Guyana and the wider world
By Dr Clive Thomas (E-mail address: cythomas@guyana.net.gy)
One of the most hotly debated issues pertaining to the prevailing global economic crisis is whether all three of its components (financial crisis, credit crunch, and economic recession) are showing signs of tapering off, or at least not-worsening. Particular attention is placed on the economic recession in the rich industrial countries (known as the G8 group of countries) and the major emerging market countries (Brazil, China, and India). These countries concentrate the bulk of global purchasing power. And, because it accounts for about one-sixth of global GDP, the USA is the country whose performance receives the greatest global attention.
Readers should note that although it is important to know whether there are reliable signs that the worst of the economic crisis is over, it is equally critical to gauge how fast the recovery will be.
V, U or L
Economists usually represent the possibilities of economic recovery from a recession by the shape of three curves. First, the letter V. This indicates a steep decline, a relatively short-lived period in recession, and rapid recovery. Second, the letter U. Here there is also a steep decline, but the period at the bottom of the recession is more prolonged. After that, recovery is rapid. Third, an elongated L. Here the decline is also steep. However, when the bottom is reached the economy lingers in that state for a protracted period.
These three scenarios would have different social, political, environmental, and geo-strategic consequences for the world economy. One can safely expect that, the longer the crisis, the greater will be geo-strategic and political conflicts around the world. One can further expect a worsening of global environmental prospects as many of the current global initiatives on pollution, climate change, sea-level rise, and forest degradation and devastation would suffer from both reduced funding and political commitment to address them.
The same can be said for social and economic priorities such as improved health care and education; improved access to safety nets and social welfare; the elimination of poverty, hunger, and homelessness, the enhancement of global livelihoods; and, efforts to reduce discrimination based on race, ethnicity, religion, gender, and political beliefs. In sum we can safely predict: the longer the global economic recession, the greater is the likelihood of reverses in every major dimension of life.
Political spin
Much of the speculation/spin as to whether there are signs of a tapering-off or the situation not worsening comes from governments anxious to convince their constituents that their policy responses are succeeding. No matter what may be the ongoing circumstances of their lives, the worst is over. Next to this group, are operatives and players on the major financial and stock markets around the globe. Media personalities and anchors on business-oriented news outlets are major cheer-leaders.
Nowhere is this more readily seen than in the United States. Concerned about a possible political backlash from his consistent sobering portrayal of the disaster confronting the United States economy as a legacy of the previous eight years of ex-President Bush’s administration, President Obama’s administration has switched its spin over the past three months to a more hopeful portrayal of the US economy, hinting repeatedly at “positive signs” or “green shoots” amidst the worsening economic trends.
Stock and financial market players have spotted an opening in this new direction of political spin, for speculation and profit-taking. Indispensable as stock markets are as sources of funding for new economic ventures, trading in stocks and financial instruments is a casino-like operation (gambling) where stunning fortunes can be made, and lost. Within a matter of days if not hours, the major financial and stock markets in the United States have become for many the leading indicator of the progress of the economic recession. With fits and starts a rally has ensued. Over the past three months, successive gains were registered on stock markets. Although not taking share prices back to pre-crisis levels, this has softened losses in a number of portfolios.
President Obama’s election campaign had focused on the fortunes of Main Street as the key indicator of the health of the economy, and repudiated Wall Street. Now, hourly and daily behaviour of prices on the Dow Jones, Nasdaq, and the S&P 500 markets have re-emerged as the main litmus test of the US’s economic fortunes.
Danger and risk
There is great danger to this. A dominant fraction of the players and operatives in the stock market are, in essence, gamblers seeking as they say, to make a quick dollar. Their behaviour when buying and selling is very, very, loosely tied to the performance of the real economy, although they do not by any means ignore it. Their focus is on the short-run scope for making money and this may or may not be directly tied to the medium and long-term opportunities afforded by prospects in the real economy and the maintenance of economic fundamentals.
The rich industrial countries (G8) policy responses to the global economic crisis have been broadly of two types. One is for the government to act counter-cyclically. That is, to make expanded government expenditure take up the slack from reduced private investment, inventories, exports and consumer expenditure in the private sector. The second is to act pro-cyclically by having government reinforce market signals that a correction is needed. No dedicated effort is made to ease the burdens of the crisis and/or re-distribute its costs to those the market does not indicate should carry the burdens of adjustment.
Both these approaches however, entail future risk. Counter-cyclical measures run three major risks, namely: 1) inflation 2) protectionism and 3) inefficiency and corruption linked to too rapid expansion in public spending. Pro-cyclical measures run the risk of 1) prolonging the recession 2) ignoring its systemic roots and 3) promoting economic and social injustice in the distribution of the burdens of economic adjustment and recovery.
Next week I shall continue the discussion from this point.
