By Arshad Shaikh,
The noose of the global financial crisis has slowly begun to throttle the economies of the world with disastrous consequences. The American economy which is at the epicenter of the crisis is failing rapidly, necessitating comparisons with the Great Depression of 1929.
America lost 2.6 million jobs last year and manufacturing is at its lowest since the Second World War. Consumer spending is declining and investor confidence waning quickly. Europe and Asia are badly hit and the Middle East is facing its biggest economic challenge with the oil barrel hitting lows of $ 36 from an all time peak of $ 147 just six months back.
In an attempt to put the economy on track, 20 different countries are pumping money to the tune of $ 1.243 trillion. If we include the $ 700 billion for the Troubles Assets Relief Program (passed under ex President Bush) and the current stimulus package the American Reinvestment and Recovery Plan of President Barack Obama, then the total figure climbs to almost $ 3 trillion.
Although the aim of the stimulus package is to jumpstart the economy and create new jobs by investing in clean energy, health care, education and infrastructure, there are some tough questions that beg to be answered.
1. Is the money being talked of real new money or which was already envisaged in previous budgets?
2. Will the money be sensibly directed to achieve speedy results? Past experience shows that infrastructure projects produced little results beyond the construction costs and salaries.
3. What will be the long term financial impact of so much government spending?
4. And finally who is going to pay for these enormous sums of money?
It is a well known fact that this economic crisis was triggered by reckless and unregulated sub-prime mortgage lending by banks and financial institutions. The unprecedented number of foreclosures and the fall of the real estate market rendered millions homeless and shattered the great American dream. Credit crunch and lack of market liquidity brought industrial and manufacturing growth at a standstill with the stock market indices all over the world nose diving to all time historic lows. Yet the biggest chunk of the bailout pie goes to these very banks which created this gigantic financial mess. Normally a thief is punished when caught red handed, not rewarded with more than what he stole; but this is exactly what we are doing to banks. Helping them out financially when they declare that we have stolen enough and are now bankrupt and filling their coffers with bailout plans to be paid by the hard earned taxpayer’s money.
Method behind the Madness
John Maynard Keynes the most influential economist of the last century proposed that the state should stimulate economic growth and improve stability in the private sector through interest rates, taxation and public projects. Keynes argued that the solution to depression was to stimulate the economy through a combination of two approaches: a reduction in interest rates and government investment in infrastructure. The injection of income results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending and so forth. The initial stimulation starts a cascade of events leading to an increase in economic activity as a multiple of the original investment. President Obama’s stimulation package is more or less on the same lines.
The Government’s broke, No Problem!
This huge injection of funds through bailouts and stimulus packages is however only possible through deficit financing whereby the government borrows through the loanable funds market. As governments finance these deficits (called national debt or public debt) through Treasury securities or government bonds, the ultimate beneficiaries are again big banks and the ultimate loser is the hard working tax payer. The United States national debt stands at a phenomenal $ 10.6 trillion and with a population of around 300 million, the debt share per citizen is around $ 34,000. The American national debt is rising at a rate of around $ 3.34 billion per day. The paradoxical part is that almost 25 % of the national debt is bankrolled by China, Japan, Saudi Arabia and other countries.
No Hope till we go Back to the Basics
These mind numbing figures erase all hope of recovery. We continue to inflate the debt bubble and live out our time on borrowed money, burdening ourselves with more and more interest payments than we can sustain. Is there a way out of this mess? The first step is to acknowledge that the system has failed us; blaming it on greed and lack of regulation will not allow us to search for an alternative. Islamic economics seeks an economic system based on uplifting the deprived masses and recommends a proactive role for the state in matters such as circulation and equitable distribution of wealth. It ensures that participants in the marketplace are rewarded for being exposed to risk and/or liability. The success of Islamic Banking amid the global meltdown should be seen as a proof of the potential of Islamic economics. The Islamic Sukuk market is $ 100 billion strong and growing at a rate of 10 % all over the world. Zero Rate Interest Policy (ZIRP) has already adopted by the FED and Japan to boost market liquidity and encourage investment throughout the economy. Move over Casino economics, Islamic economics is here to stay.
(The author Arshad Shaikh can be contacted at [email protected])