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» Articles - Demise of the economy
Demise of the economy
As one of the founders of SuperInvestor, I have held back from making comments on the current international financial crisis. The key reasons for holding back is based on the fact that we have well qualified and experienced members who have been sharing their ideas with all our members and the fact that we believe that our members do not expect a regurgitation of the everyday headlines of the daily press about the gloom and doom and the possible solutions. The paradox of the everyday press is that every commentator expects the Government to come in and bail the economy out. So the expert advocates have gone from supporters of free market capitalist based system to State initiatives and bail-outs. Not to miss any opportunity of becoming loved and popular by the public (recent Prime Minister’s popularity rating is an example), the politicians have been dishing out stimulus packages all round!
We can debate into infinity about the impact of the stimulus packages and whether these will work. The underlying facts of the financial meltdown are as follows: (i) over expenditure and over extension by individuals and private sector; (ii) risky financial products traded by the banks and other capital market participants; and (iii) some financial product risks were not understood by individuals/institutions supporting these. On the positive side, up to mid to late 2008 the public sector remained fiscally prudent through balanced and surplus budgets, low levels of borrowings and the shift of financial risk to the private sector through PPP (Public Private Partnerships).
So the politicians in the developed countries viewing their historical strong balance sheets (except probably the US) as the major platform chosen for solving the financial meltdown by spending the hard earned through: (i) giving money to the consumers; (ii) buying of bad assets from the banks; and (iii) issuing of government guarantees for deposits and for State borrowings. Nowhere in this spending equation is production of any saleable income generating assets. The projected result in the next 3-5 years is overstretched public sector and inefficient private sector with a continuing ripping off banking sector, and high unemployment. The fundamentals of the economic theory have been thrown out.
Our international experience (25 countries) in developing markets over the last 16 years have shown that funding (provide donor’s funds to countries) through budget support on non-specific projects is a less successful stimulus than providing specific project funding. The key reasons for this is that Government’s budget expenditure is in most cases: (i) inflationary (detrimental impact on prices for those who can least afford it); (ii) difficult to measure in terms of outcomes and improvements; and (iii) at best a short-term benefit to consumers that has no lasting benefit and actually has detrimental impact in the longer term as (i) above.
Government’s support through specific investments that generate economic activities has been more successful in improving standards of living of the population, even though it takes a longer time. I wonder why it is that we can offer good proven and sensible advice for developing countries but are not able to do this for our own country?
I don’t want to be too cynical but I wonder whether the next election is not too far away?
Vas Banschikov
www.SuperInvestor.com.au
Now that you have read this, what do you think? Do you have other ideas? Please share you views with other members (eg by blog or discussion form) and/or request professional member(s) to contact you directly.
