresponsible. Yet the boom had hugely increased the wealth of
Americans, and it was logical for them to spend part of this wealth. The
spending spree was subsidised by artificially low interest rates, which also
generated bubbles in the markets for houses, stocks and commodities.
These bubbles have now burst. A Keynesian stimulus amounts to an attempt to
re-inflate those bubbles. That is neither practical nor wise. The US government
in 2008 mailed $80 billion to households to stimulate spending, but
households spent only $12 billion of that and saved the rest — they knew,
even if politicians did not, that the old spending spree had to stop.
The world — and India
— must accept that the global boom of 2003-08 was based on an unsustainable
economic structure. In future, Americans will have to save much more (and
export more), and Asians will have to consume much more (and export much
less) to end existing global imbalances. This Hayekian adjustment, which
started in 2007, may take years to complete.
So, the global — and Indian — economy may not revive in mid-2009. Even if it
does, the recovery may be so weak as to count for little. Hayekian theory
suggests that we may have to wait till 2010 or 2011 for a sustained economic
bounce. One ray of hope: the current recession may be partly Keynesian, even
if mainly Hayekian. That may diminish its travails.
AND
MIND
YOU THE TERM CON GAMES PLAYED BY THE POLITICIANS, BUSINESSMEN ,BUREAUCRATS,BOOK
KEEPERS AND BANKERS HAVE RESULTED IN THIS WORLD WIDE SCAM
AND THESE SCAM OR SCUM BAG MILLIONAIRES SHOULD BE DEALT SERIOUSLY UNDER
FINANCIAL FRAUD AND MONEY LYING IN THE RESERVES IN SWISS /GERMAN/MAURITIAN
BANKS SHOULD BE BROUGHT TO THE COMMON MAN OF ALL COUNTRIES ESPECIALLY
USA/INDIA/UK/RUSSIA/JAPAN AND ENTIRE ECONOMY CAN REVIVE FASTER THAN YOU CAN
EXPECT AND
HERE THE GLOBAL CITIZEN HAS TO UNDERSTAND THAT RICH BECOMING RICHER
AND MIDDLE CLASS/POOR BECOMING POORER CAN LEAD TO RECESSION WORLD WIDE UNLESS
AND UNTIL ALL GLOBAL CITIZENS WORLD WIDE DO NOT ACT TO BRING THE PURCHASING
POWER PARITY OF THE COMMON MAN THIS DOWNWARD TREND WILL CONTINUE