The Dawn of a New Era and the Story of the US Federal Government, Penicillin, and Tumors.

Since the beginning of this global financial crisis, I haven't quite fully subscribed to the US government's position on using pure fiscal stimulus (spending tonnes of government money) to come out of the mess. The concept of using massive government spending as a primary tool against recessions was developed and recognized as a result of the great depression of the 1920s & 30s. Ever since then, governments from Washington DC to Tokyo have used fiscal stimulus to break out of recessions in just about every decade since then, and sure enough, stimulus has worked just about every single time its been used. This global recession, however, is quite a different beast, and I've always held the view that fiscal stimulus is not a one-size-fits-all remedy. I like to use the analogy of a the American economy as a patient at a hospital. Think of fiscal stimulus (massive federal government spending), as penicillin. Now, while penicillin is a great medication to treat a wide host of bacterial infections, some major, some minor; you sure as hell can't use penicillin to treat a tumor. And that's quite what this crisis is.... a tumor. Not necessarily a terminal condition, but quite serious none-the-less... and what the federal government, especially under George Bush was trying to do was to treat it with penicillin. Quite absurd when you really think of it that way, right?

Now comes the explanation.... Why is this recession so different? Because it was caused by something completely different. The great depression, and many other small recessions after that were in some shape or form caused as a result of a plunge in demand. Either because of the end of a war or something similar. You can argue that some recessions resulted from stock market collapses or other oddities, but these “bubble-bursts” usually ran only several billion dollars in total, and for such 'minor' problems, penicillin (fiscal stimulus) did quite a good job of recovering from the condition. In such instances, creating artificial demand through fiscal stimulus created more liquidity and raised consumer confidence sufficiently enough to reboot the economy. This time though, you're dealing with fictitious assets.... quite simply.... debt. Think about it this way.... Imagine that the US mint only 'printed' $100 in total. Initially, that $100 would go around from person to person, and each person would work harder and harder to get their hands on that $100, which would slowly build a robust economy as a result. Now imagine if that growth and development happened too fast... so fast that people made promises to pay the $100 back with interest.... $110. Over time, more and more people did the same thing until the total value of promises and interest totaled $100,000,000..... Now obviously the lenders were expecting to collect this huge sum of money, and as a result, gave lavish salaries, amazing bonuses, corvettes (sports cars), and so on to keep their employees happy. They figured that they would be able to afford it, since they were supposed to get $100,000,000... But obviously you and I remember that the US mint only printed $100 to begin with.

And that, my friends.... is the highly simplified root problem of this crisis. If the federal government uses penicillin (fiscal stimulus) to treat two trillion dollars of currently known toxic debt, then it really is an uphill battle....especially considering that the US federal government itself is already $11,059,223,131,303 and 81 cents in debt as of 30/03/2009 (source : brillig.com). In addition to all this, the global crisis itself has started to dent confidence in lending across the world, which effectively means that spending will further reduce and more debt that was actually credible debt will become bad, eventually causing more and more debt to become toxic. So what really is the solution? My solution was always not a pretty one. I believe that the solution to every problem lies within the root of the problem itself. You treat a tumor by removing it.... not by giving the patient penicillin, and so... silly little analogies aside, America's most practical solution is to 'print money'. I put that in quotes because in this day and age, it's all mostly electronic so there's really no printing involved. But yes... money supply must be increased. Slowly but surely, the solution to this crisis will lie in encouraging more and more countries to guarantee debt at the governmental level. Since so many developed countries, quite notably the US, are already so much in debt, federal government backed debt really just means converting the average Joe's debt into Obama's debt. But that creates the problem of reduced confidence in the US federal governement. So realistically speaking, after this crisis, Americans will either have to get off the couch and become far more productive to pay their estimated 14 - 16 trillion of debt (by that time) or simply just print more dollars. While its not an ideal fairytale ending.... in the long run.... this does seem quite probable.

Believe it or not, I had mentioned this viewpoint to my brother some time last year, and sure enough, a few days ago, the Obama administration released their plan on a complex new financial plan that effectively guarantees toxic debt by the federal government, and on the other side of the Atlantic, the UK, has already started the process of “Quantitative Easing” which basically means 'Printing Money'. What this means is that in the short to medium term, I believe that these two measures, by the two countries where the crisis started, will have the biggest impact on pulling the world out of this mess...obviously this is provided that these plans receive enough funding and support. In the very long term though, these measures, unless followed through, or supported by economies around the world, will cause these two counties the most harm. I will however, end on a lighter note. No matter what happens, The US and the UK, are still the financial capitals of the world, and while this global financial crisis may be a game changer, America is still among the most creative nations in the world. The best universities and medical and research facilities exist there, and the philosophy of importing brain power coaxed-in with the treat of the 'American Dream' just might mean that Republican candidate, Mitt Romney's closing message that 'while United States will forever be a great nation....she just might no longer be the greatest nation' might just prove to be true.

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Arjun Parameswaran is a US Certified Public Accountant, and a business executive with operations in the USA and Botswana. He can be contacted at Arjun@Exelle.co.bw
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