Every four years the U.S. elections split the country down the middle into two, Republicans versus Democrats, and the entire world which depends on it for its economic sustainability awaits with abated breath for the new President of the United States of America to take office. This time around the usual nervousness has turned into jitters due to a blundering European economy and the slowdown in the BRICS countries (Brasil, Russia, India, China and South Africa). For a change, it is not the political conventions of the either parties and their messages that the rest of the world has been banking on, but rather a policy speech delivered on August 31, 2012 by Ben Shalom Bernanke, the Chairman of the Federal Reserve (equivalent of Reserve Bank of India) in Jackson Hole, Wyoming.
Banking on Bernanke
‘Creation of jobs,’ said Benranke, ‘is the main concern’, and the listeners heaved a sigh of relief, the stock markets around the globe reacted positively, as though to say, ‘Right way to go.’ He observed that the response to the measures taken resulted in the creation of 2 million jobs in the private sector. The reference was definitely to the Obama stimulus package which created jobs in the car industry. However, those measures cannot be repeated and he pointed out that the monitory policy would look to ‘non-traditional’ methods. The economic sense has it that when the monetary policy of stimulus is overdone it may have negative results. Hence, for instance, issuing of more government bonds would be less risky and evenly manageable, asset purchasing and forward guidance, lower interest rates that the Federal Reserve Bank pays for the reserves banks keep with it, etc. – all these could be non-traditional methods.
Stimulating the economy is a favourite phrase, so too recovery; but Bernanke was more realistic when he said that the actual economic situation was ‘far from satisfactory’. In a strange economic situation as this, where federal reserves are high, very low inflation and a highly appreciated dollar against which the currencies of the BRICS countries are plummeting, doing business with America has become a costly and unsustainable affair. The exceptions are the outsourced services and individual remittances from the U.S. which enjoy higher exchange rate against home currencies. With this form of interplay, doing business with the US is a loss-loss predicament.
Demand versus Supply Politics
On CNN’s weekly programme GPS (August 2, 2012), Fareed Zakaria interviewed a senior manager from Mitt Romney’s Bains Capital representing the Republican Party and a venture capitalist with allegiance to the Democratic Party. The Republican advocated for tax cuts for corporations and at the same time higher rate of interest as an incentive for saving and money supply to industry. The Democrat countered saying that there is already $ 2 trillion idling in the industry; hence, he advocated that the priority is to put people to work, lend money to small businesses and while raise tax on the 2% of the richest people, cut tax on the middle class, which will put money in the hands of the people creating an all-round demand for goods and services. While the Republicans charge the Democrats with big and unmanageable government, and wastage of funds in stimulus packages, the latter blame the former for mess of the Bush era and the trickle down policy of Reagan which have downed the country in public debt.
New Economic World Order
The economies of the BRICS countries, when their chance comes, naturally depend on the supply side; since there is no demand for their exports, they could be patient for the Americans until they earn their money to buy from them. Such patience has cost them not only their business, but also the value of their currencies. So, earlier the Americans recover as their presidential candidates promise, the sooner is the hope for emerging economies to salvage their losses since the financial meltdown of 2008.
If America does not recover, or the recovery is too slow, then the BRICS would have to shift their business paradigm. To begin with they could shape up new monetary policies and then come together as a group to stabilize the rate of exchange. The new mechanism may reflect the Euro; however, with the fundamental difference that the member countries would not lose their currency sovereignty as in the Eurozone. Such a turn of events would displace America’s economic pre-eminence; further, it would junk the Euro. Europe having lost its clout and the U.S. off its straddle, a new economic world order will emerge. A decade following this shift, India and China, the most populous countries of BRICS could be the power behind the world economic engine.
The Economic Impact of USA
The above is a mere oracle since the BRICS are eons away from forming any common monetary policy. In the meantime, there is no justification to rubbish U.S. Apart from its high status as the world’s largest economy, there are several other credits which make it the greatest nation on the planet. It is a nation built by enterprising immigrants and it still remains the hope of thousands of immigrants entering the country every year. For instance, the Indians in the U.S. contribute highly, equal to the GDP of India, and enjoy the highest millionaire status amongst all the communities. Although it is fighting wars on several fronts, draining its precious man and money resources, the New York Times (August 26, 2012) reported that last year the arms sales alone have contributed over $85 billion thus taking care of all its overseas military liabilities and also helping at home. Add to this other positives such as $ 4 trillion dollars of multinational investment, largest number of universities with best quality education, cultural influence – food, films, music, sports, fashion - across the globe, economic and social aid for the world, etc. Thus, before toppling it from its top position, the rest of the world has a lot of catching up to do with USA.
The problem is that election time in America implies a general economic handicap for the rest of the world.