Financial Leadership is Needed Now

In the looming spectre of a second dip in the recession, clear strong economic planning is needed if capitalism is to survive. Right now governments and economists around the globe are working frantically to uncover the key to surviving the continual crisis of capitalism that began with the US financial crash in 2008. Despite the rhetoric spouted by free market fundamentalists, clear strategic planning will be required if the markets of the world are to survive. What is needed is a plan, and leadership in its implementation. Capitalism is a system designed to compete, not co-operate in order to sustain itself. So what happens when all the conflicting interests converge in important global event? Without leadership there will be only disaster. The chaos of the market cannot be allowed to run free, in times like these, the state must take leadership and guide the sinking ship of capitalism into shallower waters. A “Great Helmsman” is required. The China seems to be the only ones to recognize this need.

The sovereign debt crisis in Europe is a major force in the looming second dip recession according to the International Monetary Fund. Current President Robert Zoellick has already said that urgent measures will be needed to avoid future problems. Decisive action is needed in the US and Europe to prevent any major shakes to the global economy. These experts said that despite developing countries growing at 5% to 6%, vigilance against crisis is still greatly needed. IMF has recommended that the US and Europe policy allow the lower income countries rebuild their strengths and policy buffers that existed before the crisis, but since then have been destroyed.

Usually the world turns toward the US as a world leader in economic thinking and leadership. However as of late the world has begun growing unsatisfied with the inability of the US to come up with a contingency plan. Right now the US Fed is talking about undergoing a third round of quantitative easing (along with further harmful spending cuts), a measure that has failed to stimulate the economy twice before. However the Federal Reserve board is claiming that the third round of quantitative easing is not that. They are saying that they are selling short term securities and buying long term government bonds in equal amounts. To them that is not quantitative easing. In my opinion, and the opinion of the Brazilian finance minister, it very much is creating more fiat money.

With this second repetition of a failed measure, many are becoming of the opinion that the financial elite in the US are at a loss for a solution. With this lack of leadership from the United States, many around the world and in the media are calling for leadership from other countries and financial analysts to fulfil that role.

A lot of experts have been asking why this happening to begin with. The question being thrown around is “why didn’t we see this coming?” Many in the financial community are blaming bad oversight and poor planning. However I believe that to only half of the story. The fact is capitalism and the economic actors themselves don’t plan. Each individual banker or investor don’t get together and plan out their investment strategies with one another. That would defeat the entire purpose of capitalism itself. The reality is that the financial community both locally and globally did not plan anything. What they did in reality was chase any idea they came up with to get as much money as possible in the shortest amount of time possible. Any such impulsive behaviour will inevitably cause problems. This is the result of the chaotic nature of the market and capitalism itself.

Right now US President Barack Obama has proposed a balanced plan for solving the US debt crisis. The plan would be the elimination of 3 trillion in debt. He has proposed ending a portion of the wars saving the country a trillion dollars over 10 years, with cuts to government spending of 500 billion on medicare over ten years. These two combined efforts would eliminate half of the immediate debt problem. The other half would come from a raising of taxes that were cut during the Bush administration that had a huge hand in the creation of this current debt. It does bear reminder that Bush was the only leader to ever cut taxes during a war, two wars in fact. Now if the US can eliminate this 3 trillion dollars of debt it would greatly increase investor confidence in the global situation. A return of investor confidence would have a positive impact. We have to keep in mind that how the market is viewed is often more important than how it actually is.

Now, this third round of quantitative easing or “selling short term securities and buying long term government bonds” as the Fed is calling it, will create more liquidity for the country and it will further expand the money supply. This expanding of the money supply will not tackle one of the most pressing issues, the mass unemployment of American workers. If these workers can be given jobs, then they can be taxed and can contribute to reducing the debt. The problem is the consistent policy of cutting takes to start new or expand businesses, which means collecting less taxes when its needed to be collecting more. The usual defence for this is the claim that it will work because those new employees will have taxable earnings. That is they theory, however the reality is that these new jobs will almost certainly be minimum wage jobs, probably part time in order to save the business owners money. Meaning those new employees will probably not make to be taxed defeating the purpose of the tax breaks to begin with.

These tax brakes are a meaningless gesture anyway. Those with enough money to invest are unlikely to invest in American facilities anyway. Investing the same facilities in China is far more profitable venture. With the exchange rate of 1 USD being equal to about 6 and a half Chinese Yuan, it is far more profitable to invest in China. The reduction of domestic taxes still cannot even come close to the amount of money that can be saved by using Chinese labour and equipment.

China right now is suffering from the same problems that India, Brazil and other such emerging markets are. Too much loose money and low interest rates are having a negative effect. Expectedly that new money created by the Fed will flood into China and the rest as investors are taking advantage of the cheaper labour and materials. This builds asset bubbles as foreigners begin to invest. Once that money begins to flow out, possibly as quickly as it came in, it could trigger a local recession. The new money coming in also raises the inflation rate as well. Luckily for China, it does have strict capital control which will help guard against such a situation as it has in the past. China’s state having a hand in its flow of capital coming in and out is helping protecting it from harm, a defence a “truly free market” most certainly would not have. One of those ways would be to raise the value of its currency. On the contrary this is a measure China has recently been avoiding taking.

Many in the international community, especially those in the emerging markets are calling for China to take the lead in the world finance. China is the world’s second largest economy, having surpassed Japan, and has investments in almost every country in the world. Many have been speculating that China may offer a hand to those south European nations that are struggling right now like Greece. Commentators are pointing to the fact that China has the world’s largest foreign exchange reserve, but China maintains that this is their safety net in case they are pounded by a second dip and are unwilling to risk it. Besides, despite the substantial gains they could make in doing so, they feel that they do not have enough liquidity to offer a bailout. Which I think is true, after all China already holds so much US debt that it would be dangerous to take any more.

What needs to happen is for someone to come along and give a solution for this problem. The world’s bankers and central bank chairmen are really at a loss for words. There is no solution, and I think they realize that there may not be one. The only thing they can do right now is try and keep capitalism afloat, not save it.

One thought on “Financial Leadership is Needed Now

  1. There is a solution. It is not that hard. Several issues hinder finding a solution; politicians and economists do not understand economics, the people want fast and easy, and the people will not like the solution.

    Some facts. Economics as taught in schools does not work. This means that past and current government policy will not work. The solution will hurt, just like the surgery that saves your life.

    So, accept the solution or prepare for the coming depression.

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