Global Economic Crisis
– Immediate Solution
The turbulence we are going through is unprecedented in the
world History. What started as A financial
institution failure, affected not only the leading financial
institutions in the world but also the major developed economic systems in the
world leading to a systemic failure.
Unlike in the past , when it had an impact on only a few countries and few asset classes, this time,
the crisis had its effect on almost all countries in the world and all asset
classes. The crisis had a contagion effect and spread far and wide without an
end in sight creating more and more uncertainties day by day.
When Government creates
stimulus it goes to increase the government debt making the government
vulnerable to financial weakness. In a few cases , where there was a government
failure, investors have taken an hair
cut in their investments. But in General, Sovereign debt is supposed to be more
trustworthy since Central Banks can print money to lend it to the government
when in need.
Governments in an effort to stop economic slide, tried many
measures including Monetary and Fiscal Stimulus but black swan events had
overtaken the efforts of governments. Many of the developed countries printed
more money and tried to stimulate the
Economic Growth and reduce the unemployment. But it has gone into a spiral. The
only effect is the outstanding debts of governments are going up, their credit
rating is being downgraded and there was a lot of trust deficit between
governments.,Banks and investors.
Everybody is in a dilemma searching for solutions and immediate remedy. The effective solutions are eluding the policy makers.
.
According to Classical Economics, Printing money is likely
to increase the demand, inflation and reduce the value of money. This is true
in cases of countries where the
potential for high growth, high employment levels and low debt repayment needs
exist.
Economic History has proven that only a few countries at any
point in time have high economic growth
rates and those who were growing at high rates for long periods of time will
see a decline in growth and potential for growth is almost negligible.
The developed countries which are affected by crisis today
has less potential for growth , less opportunities for providing additional
employment and supply exceeding demand levels for many of the product
categories. The scope for stimulating the domestic demand and increasing inflationary tendencies are limited.
The need for new money creation has to continue in these
economies till they achieve an economic balance but with a difference. The
classical economic theories were created when the world was very simple, the
financial architecture in the economies
were very simple, the products available in the financial market were
very simple and transparent. The world was not integrated like today. The
theories proved right, whenever there was an economic crisis.
But we are living in a modern world with many factors
influencing the economic performance and it is very difficult to exactly
quantify the impact of each factor on the economy. The present crisis gives an
impression that there is no solution in sight. There is a fear, gloom and high
level of uncertainty.
The crisis in Europe today
is due to high level of government debt which was created because of the high acceptance of debt denominated in Euro
issued by member countries. Only the Monetary union happened and to some extent
economic integration. There was a total
absence of Fiscal Union and Political Union and lack of full economic
integration. There is a need to move towards a fiscal integration and member
countries should give the mandate to Germany
and France
The crisis today is due to Debt at Country Level , Province/State
Level, Municipal Level, Corporate level and individual level. All the players
in the system are affected but the degree of impact varies on each stake
holder. Unlike in the past, it looks like the issue could not be resolved
within a short period.
One solution seems to
be in sight, that is the way in which the debt levels could be reduced for all
stake holders. This
could be achieved through creating money by Government without adding debt to
its balance sheet. That is to just print money and allocate to all the
Stakeholders based on criteria to be evolved which will ensure the viability of the macro economic system,
banking system, corporate sector and individuals who are indebted. The amount
of money to be created depends on the need of all the stakeholders. It could be
capped at 25% of the money in circulation today. This strategy might require,
control of inflation within specified levels and managing the currency exchange
rate within a specified levels. Since the actions taken in one country will
have impact on all other countries in the world there has to be a coordinated
action which is facilitated through a body like IMF. This strategy will change
how Economic systems function, Capital markets work and transmission of money
takes place. How this system will work can be tested through applying this concept to the most affected country in the world today and
see the results in six months and if after effects are manageable then this concept could be implemented in other
countries.
Introducing this system will make the economic systems
viable. Improve the liquidity, bring back the trust levels. , removing the
gloom and doom and make the financial systems functional. Today, financial
systems are in a limbo and their traditional roles in financial sector have
been totally hampered . The employment levels will go up.
Adopting the above strategy might require a close
coordination of Fiscal and Monetary functions in a country and both Fiscal and
Monetary policies have to be developed in an integrated manner. There has to be
an increased integration between all the regulators in a country and continuous
exchange of information on the developments in each domain.
The Analysis to be done and the parameters to be tracked.
Analysis of Debt with
the average maturity period of the debt with Aging profile.
At the Country Level
State/Province Level
City/Municipal Level
Corporate Debt
Individual debt.
Criteria for determining
the Printing of Money without Creating Debt for the Government
Total Debt in the system / GDP
Government Debt / GDP
External Debt / GDP
Repayments/ GDP
External Repayments / Reserves.
Forex Reserves / Negative Balance
Budget Deficit
Current Account Deficit
GDP Growth Rate /Potential Growth rate for next 5 years.
Interest Rates
Inflation and the likely trend in 5 years.
Unemployment level. and the likely trend in 5 years.
Distribution of Money
Created.
The end use of money created should go to reduce the debt
levels of stake holders including investment in Equity capital . The government
can invest in Equity capital of Banks and Companies. Whenever governments had
given stimulus in the form of investments in shares of companies, when there
was a boom , governments were able to exit the investments at good profits.
There has to be a careful deployment of the money created
and as per the criteria to be developed in consultation with a body like IMF,
World Bank.
These are my initial thoughts and this concept could be
further refined and modified after discussions and debates. Hope adopting this
approach would help to address the issues before the world leaders in the Short
term.
R.Kannan
