When economic crisis will end ?

When economic crisis will end ? by Professor Anton Caragea Economic crisis or doomsday?

If we are looking at mass media coverage of the last weeks regarding the economic crisis in United States and around the world we could believe that we are on the fresh hold of doomsday.

Professor Anton Caragea Off course such a mass media frenzy has his reasons: from the governments interest in having public support in committing public money for saving private institution, to public fear regarding there saving, houses, loans and economic future. In this turmoil what we need it is an objective analysis of the economic event that we are witnessing and there implications in our future.

World economic crisis?

The first question that it is on every body’s mind is: are we facing a world economic crisis like we have experienced in 1929-1933?

The answer is yes. The world dimension of the economic crisis is very easy to be observed if we take in account a few simple facts like the fall in stock market value of around 25% in Europe and US ( taking as reference point January 2007 stock value ) and even more then 30% at Hong Kong, Tokyo Bombay and Shanghai Stock Exchanges. If we see that in the last two month governments from Europe: Italy and Ireland had declared a decrease in there economy and at the end of the year situation will became critical for many countries in Africa and Asia we can say that US crisis has rapidly became a world crisis.

If we take under considerations and the fluctuation in oil and gas market, in US dollar value and the fluctuation in all foreign currency we can see that all of this phenomenon will gravely disrupt sensible and important sectors of world economy as transportation, aviation company, heavy industry that will

provoke further disruption in the world economy ( Alitalia is a popular name if we look at economic crisis effect but we must not forget that from the beginning of this year according to IATA numbers more than 15% of the world aviation company field for bankruptcy ).

The New York Stockexchange crippled by financial crisis.

The real estate crisis spreads very fast from United States to Europe involving more and more markets and disrupting one of the most productive sectors of the world economy: housing and buildings with dire consequences for the future. Looking at all this numbers we have to prepare ourselves and be a ware that the worst it is not over yet.

Off course the most heavy is the financial crisis that affects the investors world wide, affects the confidence of the consumer and left the markets closed for money necessary for investments , little businesses , housing and even the life standards of the providence states from the West is threatened by this crisis.

Taking all of this into consideration we can assume safely that we are looking at a world economic crisis.

Crisis yes, recession, no!

No we have to make the separation between crisis and recession. Recession is the falling of the general economy not only financial, housing and stock exchange sectors, and we are not seeing that at the moment. Still the economy of China, India and European Union are growing, US is likely that will have an economic growth this year so we are not in recession. The present day crisis is a development crisis not on overheating as many have said. This is crucial to understand. As in an illness a fault in diagnose could became a mistake in treatment with fatal consequences.

Just a few numbers show as very clear that the present day economy have still a lot of place to growth. According to UN data on standard of living only 1.5 billions people are part of the developed countries. This figure from a 6 billions people proves that it is still along way until we will see an overdevelopment crisis or a super-production one.

It is very clear that while we have billions of people living below the poverty line in Africa, South East Asia, China, India or Indonesia we can not fear an overheating of the economy.

GM banckruptcy or world economic cataclysm .

So this is a crisis of underdeveloped and an over speculative market. If it is a responsible in this crisis, the financial market could take the blame vote.

In the last years between 40 and 60% of the financial transaction where speculative ones, in stock exchanges also in stead of fulfilling there role of pumping money into the real economy more the 70% of the transaction as suspect to be speculative. This deprived real economy of the necessary money for productive investments and made a spiral of false expectations and fortunes.

In conclusion the true diagnose of our crisis is underdevelopment of the economy and speculative actions.

Remember the past

Usually we forget the past and his valuable lessons. Let’s hope that this will not be the case. At the beginning of the world economic crisis in 1929 every body has spoken about over heating economy, over-production and let the free market forces regulate the game. This policy has quickly transformed the Wall Street collapse from Black Friday 1929 to a world economy crisis that plunged the world into the Second World War, into communism and Nazis experience. In 1930 John Maynard Keynes decided as he putted “to give 30 more years to capitalism” and he wrote his ideas about a general plan to put in motion the world economy. The rest is history. His ideas became the Roosevelt plan that helped the US recovery and then the world recovery.

Today we see the same false prophets preaching about Adam Smith invisible hand and rejecting state involvement in economy and creating a general plan to stop the c world crisis. Is the same mistake over and over again. Keynes explained in his time that the economy could not possible overheating when only 300 millions people belong to developed economy in 1929 from a total of 2c billions. What was true in 12929 is true to that day. Keynes simple idea but revolutionary one was that capitalism must embrace the poorest from western society in to the welfare state. He created the consumption society, the dividends paid to employees, the financial support for private enterprises all that we take now for granted. Now it is the time for a new Keynes Deal at world wide dimensions.

A New Keynes Deal.

The solution to our present day crisis is not far reachable as many want us to believe. And it is surely not the 700 billion investment of public money in private enterprises mismanaged and abused and in paying huge dividend’s as golden parachute to not responsible directors. The 700 billions bails out will only maintain the corrupt system that lead to present crisis and will not help the sectors of the economy that need urgent investments. Such a cash flow in an unregulated and inefficient sector not purged from the habits that destroyed it is contra productive. What we need now is an increase in real economy investments, control on the markets, fiscal incentives to business and real economy and increase in consumption, blocking the speculative affairs that lead to the down fall of the system and supplementary taxation of speculative stock market exchanges, directing the money in investments projects, this 700 bailout many could be put to far better use in real market.

Is capitalism dying?

Clearly not. Capitalism is good in promoting development and increasing economy and while we have 2/3 of the world population living in poverty we need capitalism. When we will reach the 99% involvement in developed economy we can start to be worry. But what we need is a new Keynes deal, to involve in the market the 4 billion peoples left out. Such a projects need world cooperation and investments directed at peoples not states. Angelos Angelopoulos, former chairman of Greek National Bank designed a plan for such a new deal based on international support of directing 0.7% of GDP of industrialized countries to this reason, a one dollar tax on an oil barrel, a 3% tax on gold market and a 3% tax on speculative financial business.

According to same calculation this taxes will offer for a World Development Program more that 150 billions each year.

A brave new world.

Unfortunately such a plan was not possible in 1929 and it was more then four year of economic crisis, millions of people left homeless and two greatest threat to democracy: nazism and communism almost controlled Europe to make Keynes plan into reality and only at the defeat of Germany the Marshall plan make the Keynes vision a reality in Europe also.

The present day crisis is still too soft to provoke a new change in our economy system, but the solution are present and feasible and the reality will force us sooner or later. Preferable sooner.

Professor Anton Caragea PhD, MA, FINS