Impending Recession????

The downgrade of US credit rating from AAA to AA+ by S & P, accompanied by the slow growth rate (0.2%) in Euro Zone is pointing at one more recession. This recession is expected to be more dangerous and long-lasting than the previous one.

This article seeks to discuss a few related aspects.

This recession is expected to be long lasting because of one prime reason - Structural defects in Capitalism having no external Prop in the current economic scenario.

Structural Defects in CAPITALISM

The recession is remotely attributed to the structural defects in CAPITALISM. Capitalism, as we know, is a form of economic system in which the government intervention is very minimal.

Under Capitalism, it is the private investment that produces goods and contribute to the GDP and in the process it is responsible for the employment status of that economy. Thus, the working and well being of an economy depends on the 'investor confidence'.

If investor confidence is high, they invest more. Their more investment creates more employment which leads to better income and better standard of living. More income leads to more demand for goods which, in turn, stimulate more investment.

On the other hand, low 'low investor confidence' leads to withdrawal of investment, reduction in employment, low income, less demand for goods and withdrawal of more investment. Thus, it is a vicious circle.

Lack of EXTERNAL PROP

Whenever a recession was hit previously, there used to be some EXTERNAL PROP for capitalism that would to help CAPITALISM come out of Recession.

• Colonial Rule provided such a PROP in the past. The companies in recession-hit countries could sell their products in colonies at the expense of local goods. But such readily available colonial markets are not to be existent now.
• During later years, state intervention in demand management provided such an external prop. State intervention in demand management is a brain-child of Keynes. The Great Depression of 1929 was overcome by this Keynesian philosophy. Keynes suggests to increase the Fiscal deficit by increasing public expenditure. With the increase in public expenditure, the money at the disposal of people increases and the investment is stimulated. But unfortunately, this Keynesian philosophy cannot be applied for the present situation because of the following reasons.

Reasons for not employing Keynesian philosophy

• In haste to bail out drowning companies in December 2007 recession, sovereign governments across Europe have incurred so much of debt that they are not in a position to service those debts now. For example, net debt-to GDP ratio in Greece stood at 152%. The meager growth rate registered in these countries has eroded their ability to service debts. So government is unable to raise any more public debt to bail out drowning companies now.
• In US, the situation is no less worse. The downgrade of sovereign credit rating of US from AAA to AA+ by S & P has shaken the investors' confidence to investment in US. The US Government is under pressure to cut its fiscal deficit since its current fiscal deficit is too high that it could push US into bankruptcy. This fiscal deficit could be reduced in two ways - increasing the tax rates and reducing the public expenditure. From the point of view of fighting recession, public expenditure should not be cut. But lack of political will has forced US senate to adopt more austerity measures by cutting public expenditure to reduce fiscal deficit. Thus, Keynesian philosophy is not being applied in US.

Given the lack of external prop to capitalism, there is no sign to fight recession and restore boom. So friends, this recession is more dangerous. Let us pray the Almighty to rescue us.