| The current recession being a blanket recession | | | | an end. In other words, from a financial perspective |
| required blanket, across the board treatment for real | | | | the imbalance in the global balance sheet needs to be |
| results. The response of the developed world and | | | | rectified. (For a better understanding we |
| the gig emerging economies (read: India & China) | | | | hypothetically consider the world as a whole to have |
| looks straight out of Keynisian economic model. | | | | a single balance sheet) |
| However a deeper study of the problem clearly and | | | | |
| without doubt reveals that the recession is more of | | | | This is feasible only when the developing world |
| a Hayekian type than Keynisian and this being so the | | | | (thanks to their surging young population and high |
| impact of the same is deeper, more painful and | | | | growth rates) starts consuming more and developed |
| needless to say will consume enough time to recover. | | | | world starts saving more (given the greying of the |
| To put the same in layman’s language so that | | | | early baby boomers’ population), thus reversing |
| every reader can understand the density of the | | | | the earlier flows and for this to happen (and it must |
| problem, this is very much like say Hepatits B viral | | | | happen as there is no viable alternative which will be |
| infection in humans which obviously is | | | | in sync with the fundamentals of the science of |
| “curable” but “will take time” to cure, | | | | economics) nations of the world have two major |
| that is, it cannot be cured instantly like a common | | | | options before them, one is to erect trade barriers |
| cold infection. | | | | (read: protectionist measures, the signs of which are |
| | | | | already visible in many parts of the world) or to |
| Being Heyakian type the impact of this recession has | | | | naturally make the trade imbalance correct itself by |
| changed the behavioural aspects of common man | | | | resorting to flooding of the world by the dominant |
| across the globe, in particular in the developed world | | | | trade currency of the world, namely the US Dollar. |
| which is worst affected and in the big emerging | | | | This exactly is what is unfolding today as America |
| economies. Bringing about changes in the behavioural | | | | rolls out the US Dollar One Trillion stimulus plan. Bulk |
| aspects of consuming public is a time consuming slow | | | | of this stimulus funds is obviously to come from the |
| and steady process. Thus to make the public go out | | | | printing press of the Government and this has many |
| and spend their money (to create demand) will take | | | | economists worrying about an inflationary spiral in the |
| its own sweet time and that’s precisely the | | | | months to come. The effect of flooding of markets |
| reason as to why Keynesian model may not bring | | | | by the US Dollar can be gauged from the |
| fast results in the current scenario. | | | | fundamental economics principle of demand – |
| | | | | supply relationship and its effect on prices of |
| Keeping all the available statistcal figures aside, lets | | | | commodities. The more of US Dollars will be made |
| purely focus on fundamental causes and its effects | | | | available in the world markets would mean abundance |
| with our thoughts firmly grouded to the basic roots | | | | in supply and hence fall in prices of the commodity |
| of the science of economics. Looking the things from | | | | (read: Depreciation of US Dollar vis a vis other major |
| a macro perspective, a major “cause” of this | | | | currencies) and this would mean attractive prices for |
| “effect” (that is recession) is the trade | | | | goods and services produced in America and on the |
| imbalance plus the capital flows. In a system based | | | | other side it would make goods and services |
| on sound economics, capital needs to flow from | | | | produced in the developing world expensive and |
| developed geographies to developing geographies | | | | hence unattractive in overseas (read: developed |
| due to trade surpluses enjoyed by the developed | | | | world) export markets. This will be so even if some |
| nations and capital inadequacy in developing world. | | | | nations try and artificially peg their currencies lower |
| However over the last few years, the direction of | | | | to the US Dollar as they have done in the past, its |
| the trade flows (and obviously so the direction of | | | | impact will be minimal given the scale of the things at |
| the capital flows as well) have been reverse to this | | | | global level. |
| fundamental concept of economics. Result was | | | | |
| evident in America’s record trade deficits (some | | | | The initial signs of the all these factors (namely |
| thing that is not a characteristic of a developed | | | | currency values changes, behavioural changes in |
| economy) and huge trade surpluses of emerging | | | | general public, etc) is already seen in the changing |
| markets in Asia (again some thing that is not | | | | figures of US Deficit numbers every month. In the |
| characteristic of a developing economy). The capital | | | | coming months this trend in trade flows will only |
| flows were also in reverse swing, as the trade | | | | strengthen (and we will see a weaker US Dollar vis a |
| surpluses of emerging markets found its way to | | | | vis other currencies and a notable improvement in US |
| America in the form of investments in US treasury | | | | Manufacturing Indices) as at the end of the day any |
| bills and other securities. Thus from a birds eye view, | | | | thing that is against the fundamentals of the science |
| we can see that the capital flow was from | | | | of economics will have to correct itself sooner or |
| developing world to the developed world which is | | | | later and the time has now come to redeem the |
| against the fundamentals of economics and thus | | | | past mistakes and to stick to the basics of doing the |
| cannot last long and the vicious cycle has to come to | | | | right things and doing them the right way. |