Friday, January 6, 2012

Happy New Year

People are saying this is the year that the US economy will make the most progress. Many analysts from Bloomberg news are predicting that financial markets will have their best year in 5 years and that the unemployment rate will drop pretty dramatically Almost akin to the 1982 economic recovery after a near decade of stagflation.

However, the US still has spending issues and Congress's inability to reach a consensus on the debt limit is slightly worrying. Our credit score was dropped in August by Standard and Poor because of our government's incompetence. Keynesian economics says that the more we spend the better we do, and while I believe that it works to an extent I don't think it's a good long term solution. While everyone agrees that corporate loopholes must be removed in order to raise more in taxes, some members of congress want additional tax increases and others want cuts in major spending initiatives and tax cuts.

The dilemma we are now faced with is if we should make a compromise in order to cut spending in a crucial growth year or evaluate our progress.

I say we should. I know there's an argument which points to countries who can survive with debt of 200% of GDP (like Japan) and how for years Ireland was pretty much unfazed by their debt of 950%. While the United States isn't in as dire a position as Ireland, the amount of debt we have is making many people uneasy particularly because of our economic influence.

My reasoning is that even though Keynesian policy would say cutting spending or raising taxes will cause a recession, there have been instances when the United States has used both options and seen economic growth unchanged, particularly during Ronald Reagan's era. He was known as the tax cutter but he accepted compromises and ended up with contracting fiscal policy despite one of the best eras of growth. Then of course Reagan proceeded to lower taxes and expand growth further.

After all we can't have our cake and eat it too. It's one or the other.

Meanwhile in Europe, the outlook is increasingly bleak as Germany is one of the few countries experiencing solid growth and the responsibility of the Euro has seemed to fall on them. Germany now has Portugal to add to the list of indebted nations and the Euro seems to be doomed for collapse and some are saying that it would make everyone better off.

I didn't like the concept of the Euro because it involved uniting strong industrial, exporting nations who could afford a strong currency with importing nations who weren't as influential on the global scale. Germany could have transitioned to the Euro, Netherlands could have accepted the Euro. Italy, Spain, Portugal, and Greece were not capable of accepting a strong currency because they were largely importing nations and their former currencies were a lot weaker in comparison.

However, transitioning back to pre-Euro times is not a good idea because that would cause a massive international default on debts and considering the size of the Eurozone, that would plunge the global economy into a hellish scenario. China's growth would be radically compromised, the US dollar would experience deflation and throw the whole growth process in reverse, and global demand would fall tremendously as these recently absolved nations would have to erase all growth created in the past decade. So I say the Euro has to stick around and the indebted nations will have to deal with the poison of austerity cuts in the meantime figuring out other alternatives to bolster domestic economic growth. As much as it would hurt the people in the Eurozone, they all would have to make severe cuts to healthcare, education, and other subsidized programs which could eat up into their budgets. As a collective currency, and I know Germany will not like this, they all have to hold each other up and take blows for each other. It's a major punishment to the countries who have followed their debt regulations and kept spending in check but they have to accept the consequences. In many ways the Euro had to act like a cartel but as with any oligopoly, the more members there are, the harder it is to collude especially as they each have different interests.

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