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Economic Stimulus Packages — The Hidden Threats

Economics / Economic Stimulus Mar 26, 2009 - 05:27 AM GMT

By: Submissions

Economics Best Financial Markets Analysis ArticleDr. Raju M. Mathew writes: Following the American lead, lunched by President Barrack Obama, almost all governments, including China, India, Kuwait, the UAE and several other countries have either introduced or are on the process of introducing economic or financial stimulus packages to make an early recovery from the global economic crisis, that they prefer to call ‘Recession’. But they are forced to admit that it is more severe than the Great Depression of 1929. Then, of course, it must be the Great Depression II of 2009, lasting several years to recover. A series of global summits to deal with the crisis are under way.


Basic Assumptions

However, almost all packages are based on the following assumptions:

1. The present crisis is a recession to disappear within one year or at the maximum two years, as it is only a short term phenomenon.
2. It is basically a problem of credit crunch.
3. The market is flooded with unsold industrial and consumer products.
4. Speedy recovery could be made by injecting more funds either by debt or deficit financing.
5. By ensuring easy credit and supporting banks and also one or two major industries, the crisis could be averted and recovery could be made soon.

Over Simplification

The present Global Economic Crisis has been over simplified or presented as a mere financial meltdown or recession and it could be dealt by making available more funds to the consumers so as to create new demand for all the unsold items and thereby revive the market and ultimately bring back the boom. The required fund could be raised by either deficit financing or public debt, besides borrowing from other sources that could form the basis of further credit. All the assumptions are wrong with out any basis.

Wrong Diagnosis

But the very assumptions of all these recovery packages are conceived without the backing of any sound theory and strategy or even history. Both the experts and rulers ignore the truth that the basic problem is not of the credit but of income and earning of the people to create a sustained demand and ensure reasonable saving and investment. If the newly created funds are flooded to the market, of course, most of the unsold items will be sold out and after that people may not have any more money or credit with them to make further purchases. That leads to another great catastrophe to appear more rigorously than ever.

Boom: Real or Illusion?

It is high time to re-examine the very truth and foundation of the so called boom that the global economy had undergone with the unbelievable availability of free credit for all. Almost all banks had offered unlimited credit, ten or twenty times over their liquidity or reasonable limit, that too without bothering the repayment capacities of the borrowers. For amassing very huge amounts as bonus, the bank men and CEOs had prepared inflated or fabricated statements about their assets, liquidity and profit without any basis by cleverly manipulating accounts, e-banking, e-credit and e-commerce. On the strength of the easily available credit cards and e-money, consumers had rushed to the market to buy even unwanted items, without bothering much about their real income and repayment capacity. That had made an illusionary boom, without the backing of real earning and actual purchasing power. In other words, the boom was not a real one.

Simple Economic Truth

No economy can survive long with mere credit based purchases without the backing of the real income and earning besides adequate saving and investments. Income and earning are very much related to resource allocation efficiency, over all productivity and competitiveness. Profitability depends upon demand and cost of production as savings depend upon thrift, earning, cost of living and taxation. Without a reasonable savings, no investment and innovation could be made.

It is equally important for a healthy economy to keep its cost of production and cost of living at the bottom. Further, there must be inter-sector balance with regard to growth and earning between various sectors, as all the sectors are equally important for the healthy survival of the global economy. The greatest blunder that we committed was giving dominance of Service Sector over Agricultural and Industrial Sectors that lead to the collapse of agriculture and then industries. The very reason for the present global crisis that has grown to the extent of the Great Depression II is the deliberate denial or rejection of the basic economic truth committed by all the economic and business players, including governments and international agencies.

Consumerism

The rate of consumption is not a true index of the soundness of an economy. Some times it shows the intensity of illness of a weak economy. If there is no hope or future, people or nations may spend every thing at the height of desperation's, including for defense expenditure and terrorism . It can be seen that in the entire history of mankind, the west and the newly rich regions spend trillions just for consumption for the last five years on the wrong belief that spending or consumption's lead to economic boom. This is the basis of Consumerism and Modern Marketing.

