Global Economic Crisis – Immediate Solution

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 to evolve a fiscal system within Euro Zone as if it is a Federal Structure. The Fiscal union is the immediate need. 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