Wednesday, April 01, 2009

WASHINGTON DIARY: Printing money -Dr Manzur Ejaz 

 Pakistan, a parody of the US economic model, has already gone through this 
process of printing money to inundate insufficient roads with vehicles, and 
homes with machines that require electricity which is not there

If your business goes under, you are forced to declare bankruptcy. But not if 
you are a government and your treasury has a working printing press. Shaukat 
Aziz & Co had the State Bank's printing press working overtime, but it led to 
an inflation disaster. However, if you are the sole superpower, your treasury 
would have the largest printing press and no one in the world would challenge 
you when you buy another country's goods with just paper. The US is running a 
printing press economy with no restraint or second thoughts.

In 2007, when the US economy started nose-diving, the Bush Administration 
pushed out 700 billion dollars to save the bloated financial institutions. The 
Obama Administration has accelerated the process and by now about two trillion 
dollars have been pumped into the economy through the US Treasury's printing 
press. The US budget deficit will reach about ten trillion dollars in the next 
ten years, given the best possible scenario. Nobody is bothered or thinking 
about how this deficit will be filled.

The logic behind every printing press economic device is the hope that 
increased money supply will ease the credit squeeze and hence the consumer will 
have better access to credit and consumption will increase. Increased 
consumption, as the logic goes, will increase demand and hence production will 
be boosted and people will get back the jobs they lost in the downturn. These 
were the lessons Americans learned when overcoming the 1930s depression. But to 
apply old lessons to a new situation is problematic.

It is true that the two main reasons behind the current US recession are 
similar to 1930s: the unbridled use of credit to live beyond means and the 
rising gap between the rich and the poor. Now, strangely enough, the Obama 
Administration is encouraging consumers to live beyond their means and support 
their purchases through borrowed money. On the second account, the Obama 
Administration does not have the votes in Congress to introduce policies to 
lessen the gap between rich and poor like it was done after the Great 
Depression through the New Deal. Therefore, the danger is that, inadvertently, 
the Obama Administration may produce an even bigger economic debacle.

The main reason behind the ongoing economic crisis was that the entire country 
had gotten drunk on easy credit. A $100,000 townhouse started selling for 
$400,000 in the span of a few months. Homebuilders started filling any empty 
lot they could find. And they had so many buyers for these new developments 
that the developers used to draw names through a lottery to determine lucky 
would-be owners.

Banks blindly lent money, real estate agents started buying $250,000 cars, the 
mortgagers moved from modest dwellings to million-dollar mansions. The economic 
downfall has put them back into the same modest homes and cars. Now, the Obama 
Administration is trying to get them back into same mode. If this approach 
succeeds in the short term, how will the next economic disaster be cured?

If the basic cause of economic ills was unsubstantiated consumption and that 
was the main engine behind the US prosperity, how can Americans reach the same 
level without spending beyond their means? They can do this if the bank lends 
blindly, which will bring them down. The whole situation will be return to 
square one. Therefore, the US either faces a lower level of economic prosperity 
or faces another economic storm.

The strategies from the Great Depression that the Obama Administration is 
following may not yield the same results. Back then, World War II had erupted 
on the heels of the depression. Every industrial country was paralysed and the 
US was the only one producing and supplying to the entire world. Therefore, 
demand was increased to such an extent that women were recruited for factory 
work for the first time in history. Furthermore, most of the US economy was 
based on manufacturing and any increase in demand would result in more jobs. 
Today, the US economy is based on financial wizardry.

If the American consumer starts buying more, it may not translate into any jobs 
because goods are not produced domestically. Consumer goods are going to be 
manufactured in China, India and other places. The manufacturer is not prepared 
to pay the American worker $15 an hour when he can get the same thing done for 
$1 somewhere else. Therefore, the US economy is in a blind ally with too many 

Pakistan, a parody of the US economic model, has already gone through this 
process of printing money to inundate insufficient roads with vehicles, and 
homes with machines that require electricity which is not there. The successors 
of Shaukat Aziz & Co are also banking on the State Bank's printing press, 
raising consumer prices every month. There is hardly any stimulus package that 
can help Pakistan kick its bad habits. But now Pakistan has company: the US, 
its main patron, is in the same league in essence if not in details.

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