The unlimited spending on consumption drains away the entire saving and even dwindles the wealth of nations and individuals and turned everybody debtors. If governments thrive on deficit financing and individuals and families live lavishly and spend on credit, an economic collapse or a Great Depression is inevitable, as nobody can prevent it. In short, Consumerism has emerged as the greatest threat of humanity in the twenty-first century, as it begets Materialism and Terrorism besides Greed, Corruptions and Frauds.

The Hidden Threats

The stimulus packages so far announced are based on wrong or improper assumptions without taking into account the simple economic truth. Credit and banking have no existence or future if the whole economy is weak and sick. No stimulus package is effective or successful if it rejects the basic economic truth. The package must be aimed at improving the very foundation and health of the economy. Other wise, the packages with shorter objectives of selling out the unsold items in the market that too based on credit, will be self-defeating and bring out further crisis more rigorously, making the entire world suffer more and making future generations more debtors.

Global Strategy

There is no short cut to solve the crisis other than putting the economy on a sound basis by improving the income and earning of the people besides their productivity and efficiency. In other words, the actual purchasing power of the people, even without the backing of credit, must be improved tremendously along with cutting the cost of production and cost of living, so as to ensure sustainable saving and investment. In other words, consumerism must be buried down at any cost for the very survival of humanity. Inter-sector and inter-regional imbalances must be rectified. It is a blunder to give too much faith or emphasis on Information Technology, Modern Management Techniques and the Service Sector. Since the problems are global in nature, their solutions too must be global. No country or people should be left in the efforts from a speedy recovery of the illness of the global economy.

It is high time to adopt a mature and balanced approach towards consumerism, marketing, credit, e-banking and e-commerce besides minimizing oil or energy consumption, development based on tour and travel and automobile. The world has more cars than it actually needs; we are burning more oil than our environment could afford and people are traveling more than what is needed for the wrong or mistaken logistics of their stay and work. Because of aggressive consumerism and marketing, just 8 % of the world population spend and consume as much as the rest of the world.

The wage and salary structure, including bonuses must be restructured so as to ensure some reasonable balance between agricultural, industrial and service sectors and between industries and services. Unreasonably high salary, bonuses and profits in some sectors or firms lead to greed, extravagance and the associated crimes that would affect their own very efficiency and survival.

UN and other intergovernmental and non-governmental agencies must come together to chalk out global strategies and policies to deal with the Great Depression II. The major religions of the world must play a pro-active role in minimizing the sufferings of the world population rather than spreading hate and revenge leading to terrorism.

(Note: This is the fifth series of work on the present global economic crisis under ‘Great Depression II’ by the same author).

Dr. Raju M. Mathew can be contacted by e-mail: rajoocyber@yahoo.com.

Some of his other works are given in his site: www.ifkt.net

Dr. Raju M. Mathew is a strategist and theoretician with strong background in Economics, Cybernetics, Education and Information Science & Technology with long years of experience in teaching and research, including directing a major research project and supervising ten doctoral works. The Netherlands based FID nominated him as one of the twelve international members for its Committee on Research on Theoretical Basis of Information Science in 1983.

Dr. Mathew formulated two basic theories of knowledge consumption and knowledge production that got published jointly by the FID and the USSR Academy of Sciences in 1985 in the work, ‘Theoretical Problems of Informatics’. Now these theories are known in his name and have become the field for doctoral research.

In 2005, Prof. Mathew proposed Knowmatics and Knowledge Technology as the two Post-Information Technology disciplines for processing and handling knowledge so as to develop knowledge industries. He also set up the International Forum for Knowmatics & Knowledge Technology (IFKT). Some of his works are available in the site: www.ifkt.net

Dr. Mathew is on a mission of making the world aware of the impacts and intensities of the present crisis, the Great Depression II of 2009 and persuading the governments and international agencies to formulate correct strategies and policies and implement them urgently to deal with it and make an early recovery from it, so as to save the lives of millions, especially the young.

© 2009 Copyright Dr. Raju M. Mathew - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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