The Next Step!

We have been seeing many major economies around the world struggling to grow – Europe: struggling with the sovereign debt crises of many of its “Euro” countries, United States: struggling to reduce unemployment and create jobs, China: struggling to stop the slowdown in growth, India: struggling to fight high levels of inflation and slow growth, other emerging market economies: struggling to face the fact that they need a stronger developed world and China for themselves to grow.

 
And what is the one common factor that is holding down so many economies? Fiscal climate. Every country has its own fiscal problems, but none have been able to address them efficiently. One common scenario in all major countries that are in trouble is the need to reduce the fiscal deficit. But how? – is the debate! And the debate has been going for so long without any decisive actions on the ground that we are entering a dangerous phase in the global economy. It’s not that the money that was present during the pre-crisis period has disappeared in thin air. The money is still out there, just not at the right place. In fact, all major economies of the world have poured more money (created money) in the last two to four years in the form of monetary stimulus by their central banks. So where is this money? Why don’t we see enough investments? Who is having this money? And what are they doing with this? Atleast during the peak of the crisis in 2008/2009, countries like China, India and Brazil were growing at impressive rates that kept the global demand for goods and services at an acceptable level. But, recently, even these emerging market economies have been slowing. 

 
In an ideal world of free markets, capital would have moved where it is needed and where there could be profits to those moving the capital. But what is that happening now that despite relatively low interest rates, the US government still does not want to use the investors’ money to invest in infrastructure and R&D projects that are direly needed in the world’s largest economy? What about Europe? Have the investors completely lost faith in the European people forever? And China? Do global investors think that China’s growth is unsustainable because they lost faith in European governments and losing faith in the US’? Or that China cannot domestically sustain itself? And India? What happened to the global attraction that India had in the last decade? Faded? Why? Inflation? Fiscal deficit? Current account deficit? Unemployment? Lack of investment sentiments? Well, in economics, one could easily mix and match these words in the same sentence to define the troubles of an economy. But underneath all this, there is one word that holds all the troubles together – Debt!

 
Huge national debts in many countries have caused enormous fear among people around the world (investors, mainly) such that the capital is not moving to places it should and people are holding it back! And when governments rely on such debt-financing to meet their capital needs, then the fear of unsustainable debt only grows further among investors and business people, thereby resulting in a sudden reduction of debt-finance. And if nations haven’t invested their capital at the right places, then this sudden reduction of debt flow to finance the capital needs of the nation causes disruptions in the everyday functioning of the economy – and widening of current account deficits, fall in the value of the currency etc. ensues.  So should nations borrow less from investors to stay out of trouble? Well, the better answer would be if nations invest the capital they get in productive areas rather than populist and ill-advised programs. But we have seen from experience that with a “power-struggle” to remain in power lingering always, and people’s sentiments so volatile and easy to capture, populist and ill-advised programs always pop up from the political spectrum.

So at this moment, all over the world, to get capital flowing again – to the right places – as the free markets dictate, it is extremely important to reduce debt in all major economies that are floating in a river of debt! And, though definitely not a fan of tax increases, I see that as a must – atleast temporarily, to gather cash resources to reduce debt, deficits and above all – to invest, productively! A wise government would do this without affecting the standard of living of its people – and yes, there are ways that could be done if the tax increases and/or tax reforms and removal of inefficient and ill-advised government programs are directed at the right section of the society (read: rich) – who won’t stand affected at the end of the day. After all, the struggle now to reduce debt globally is to provide a better future for all – which requires best investments in various areas of science, technology, education, health, climate and infrastructure. And the immediate challenge now is who is going to take the next step!? – Public sector or private? For one, even in the world of free markets, in my view, public sector is better organized to take the next step – even globally (read: G-20) - and I am sure the private sector will then leap forward! Increased tax revenue to many governments - US, India being the best examples - in the form of appropriate tax reforms, without affecting the long term private  investment climate - is an urgent need for today’s economy and tomorrow’s children.

 
Bottom Line: Government is a key player in free-markets and not an outsider! When it is time for it make the move in the game, it means the situation is ugly, and the move is not going to be perfect, but it still has to make the move for the game to continue – and that would require giving some resource to the government – for otherwise the game is stuck!