The Financial Tsunami ( FT ) - The Way Forward ( 13 ) - Thundery Cloud Before the Storm

http://www.nytimes.com/2009/03/07/business/economy/07jobs.html?th&emc=th

The above link to today's headline in the New York Times points to a thundery cloud on the global economic horizon that could easily lead to a devastating tempest. The current unemployment rate in USA has reached a staggering 8.1 % the worst in 47 years. It rightly said that the whole economic scene is about to change in the biggest economic system of the world. On top of the fact that GM is at the brink of a total collapse with the potential loss of hundreds of thousand of jobs there is now the possibility of huge corporations withdrawing from some of their traditional lines of trade permanently, again resulting in the same catastrophic loss of jobs.

Everyone in the financial circle is correct in appealing for bigger spending but so far the main emphasis of the call has been on the Government to raise a bigger rescue package. This is a lob-sided call because most governments of countries operating on a market economy ( the capitalistic system ) generally account for only 15 % or thereabouts of the GDP. In any event, it will be labeled socialistic if the government budget reaches 20 % or more of GDP. Let us say there is a drop of 10 % in total consumer spending due to the FT. This will mean a 8.5 % drop in GDP ( being 10 % of 85 % of private sector spending in GDP ). It will take an increase of 56% of government spending to make up the short fall ( 8.5 / 15 ). Even if this is done the increase will partly be spent in infrastructure projects that are not directly consumer or retail spending. Thus, the consumer sector will not immediately get the confidence boost. There will only be a delayed consumer spending effect through the marginal propensity to spend ( the % income that will be spent at a given income level ) and its subsequent multiplier effect on the actual increase in consumer spending. At this point of our crisis , consumer confidence especially those who still have the savings to spend is of top priority. To hit the nail on the head, what I am saying is that we cannot depend on the Government alone to do the job of rescuing the tumbling economy.

So, what am I recommending ? Well , it is simply this. I am appealing to the well off sector of society to keep up their normal spending pattern. If you usually change to a new car every 4 years or upgrade your computer equipment in 3 keep to your original schedule. If your wealth has been drastically reduced by say, 50 % as a result of the FT what was actually hurt is not your ability to survive financially but a badly wounded pride and a sense of betrayal. I honestly do not believe that people have to change their spending schedule simply because their wealth has been reduced from say, US$10 million to US$5 million. Besides, one cannot know for certain when heaven calls or one's health can always keep up its level 5 to 10 years down the road. Without the intention of spreading a pessimistic view, this is your truly's private guess of the possible duration of the present crisis. Money is stored up value which is not yours until it is spent.

My second recommendation is to suggest to governments not to finance the rescue package by taking the seemingly easy way out - simply by printing more money. This is morally dubious and could possibly lead down the path to a becoming a fifth rate country. The fact that the US$ is still stable despite all her economic woes is mainly due to the situation that too many people and countries are holding US$ denominated assets both for investment and as a reserve currency. No people would like to see the US$ depreciate in value to their own detriment. People are not fools as the great President Lincoln wisely said :- " You can only fool most people some of the time but you can definitely not fool all the people all the time ! " If this money printing trend goes on people will ultimately find another haven or reserve currency one of these days.

What to do then with the much needed funds for the Government's urgent economic rescue package ? I think the short and sweet answer is to issue FT rescue bonds which must be promoted like WWII war bonds for we are, indeed, fighting a financial war of an enormous magnitude. It is high time that the well off sector of society and, indeed, every patriotic citizen should share in this rescue burden in whatever way they can contribute. Besides, your Government will guarantee the repayment of such interest bearing bonds. It is also a good opportunity for civic duty education. As all the theoretical justification and implementation mechanism are already in place this is the fastest way to channel savings into investment and create employment with the related boost to consumer confidence.

It is time for immediate action both by Governments and the responsible citizen. Further delays will spell certain global disaster and a second gigantic wave from the unabated FT. As for yours truly, I am planning my usual holidays with the possibility of a side trip to the UK for a get together of amateur astronomers of the Galaxy Zoo community. What is the Galaxy Zoo ? Please refer to the Web Encyclopedia - WIKIPEDIA ( click on link below ) and see my astronomy research in my personal website by clicking on the ( green coloured title of any one of my blog postings ). Please act on my above recommendations now, both Uncle Sam & citizens of the home of the brave before it is too late !!!

( http://en.wikipedia.org/wiki/Galaxy_Zoo )


JKHC.