Tuesday, July 06, 2010

Underlying Problems of the World Economy

We are in a catch 22. Economies of the world need to grow themselves out of the looming deflation that is on the horizon. But, private spending is collapsing, so public spending has to take its place until the economy is turned around. But, public spending is reaching its limits, because private sources of financing are losing confidence in governments ability to meet its obligations. Normally, what would happen under such circumstances, if the problem existing in only one country, is that the country would be forced into austerity measures, all the while being propped up by loans from outside sources such as the IMF, and by devaluation of their currency to stimulate exports,  thereby improving their economic outlook. But, this a worldwide crisis. All countries can’t devalue their currencies simultaneously, and where will the money come from to prop them up while they recover?

The underlying problem is that our productive resources, labor and capital are being employed unproductively in wars and economic endeavors that do not increase our standard of living. In the US we have shifted from an industrial economy that makes useful products to one that imports everything and all we do is sell things to one another. To add to this dilemma, our capital resources are being concentrated in the hands of fewer and fewer people, who hoard them rather than employ them productively. The broad middle class earning and spending power has stagnated as a result.

The solution will ultimately be forced upon us as the middle class is driven into poverty. We will either become more like Mexico or we’ll change our ways by reducing our expenditures for foreign wars and products that are of marginal utility and get back to basics. We will have to rebuild our industrial base and contract our financial base to balance capital with the need for capital and to employ our population productively. This will require a  more progressive tax structure like we had in the fifties, enabling workers to share in the prosperity of the country. We can either plan for this, or go the way of Mexico, where the wealth is concentrated in the hands of a few and the population flees to other countries to make ends meet.