FISCAL PROFLIGACY COULD BE DANGEROUS.
By Shan Saeed
INDEPTH ANALYSIS OF THE MAJOR GLOBAL PLAYERS:
Some people
feel that fiscal policy is the only hope to get the economy out of recession or
to get into the growth momentum. Its debatable. I know there is a portion of
the economic populace out there who thinks the government needs to spend its
way and stimulate its way out of this recession [see Nobel Memorial Prize in
Economics Sciences-winning economist Paul Krugman]. Expansionary fiscal policy could be devastating for some economies in the developed world. I think it is the monetary
policy that gets the economy out of recession. Nobel Laureate Late Milton Friedman
from Uni of Chicago was a strong advocate of this policy and I follow him very
closely in terms of economic strategy. Christina Romer [ ex-Chairwoman Obama
Economic team] while addressing at Brooking institution in March 2009, made the
same emphasis on the importance of monetary policy over fiscal policy.
However,
I do not think it is possible at the moment. Let’s
forget the writings of John Maynard Keynes and if spending by the government
would even succeed. The fact of the matter is that I do not think the United
States is even in a position to do this with analyst, economist and other
experts talking about fiscal cliff hanging on the wall.
STRATEGIC ANALYSIS OF COUNTRIES HAVING
DEBT TO GDP RATIO HIGHER THAN 100%
According
to the International Monetary Fund, some of the countries in the world that
have debt-to-GDP ratios of over 100 percent, or larger debts than the size of
their economies.
Countries %Debt
to GDP Year Region
Japan 230 2011 Asia
Greece 160 2011 Europe
Saint Kitts/Nevis 153 2011 North
America
Jamaica 139 2011 North America
Lebanon 136 2011 Asia/Middle East
Eritrea 134 2011 Africa
Italy 120 2011 Europe
Barbados 117 2011 North America
Portugal
107 2011 Europe
Ireland 105 2011 Europe
USA 103 2011 North America
Singapore 101 2011 Asia
Sources:
IMF Via Wikipedia, World Bank, ADB, Economist, Bloomberg
As you
can see, other than Singapore, these are mostly really weak economies. There
are four of the five PIIGS (Portugal, Italy, Ireland, Greece and Spain) and
some small Caribbean nations that have been hurt by the global slowdown as it
hit the tourism industry. Most of these countries are experiencing near zero
growth or in a recession. In the case of Greece, we have an out and out
collapse of the economy, and Japan has basically been in a 20-year recession.
My point is, even if the USA can stimulate the economy by QE3, it will not have a positive impact in the long run. With a debt-to-GDP ratio near 103 percent, and headed to more than 110 percent by next year, the debt is too high to spend more. Most studies show that when your debt gets over 100 percent of GDP, your economy slows, productivity slows down, purchasing power is reduced, living standards come down and inflation rises
When President Franklin D. Roosevelt started his New Deal in the early 1930s and Japan began its downturn in the early 1990s, both countries had debt-to-GDP ratios of less than 30 percent. They had room to spend to stimulate the economy not only in the short run but also in the long haul.
My point is, even if the USA can stimulate the economy by QE3, it will not have a positive impact in the long run. With a debt-to-GDP ratio near 103 percent, and headed to more than 110 percent by next year, the debt is too high to spend more. Most studies show that when your debt gets over 100 percent of GDP, your economy slows, productivity slows down, purchasing power is reduced, living standards come down and inflation rises
When President Franklin D. Roosevelt started his New Deal in the early 1930s and Japan began its downturn in the early 1990s, both countries had debt-to-GDP ratios of less than 30 percent. They had room to spend to stimulate the economy not only in the short run but also in the long haul.
Therefore,
even if you believe in Keynesian economics, the United States has betrayed the
belief that you should save during bad times to have money to spend during bad times.
The United States for the last 40 years has mostly run deficits and failed to
save for the rainy day that has now arrived. It’s not so much that austerity
works. It’s that it is forced. It’s either you cut back or default or print
money and go into hyperinflation.
ECONOMIC OUTLOOK FOR USA
ECONOMIC OUTLOOK FOR USA
Right
now, USA need tough decisions to made. A combination of defense cuts,
streamlining of entitlements (e.g., raising the retirement age) and decreasing
taxes must be implemented. However, both President Barack Obama and Mitt
Romney, the likely Republican Presidential nominee, are failing to address any
of these real problems. This will probably see the so-called fiscal cliff
pushed back another year no matter who gets elected.
The way this will end is either in stagnation, with rates staying low and little to no economic growth; mediocrity for the next 10 years; or, more likely, sometime in the next three to five years, despite all of the Federal Reserve’s efforts, interest rates will begin to spike and it will cause a crisis that will force streamlining of the economy and real change to occur. My money is on the latter. I feel that the market will force the hands of politicians, not the other way around.
What does this mean? In the long run, it means the USA will need to reshape it economic model to show the turnaround. When cuts are made, it will be the closing of dozens if not hundreds of U.S. military bases and a change in the U.S. political system. It may seem unlikely because it will have been open for so long.
However, remember that at one time the “Sun Never Set on the British Empire,” with Britain controlling one-fourth of the world’s land mass. The British Empire was far more powerful and greater than the American Empire has ever been. It might come under pressure as well in the next 3-5 years. The only way to really get out of this mess is by making tough decisions, decreasing taxes, cutting entitlements, cutting spending and letting the free market system to work without government intervention /regulation. The question is, does the United States have politicians with guts enough to make these changes or will the market force the government’s hand?
The way this will end is either in stagnation, with rates staying low and little to no economic growth; mediocrity for the next 10 years; or, more likely, sometime in the next three to five years, despite all of the Federal Reserve’s efforts, interest rates will begin to spike and it will cause a crisis that will force streamlining of the economy and real change to occur. My money is on the latter. I feel that the market will force the hands of politicians, not the other way around.
What does this mean? In the long run, it means the USA will need to reshape it economic model to show the turnaround. When cuts are made, it will be the closing of dozens if not hundreds of U.S. military bases and a change in the U.S. political system. It may seem unlikely because it will have been open for so long.
However, remember that at one time the “Sun Never Set on the British Empire,” with Britain controlling one-fourth of the world’s land mass. The British Empire was far more powerful and greater than the American Empire has ever been. It might come under pressure as well in the next 3-5 years. The only way to really get out of this mess is by making tough decisions, decreasing taxes, cutting entitlements, cutting spending and letting the free market system to work without government intervention /regulation. The question is, does the United States have politicians with guts enough to make these changes or will the market force the government’s hand?
Disclaimer:
This is just a research piece and not an investment advice. All financial
transactions carry a RISK.